Private ruling: Foreign income -23AG
Published: October 2014
Ruling period: 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Q1: Are the salary and allowances you earned while posted to country X for full-time study exempt from income tax in Australia? | A1: No

Relevant facts and circumstances: You are a resident of Australia for tax purposes. You are serving in the Australian Defence Force. You will be posted to country X for the period greater than 91 days. The purpose of the posting is to undertake military specific training at country X as a full-time student. For the duration of the posting you are not required to do any other duties other than as a student. You do not intend to return to Australia during your assignment. You are not a member of the Australian Embassy; you do not have a diplomatic passport or receive diplomatic privileges. You will receive your normal base salary and allowances. You will also be paid an overseas allowance to cover meals, incidentals, accommodation and equipment expenses. Your posting to country X was not on a cyclical basis. There is a tax treaty between Australia and country X, interalia the Agreement between the Government of Australia and the Government of country X for the Avoidance of Double Taxation and The Prevention of Fiscal Evasion with respect to Taxes on Income (signed 17 April 1988, effective from 28 December 1990). You stated that Article 19 of the country X Agreement applies to you. You stated the 'Terms of Reference country X advanced language study tour' (dated 18 June 2013) provides that the language training you are undertaking is a development activity aimed at fostering relationships between the Australian Defence Force (ADF) and country X. You have not provided evidence that your posting to country X is covered under a memorandum of understanding, or similar agreement between Australia and country X.

Relevant legislative provisions: Income Tax Assessment Act 1936 Section 23AG. | Income Tax Assessment Act 1997 Section 6-5

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 purpose 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 included in assessable income. Section 11-15 of the ITAA 1997 lists those provisions dealing with income that may be exempt. Included in this list is section 23AG of the Income Tax Assessment Act (ITAA 1936), which deals with foreign earnings. Subsection 23AG(1) of the ITAA 1936 provides that where Australian resident individuals are engaged in foreign service for a continuous period of not less than 91 days, foreign earnings derived from that foreign service are exempt from tax in Australia. Subsection 23AG(1AA) of the ITAA 1936 provides that those foreign earnings will not be exempt under subsection 23AG(1) of the ITAA 1936 unless the continuous period of foreign service is directly attributable to any of the following: (a) the delivery of Australian official development assistance by the taxpayer's employer (generally provided by AusAID or the Department of Foreign Affairs and Trade); (b) the activities of the taxpayer's employer in operating a public fund covered by the deductible gift recipient categories overseas aid fund and developed country disaster relief fund; (c) the activities of the taxpayer's employer where they are a charitable institution or religious institution which is income tax exempt because they are a prescribed institution located outside Australia or pursuing objectives principally outside Australia; (d) the taxpayer's deployment outside Australia as a member of a disciplined force of Australia (generally considered to be the ADF or Australian Federal Police); or (e) an activity of a kind specified in the regulations. During the period you are in country X, you will remain an Australian resident employed by the ADF. You are posted to country X to undergo advanced military training as part of your employment with the ADF, and are therefore engaged in service in a foreign country as an employee. During this posting you will receive your normal salary and additional allowances for service overseas. The salary and allowances paid for the duration of your overseas posting are foreign earnings derived from your foreign service. Your foreign service is for a continuous period exceeding 91 days. Your foreign service is of the kind specified in paragraph (d) of subsection 23AG (1AA) of the ITAA 1936, that is, your deployment as a member of a disciplined force (ADF) by an Australian government. However, the exemption does not apply if the income is exempt from tax in the foreign country only because of any of the reasons listed in subsection 23AG(2) of the ITAA 1936. One of these reasons is a tax treaty contained in the International Tax Agreements Act 1953 (Agreements Act). Australia has a tax treaty with country X, so it is necessary to consider whether your foreign earnings are exempt from income tax in country X under this agreement. Section 4 of the International Tax Agreements Act 1953 (Agreements Act) incorporates that Act with the ITAA 1936 and the ITAA 1997 so that all three Acts are read as one. The Agreements Act overrides both the ITAA 1936 and ITAA 1997 where there are inconsistent provisions (except in some limited situations). Section 5 of the Agreements Act states that, subject to the provisions of the Agreements Act, any provision in an Agreement listed in section 5 has the force of law. The country X Agreement is listed in section 5 of the Agreements Act. The country X agreement is located on the Austlii website (www.austlii.edu.au) in the Australian Treaties Series database. The country X agreement operates to avoid the double taxation of income received by residents of Australia and country X. | Detailed Reasoning - The country X Agreement: You stated that Article 19 of the country X Agreement applies to you. Article 19 of the country X Agreement provides that remuneration paid by Australia to any individual in respect of services rendered to it (government service) shall be taxable only in Australia. However, such remuneration will be taxable only in country X if the services are rendered in that country and the individual is a resident and citizen of country X, or did not become a resident of country X solely for the purpose of performing the services. The employment income you receive in relation to your posting to country X is taxable only in Australia under Article 19 of the country X Agreement, as the income is paid by Australia in respect of your service in the ADF (government service). This income is not subject to tax in country X by virtue of the operation of Article 19. Consequently, one of the reasons listed in subsection 23AG(2) of the ITAA 1936 is satisfied, as your foreign earnings are exempt from income tax in country X because of a tax treaty. If your foreign employment income derived in country X is exempt for a reason other than, or in addition to the reasons listed in subsection 23AG(2) of the ITAA 1936, the it will still be exempt from taxation in Australia. For example, if your foreign employment income is not taxed in country X because there is a memorandum of understanding (MOU) or similar agreement between Australia and country X. | Detailed Reasoning - Conclusion: As your employment income derived while posted to country X is exempt from tax in country X due to the tax treaty (the country X Agreement) only , subsection 23AG(2) of the ITAA 1936 applies to deny the exemption from tax on your overseas employment income. Accordingly, your salary and allowances earned while posted to country X are not exempt from tax in Australia under subsection 23AG (1) of the ITAA 1936 and are assessable income under subsection 6-5(2) of the ITAA 1997.