Private ruling: Foreign source income
Published: March 2015
Ruling period: Year ending 30 June 2015 | Year ending 30 June 2016
Date scheme commenced: 1 July 2014

Ruling: Q1: Are the salary and allowances you receive while posted to country X exempt from income tax in Australia? | A1: No.


Relevant legislative provisions: Income Tax Assessment Act 1997 6-5(2) | Income Tax Assessment Act 1997 6-15(2) | Income Tax Assessment Act 1997 11-15 | Income Tax Assessment Act 1936 section 23AG

Reasons for decision: Summary: Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources, whether in or out of Australia, during the income year. Salary and wages are ordinary income for the purposes of subsection 6-5(2) of the ITAA 1997. Subsection 6-15(2) of the ITAA 1997 provides that if an amount is exempt income then it is not assessable income. Section 11-15 of the ITAA 1997 lists those provisions dealing with income which may be exempt. Included in this list is section 23AG of the Income Tax Assessment Act 1936 (ITAA 1936) which deals with exempt foreign employment income. | Detailed Reasoning - Exempt income: Subsection 23AG(1) of the ITAA 1936 provides that foreign earnings of an Australian resident derived during a continuous period of foreign service of not less than 91 days employment in a foreign country are exempt from income tax in Australia. Foreign earnings includes income consisting of salary, wages, bonuses or allowances (subsection 23AG(7) of the ITAA 1936). Subsection 23AG(1) is subject to subsection 23AG(2) so that the exemption from tax in Australia in subsection 23AG(1) does not apply if the income is exempt from taxation in the foreign country only because of any of the reasons set out in subsection 23AG(2). Section 23AG of the ITAA 1936 has been amended so that foreign employment income derived by Australian residents will only be exempt in certain circumstances. These amendments are effective from 29 June 2009. Subsection 23AG(1AA) of the ITAA 1936 provides that foreign earnings are not exempt from tax unless the continuous period of foreign service is directly attributable to any of the following: • the delivery of Australia's overseas aid program by the individual's employer; • the activities of the individual's employer in operating a developing country relief fund or a public disaster relief fund; • the activities of the individual's employer being a prescribed institution that is exempt from Australian tax; or • the individual's deployment outside Australia by an Australian government (or an authority thereof) as a member of a disciplined force. In your case as you meet the conditions of subsection 23AG(1AA) your foreign earnings are eligible for exemption pursuant to section 23AG, subject to the conditions contained in subsection 23AG(2). | Detailed Reasoning - Certain foreign earnings not exempt: In accordance with subsection 23AG(2) of the ITAA 1936, the exemption under subsection 23AG(1) of the ITAA 1936 will not apply if the income is exempt from income tax in the foreign country only because of one or more of the following conditions: • a double tax agreement or a law of a country that gives effect to such an agreement (paragraphs 23AG(2)(a) and (b)); • the foreign country exempts from income tax, or does not provide for the imposition of income tax on, income derived in the capacity of an employee, income from personal services or similar income (paragraphs 23AG(2)(c) and (d)); or • a law or international agreement dealing with diplomatic or consular privileges and immunities, or privileges and immunities of persons connected international organisations (paragraphs 23AG(2)(e), (f) and (g)). In your case, your income is exempt in country X solely because you are a diplomatic passport holder and therefore as a member of the diplomatic staff you are afforded the rights and privileges as set out in the Vienna Convention on Diplomatic Relations (VCDR). The VCDR sets out the special rules, that is privileges and immunities, which apply to diplomatic missions. Article 34 of the VCDR provides an exemption from all dues and taxes having its source in country X. Accordingly, the VCDR applies to exempt from tax in country X the salary, wages and allowances earned by DFAT employees in country X. The VCDR is an international agreement to which Australia is a party and that deals with diplomatic or consular privileges and immunities, and as such, the reason for this exemption from tax in country X is because of one of the reasons listed in subsection 23AG(2). As you are exempt from income tax in country X solely because of one of the reasons listed in subsection 23AG(2), your foreign earnings are not exempt from tax in Australia under subsection 23AG(1).

Relevant facts: You are an Australian resident for taxation purposes. | You were posted to country X. | Your foreign service it directly attributable to the delivery of Australian official development assistance (ODA). | Your primary role in country X is to manage Australia's development programs. | Your posting is for 12 months with the possibility of extending. | You travelled to the posting on your diplomatic passport. | You will be engaged in foreign employment for more than 91 continuous days. | Australia does not have a double tax agreement or tax treaty with country X. | Your salary is not assessable in country X because you are not subject to country X taxation system due to your diplomatic status.