Private ruling: Foreign source income - Exemption
Published: October 2014
Ruling period: Year ending 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Q1: Are the salary and allowances you earned while employed overseas exempt from income tax in Australia? | A1: Yes.

Relevant facts and circumstances: You are an Australian resident for income tax purposes. Your foreign service was directly attributable to the delivery of Australian official development assistance by your employer. You were engaged in foreign employment for more than 91 continuous days. There is an agreement between Australia and the overseas country that exempts the income from taxation in the overseas country. There is no taxation treaty between the Australian Government and the overseas country.

Relevant legislative provisions: Income Tax Assessment Act 1936 Section 23AG | Income Tax Assessment Act 1936 Section 23AG(1) | Income Tax Assessment Act 1936 Section 23AG(1AA) | Income Tax Assessment Act 1936 Section 23AG(2)

Reasons for decision: Summary: Subsection 23AG(1) of the Income Tax Assessment Act 1936 (ITAA 1936) provides that foreign earnings are exempt from income tax where all of the following requirements are satisfied: • you are a resident of Australia and a natural person, • you are engaged in foreign service, • the foreign service is for a continuous period of at least 91 days, • you derive foreign earnings from that foreign service, • the foreign service is directly attributable to an activity that is listed in subsection 23AG(1AA) of the ITAA 1936, and • the foreign earnings are not exempt from income tax in the foreign country only because of one of the reasons listed in subsection 23AG(2) of the ITAA 1936. Given a consideration of the whole arrangement, it is accepted that you meet the above criteria and the income referable to your foreign service is exempt from income tax in Australia. | Detailed Reasoning - Additional information: If a taxpayer has income in a financial year which is only partially exempt, there is a requirement to apportion the income. Salary and wages which are not exempt foreign earnings should be declared as normal at Salary and wages when lodging. Tax withheld should be declared in full. Any excess Pay As You Go Withholding (PAYGW) credits will be refunded automatically. Foreign earnings exempt under section 23AG of the ITAA 1936 need to be included as exempt foreign salary and wage income in an individual's tax return. These amounts are taken into account in calculating the tax payable on other income derived by a taxpayer. This method of calculation referred to as exemption with progression prevents the exempt income from reducing the Australian tax payable on the other income. It is advisable to include a note with lodgement, explaining the method of calculation and reference any applicable private rulings for the periods.