Private ruling: Foreign employment income - Australian Defence Force.
Date of advice: 12 May 2017
Published: March 2018
Ruling period: Year ending 30 June 2018
Date scheme commenced: 1 July 2017

Ruling: Q1: Is your foreign employment income (including allowances) exempt from taxation in Australia under section 23AG of the Income Tax Assessment Act 1936 ? | A1: Yes

Relevant facts and circumstances: You are an Australian resident for tax purposes. You are a full time member of the Australian Defence Force. You will be posted to the Country X on a full time assignment from 1 July 2017 for a period of one year. Whilst posted to Country X, you are not a member of a diplomatic mission, covered by the Vienna Convention or any other similar agreement. There is no double taxation agreement between the Government of Australia and Country X. Country X normally taxes income derived in the capacity of an employee. In addition to your salary, you will receive a hardship allowance and an overseas rental rebate.

Relevant legislative provisions: Income Tax Assessment Act 1936 Section 23AG | Income Tax Assessment Act 1997 Section 6-5

Reasons for decision: Summary: As an Australian resident, your assessable income includes the ordinary income you derived directly or indirectly from all sources, whether in or out of Australia, during the income year. Income in the form of salary, wages and allowances are all types of ordinary income. Although a payment may be considered ordinary income and will generally be assessable under the provisions of section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997), there are some instances where ordinary income may be excluded from an individual's assessable income in Australia. | Detailed Reasoning - Exemption from taxation under section 23AG of the Income Tax Assessment Act 1936 (ITAA 1936): Subsection 23AG(1) of the ITAA 1936 provides an exemption from Australian income tax where a resident, being a natural person, has been engaged in foreign service for a continuous period of not less than 91 days. Foreign earnings derived by the person from that foreign service are exempt from tax providing all of the other requirements of section 23AG are satisfied. Foreign earnings are exempt only if the continuous period of foreign service is directly attributable to one of the situations listed under subsection 23AG(1AA) of the ITAA 1936. This includes the deployment outside Australia as a member of a disciplined force (including the Australian Defence Force (ADF)). As you have been directed to perform duties outside Australia by the ADF in your capacity as a member of the ADF, you have been deployed by the Commonwealth for the purposes of paragraph 23AG(1AA)(d) of the ITAA 1936. From the information that you have provided, during your posting you will satisfied all of the above criteria. Subsection 23AG(2) of the ITAA 1936 considers whether, and if so, why, the foreign earnings are exempt from tax in the foreign country. Foreign earnings are not exempt under this section if the amount is exempt from income tax in the foreign country only because of any of the following: a) a law of the foreign country giving effect to a double tax agreement b) a double tax agreement c) provisions of a law of the foreign country under which income covered by any of the following categories is generally exempt from income tax: i. income derived in the capacity of an employee ii. income from personal services iii. similar income d) the law of the foreign country does not provide for the imposition of income tax on one or more of the categories of income mentioned in paragraph (c); e) a law of the foreign country corresponding to the International Organisations (Privileges and Immunities) Act 1963 or to the regulations under that Act; f) an international agreement to which Australia is a party and that deals with: i. diplomatic or consular privileges and immunities; or ii. privileges and immunities in relation to persons connected with international organisations; g) a law of the foreign country giving effect to an agreement covered by paragraph (f). Australia does not have a double taxation agreement with Country X therefore paragraphs 23AG(2)(a) and 23AG(2)(b) of the ITAA 1936 do not apply. The law of Country X provides for the imposition of income tax on employment income and you will be subject to Country X tax laws, therefore paragraphs 23AG(2)(c) and 23AG(2)(d) of the ITAA 1936 do not apply. Further, your earnings are not subject to any laws or agreements relating to privileges and immunities granted to persons connected with international organisations. Therefore, paragraphs 23AG(2)(e), 23AG(2)(f) and 23AG(2)(g) of the ITAA 1936 do not apply. Therefore 23AG(2) of the ITAA 1936 will not deny an exemption under 23AG(1) of the ITAA 1936. | Detailed Reasoning - Overseas rental rebate: The part of the allowances received by you that relate to living expenses in the foreign country will be exempt from tax under subsection 23AG(1) of the ITAA 1936. This amount is paid to cover expenditure while you are in the foreign country and engaged in a period of foreign service, and is therefore derived from that foreign service. | Detailed Reasoning - Hardship allowance: The allowance is designed to cover various costs and hardship of the foreign service. As they are paid to compensate for costs arising from the foreign service and for the hardship attributable to the foreign service, they are considered to be derived from your foreign service. In summary, your salary, hardship allowance and overseas rental rebate are exempt from Australian income tax under section 23AG of the ITAA 1936.