Private ruling: Exempt income
Date of advice: 1 March 2018
Published: May 2018
Ruling period: Year ending 30 June 2018
Date scheme commenced: 1 July 2017

Ruling: Q1: Are the salary and allowance you earned exempt from income tax pursuant to section 23AG of the Income Tax Assessment Act 1936 ? | A1: Yes | Q2: Is the leave you accrued from DDMMYY to DDMMZZ exempt from income tax pursuant to section 23AG of the ITAA 1936? | A2: Yes

Relevant facts and circumstances: You are a member of an Australian Government Department. You are an Australian resident for tax purposes. You were deployed to Country A for 92 days to provide assistance to the Country A under a relevant program. Your salary and allowances were paid by the Department. You accrued leave while posted to Country A. The objective of the relevant treaty is to set out arrangements relating to development cooperation between Australia and Country A in accordance with the declaration.

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(1AA) | Income Tax Assessment Act 1936 paragraph 23AG(1AA)(d) | Income Tax Assessment Act 1936 subsection 23AG(2) | Income Tax Assessment Act 1936 paragraph 23AG(2)(b) | Income Tax Assessment Act 1936 subsection 23AG(7) | International Tax Agreements Act 1953 section 5

Reasons for decision: Summary: You were engaged in foreign service in Country A for a period of not less than 91 days, as an Australian Government Department member, therefore your salary and allowances from Country A are exempt from tax in Australia under subsection 23AG(1) of the ITAA 1936. | Detailed Reasoning - Detailed reasoning: Subsection 23AG(1) of the Income Tax Assessment Act 1936 (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 tax in Australia. Foreign earnings include income consisting of salary, wages, bonuses or allowances (subsection 23AG(7) of the ITAA 1936). The salary and allowances you receive from your foreign employment is considered to be derived from your foreign service and are considered foreign earnings for the purposes of subsection 23AG(1) of the ITAA 1936. However, subsection 23AG(2) of the ITAA 1936 provides that the exemption in subsection 23AG(1) of the ITAA 1936 will not apply where the income is exempt from income tax in the foreign country because of any of the conditions listed in this section. One of the reasons listed is where the income earned by the resident in the foreign country is made exempt by the operation of a tax treaty (paragraph 23AG(2)(b) of the ITAA 1936). It is therefore necessary to consider not only the income tax laws but also any applicable tax treaty contained in the International Tax Agreements Act 1953 (the Agreements Act). Section 5 of the Agreements Act lists the Country A Agreement. The Country A Agreement operates to avoid the double taxation of income received by residents of Australia and Country A. Article 19(1) of the Country A Agreement provides that remuneration paid by Australia to any individual in respect of services rendered in the discharge of governmental functions shall be taxable only in Australia. The salary and allowances you earn while posted in Country A are exempt from tax in Country A in accordance with the provisions of the relevant treaty are granted exemption from income taxes or other taxes on salaries and allowances. As a result, your salary and allowances are not exempt from tax in Country A solely because of any of the reasons listed in subsection 23AG(2) of the ITAA 1936. Therefore, subsection 23AG(2) of the ITAA 1936 does not operate to deny the foreign earnings exemption under subsection 23AG(1) of the ITAA 1936. Subsection 23AG(1AA) of the ITAA 1936 provides that foreign earnings derived by an Australian resident from 91 days continuous foreign service will only be exempt if the foreign service is directly attributable to: (a) the delivery of Australia's overseas aid program by the individual's employer; (b) the activities of the individual's employer in operating a developing country relief fund or an overseas public disaster relief fund; (c) the activities of the individual's employer, being a prescribed institution that is exempt from Australian income tax. (d) the individual's deployment outside Australia by an Australian government (or an authority thereof) as a member of a disciplined force. (e) an activity of a kind specified in regulations. You are a member of an Australian Government Department who was deployed in Country A for 92 days. Paragraph 9 of Taxation Ruling TR 2013/7 Income tax: foreign employment income: interpretation of subsection 23AG(1AA) of the Income Tax Assessment Act 1936 provides that the phrase 'disciplined force' in paragraph 23AG(1AA)(d) refers to the an Australian Government Department, Australian Federal Police (AFP) and the State and Territory police forces. Therefore your income as a member of an Australian Government Department satisfies paragraph 23AG(1AA)(d) of the ITAA 1936. Accordingly, as you were engaged in foreign service in Country A for a period of not less than 91 days, as an Australian Government Department member, your salary and allowances from Country A are exempt from tax in Australia under subsection 23AG(1) of the ITAA 1936. | Detailed Reasoning - Question 2: Is the leave you accrued during your foreign service exempt from income tax pursuant to section 23AG of the ITAA 1936? | Summary: Taking leave attributable to your periods of foreign service and therefore the salary you receive while taking this leave will be exempt from tax in Australia under section 23AG of the ITAA 1936. | Detailed Reasoning - Detailed reasoning: To qualify for the exemption the foreign earnings must be derived from the foreign service. That does not mean that the foreign earnings need to be derived at the time of engaging in foreign service. The important test is that the foreign earnings, when derived, need to be derived as a result of the undertaking of that foreign service. Specifically, paragraph 81 of Taxation Determination TD 2012/8 Income tax: what types of temporary absences from foreign service form part of a continuous period of foreign service under section 23AG of the Income Tax Assessment Act 1936? states that where recreational leave accrues during a period of foreign service and is taken at a later time when the individual is employed in Australia, the earnings will be attributable to the period of foreign service and will be foreign earnings derived from that foreign service. Therefore, the salary or wages paid for the period of leave will be exempt from income tax. In your case, you have completed a period of foreign service that met the criteria for your earnings to be exempt from tax in Australia under section 23AG of the ITAA 1936. You accrued leave during your periods of foreign service and intend to use this leave while you are working in Australia. Taking leave attributable to your periods of foreign service and therefore the salary you receive while taking this leave will be exempt from tax in Australia under section 23AG of the ITAA 1936. | Detailed Reasoning - Note: The amount of tax that is withheld from your salary payments is a matter for your employer to calculate. When discussing this matter with your employer you may use this ruling as evidence of the tax law that applies to your salary payments whilst you are taking leave that is attributable to your foreign service. Should you consider that the PAYG payment summary you subsequently receive from your employer for the 201X income tax year does not accurately reflect your income and tax withheld you may amend it. The easiest way to do this is to lodge a Request for amendment of income tax return for individuals which is available from our website. It is important to note that foreign earnings exempt under section 23AG of the ITAA 1936 are taken into account in calculating the tax payable on the other income derived by you. This method of calculation referred to as exemption with progression prevents the exempt income from reducing the Australian tax payable on any other income. This income needs to be included as exempt foreign salary and wage income in your Australian tax return.

Question 1: Are the salary and allowance you earned exempt from income tax pursuant to section 23AG of the Income Assessment Act 1936 ?