Private ruling: Exempt foreign sourced income
Published: July 2013
Ruling period: Year ended 30 June 2012
Date scheme commenced: 1 July 2011

Ruling: Question and answers: | 1. Is the income that you derive in respect of your foreign employment exempt from Australian income tax under section 23AG of the Income Tax Assessment Act 1936? | Yes. | 2. Is the cost of living allowance that you receive fortnightly in respect of your foreign employment exempt from Australian income tax under section 23AG of the Income Tax Assessment Act 1936? | Yes. | 3. Is the relocation allowance that you have received post you taking up your foreign employment exempt from Australian income tax under section 23AG of the Income Tax Assessment Act 1936? | No.


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

Reasons for decision: Detailed Reasoning - Salary and cost of living allowance: 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 · 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 - Prior and post allowance: Allowances are often paid to cover costs associated with preparing for departure and returning from the country where the employment will be exercised. These allowances are not paid to cover costs arising from the performance of a foreign service and they are paid to cover costs arising prior to and after the end of the period of a foreign service. Accordingly, any allowances that you are paid to cover costs associated with preparing for departure and returning from the deployment are not considered to be derived from foreign service, and therefore not exempt from income tax under subsection 23AG(1) of the ITAA 1936.

Relevant facts: You are an Australian resident for income tax purpose. | You were involved in an Australian government aid development program. | As a consequence of your involvement in the program you were a volunteer with a local foreign non government organisation (NGO). | Upon completion of your assignment you were offered employment with an international aid providing partner. | In accepting the employment contract you had the opportunity to continue working on the project that you were involved in as an Australian government aid supported program. | After a number of months, you were offered a full time position with the organisation. The fulltime position provided the opportunity for you to continue to work on the project that you were involved in as an Australian government supported program. | During the income year included in this ruling you took the following breaks a number of short breaks of no longer than 7 days. | All annual leave was accumulated whilst working in the foreign country. | In addition to your salary you receive a fortnightly cost of living allowance from your employer. You also received a relocation allowance. | You have been engaged in service in the same foreign country for a continuous period in excess of 91 days. | The foreign sourced employment income that you earn is not liable to assessment in the country that the employment is exercised for the following reasons; | · Your employer, as all international non government organisations, has an Memorandum Of Understanding with the Ministry of Foreign Affairs and International Co-operation. | · According to the 1997 Tax Law, NGOs do not pay taxes on their income if they are organizations with either religious, charitable, scientific, literary, or educational purposes (Article 9 of the Tax Law 1997). | This is not specifically mentioned in your employers' MOU (this MOU is one page authorization for your employer to work in the foreign country). Your employer is only obliged to submit the list of foreign staff persons, including the nationality, passport number, address in the country where you exercise your employment, and the accompanying employment contract. | Your employer is defined as an exempt organisation in their country of residence.