Private ruling: foreign income
Published: March 2012
Ruling period: Year ended 30 June 2012 | Year ended 30 June 2013 | Year ended 30 June 2014
Date scheme commenced: 1 July 2011

Ruling: Q1: Are your salary and allowances earned while deployed in Country A exempt from tax in Australia pursuant to section 23AG of the Income Tax Assessment Act 1936 (ITAA 1936)? Answer Yes.

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. You are an Australian resident for tax purposes and will remain so while overseas. You are a member of the defence force working in Country A on a three year posting that commenced in 2012. Your employment in Country A is expected to cease in 2014. You do not intend to remain in Country A beyond your current employment contract. While employed in Country A, you will be paid a salary and overseas allowances. You will accrue X days recreational leave per year as a result of your employment in Country A. You will expend your recreational leave outside Country A, primarily in Australia. You will not perform any work duties whilst in Australia. Country A has a taxation system that taxes employment income. Australia has a double tax agreement with Country A ("Country A Agreement). Your liability for taxation is covered in a Memorandum of Understanding (MoU) between Australia and Country A. Under the MoU, your salary and allowances will not be liable for tax in Country A.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subsection 6-5(2), | Income Tax Assessment Act 1997 Subsection 6-15(2), | Income Tax Assessment Act 1997 Section 11-15 and | Income Tax Assessment Act 1936 Section 23AG.

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 during the income year. Salary and allowances are ordinary income for the purposes 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, it is not included in the assessable income of a taxpayer. Section 11-15 of the ITAA 1997 lists those provisions dealing with income which may be exempt. Included in this list is section 23AG of the ITAA 1936 which deals with overseas employment income. Subsection 23AG(1) of the ITAA 1936 provides that foreign earnings of an Australian resident derived during a continuous period of foreign service of not less than 91 days of employment in a foreign country are generally exempt from tax in Australia. One of the conditions listed in subsection 23AG(1AA) of the ITAA 1936 is paragraph 23AG(1AA)(d) which provides that foreign earnings will not be exempt under 23AG of the ITAA 1936 unless the continuous period of foreign service is directly attributable to the taxpayer's 'deployment outside Australia as a member of a disciplined force of Australia'. Pursuant to subsection 23AG(6) of the ITAA 1936, certain temporary absences form part of a period of foreign service, such as recreation leave which is accrued as a result of the foreign service, other than long service leave and leave without pay. You are an Australian resident for tax purposes and will remain so while overseas. You are a member of the defence force working in Country A on a three year posting that commenced in 2012. Your employment in Country A is expected to cease in 2014. You do not intend to remain in Country A beyond your current employment contract. While employed in Country A, you will be paid a salary and overseas allowances. You will accrue X days recreational leave per year as a result of your employment in Country A. You will expend your recreational leave outside Country A, primarily in Australia. You will not perform any work duties whilst in Australia. To qualify for the exemption, the 'foreign earnings' must be derived from the 'foreign service'. As you will be employed to work in Country A, your salary received from this employment will be considered to be derived from foreign service. As your allowances will be paid to compensate for costs arising from the foreign service, they are also considered to be derived from your foreign service. Therefore, your salary and allowances will be foreign earnings from foreign service for the purposes of subsection 23AG(1) of the ITAA 1936. As you are employed as a member of the defence force while working in Country A, you satisfy paragraph 23AG(1AA)(d) of the ITAA 1936. As the recreational leave you intend to take accrues during your foreign service in Country A, this leave will form part of your foreign service pursuant to subsection 23AG(6) of the ITAA 1936 and you will perform a continuous period of foreign service of not less than 91 days. 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 foreign income is exempt from income tax in the foreign country only because of any of the reasons listed in this section. One of the listed conditions is where the foreign income is made exempt in the foreign country by the operation of a double tax agreement (paragraph 23AG(2)(b) of the ITAA 1936). Therefore, it is necessary to consider not only the income tax laws but also any applicable double tax agreements. The International Tax Agreements Act 1953 overrides both the ITAA 1936 and ITAA 1997 where there are inconsistent provisions (except in some limited situations). The Country A Agreement operates to avoid the double taxation of income received by a resident of either Australia or Country A. Article Z 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. However, such remuneration will be taxable only in Country A if the services are rendered in Country A and the individual is a resident and citizen of Country A, or did not become a resident of Country A solely for the purpose of performing the services. Your foreign income will be taxable only in Australia pursuant to Article Z of the Country A Agreement as you are an Australian resident and the income will be paid by Australia in respect of services rendered in the discharge of governmental functions. As your foreign income will be exempt from tax in Country A because of the operation of a double tax agreement, paragraph 23AG(2)(b) of the ITAA 1936 would normally apply and the income would therefore not be exempt from Australian tax under subsection 23AG(1) of the ITAA 1936. However, your foreign income is exempt from taxation in Country A in accordance with the MoU between Australia and Country A. Taxation Determination TD 2005/37 states at paragraph 3 that if the foreign earnings are exempt because of one or more of the reasons in subsection 23AG(2), and also exempt because of a reason not listed in the subsection, the subsection does not apply. Consequently, subsection 23AG(1) would apply to make the relevant earnings exempt from tax in Australia. The exemption provided by the MoU would not fall under any of the exemption categories under subsection 23AG(2) of the ITAA 1936. Therefore, applying TD 2005/37, subsection 23AG(2) of the ITAA 1936 will not apply. Accordingly, your salary and allowances earned during your deployment in Country A will be exempt from Australian income tax pursuant to section 23AG of the ITAA 1936 and will not be assessable pursuant to subsection 6-15(2) of the ITAA 1997.

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