Private ruling: Assessability of foreign employment income
Published: April 2015
Ruling period: Year ending 30 June 2015
Date scheme commenced: 1 July 2014

Ruling: Question and answer | Is your foreign employment income exempt from taxation in Australia? | Yes.

Relevant facts and circumstances: You have been deployed to a foreign country for a period of six months. You state that you will be engaged in continuous foreign service for more than 91 days. You state that your foreign service is directly attributable to the delivery of Australian official development assistance by your employer. You are a resident of Australia. You are not accredited as diplomatic or consular personnel. The foreign country imposes income tax on employment income derived by both residents and non-residents. There is no double tax agreement between Australia and the foreign country. There is a Memorandum of Understanding (MOU) between Australia and the foreign country on which provides for Australians to assist that country without the foreign country taxing the employment income. Your employer considers that employees of your classification deployed to the foreign country are covered by the provisions of the MOU between Australia and the foreign country.

Relevant legislative provisions: Income Tax Assessment Act 1936 Section 23AG | Income Tax Assessment Act 1936 Subsection 23AG(1) | Income Tax Assessment Act 1936 Subsection 23AG(2) | Income Tax Assessment Act 1936 Subsection 23AG(3)

Reasons for decision: Summary: Section 23AG of the Income Tax Assessment Act 1936 (ITAA 1936) provides that where you are working overseas and earning foreign employment income, the income is exempt from income tax in Australia if all of the following applies: • you are an Australian resident; • you are engaged in continuous foreign service as an employee for 91 days or more; • your foreign service is directly attributable to the delivery of Australian official development assistance by your employer; and • you are not excluded from the exemption by specific conditions listed in the law. Subsection 23AG(2) of the ITAA 1936 provides that no exemption is available in circumstances where an amount of foreign earnings derived in a foreign country is exempt from tax in the foreign country solely because of: • a double tax agreement or a law of a country that gives effect to such an agreement (paragraphs 23AG(2)(a) and (b)); • a law of that foreign country which generally exempts from, or does not provide for, the imposition of income tax on income derived in the capacity of an employee, income from personal services or any other similar income (paragraphs 23AG(2)(c) and (d)); and • a law or international agreement dealing with diplomatic or consular privileges and immunities, or privileges and immunities of persons connected with international organisations (paragraphs 23AG(2)(e), (f) and (g)). If your foreign employment income is exempt for a reason other than, or in addition to, the conditions listed above, then it will still be exempt from taxation in Australia. For example, your foreign employment income may not be taxed in the foreign country you are working in because there is a MOU or similar agreement between Australia and the foreign country which provides for Australians to assist that country without the foreign country taxing the employment income. In your case: • you are an Australian resident; • you are engaged in continuous foreign service as an employee for 91 days or more; and • your foreign service is directly attributable to the delivery of Australian official development assistance by your employer. Therefore, your employment income will be exempt from taxation in Australia as long as you are not caught by the non-exemption conditions as listed in subsection 23AG(2) of the ITAA 1936. In your situation, it is evident that the non-exemption conditions do not apply to you as your foreign earnings are not exempt from tax in the foreign country solely because of a double tax agreement or a law that gives effect to an agreement, a law that does not impose a tax on employment income, or a law or international agreement that deals with consular or diplomatic privileges. Instead, your foreign earnings are exempt from tax in the foreign country because of the MOU between Australia and the foreign country. Therefore, your foreign earnings will be exempt from taxation in Australia for the period of your deployment. | Detailed Reasoning - Exemption with progression: Foreign earnings that are exempt from Australian tax under section 23AG of the ITAA 1936 are nevertheless taken into account in calculating the Australian tax on other assessable income derived by the employee as specified in subsection 23AG(3) of the ITAA 1936. Tax on other assessable income will be calculated by applying to the non-exempt income (for example, Australian salary or investment income), the notional average rate of tax payable on the sum of exempt income and non-exempt income. In calculating these amounts, any deductions that relate to the exempt income are allowed as if the exempt income was assessable income. That is, expenses which relate directly to earning the exempt foreign employment income are deductible from the income.