Private ruling: Foreign employment income
Date of advice: 19 April 2016
Published: June 2016
Ruling period: Year ending 30 June 2016 | Year ending 30 June 2017 | Year ending 30 June 2018
Date scheme commenced: 1 July 2015

Ruling: Q1: Is your foreign employment income exempt from income tax in Australia under section 23AG of the Income Tax Assessment Act 1936 (ITAA 1936)? | A1: No

Relevant facts and circumstances: You are an Australian resident for taxation purposes. You are a full time member of the Australian Defence Force. You have been posted to Foreign Country A to attend a training institution as a full time Foreign Instructor. Your posting commenced in month 20XX and concludes in month 20YY. While in Foreign Country A, you are not a member of staff of the Australian Embassy and do not have diplomatic status. Your passport and visa are official documents. During your posting to Foreign Country A, in addition to your normal base salary, you receive allowances. You have provided the following documents: • Arrangement between the Department of Defence of Australia for the implementation of the agreement between the Foreign Country A and Australia on the Framework for the security Cooperation and its plan of action on Defence Cooperation • Agreement Between Australia and the Foreign Country A on the Framework for Security Cooperation • General Agreement on Development Cooperation between the Government of Australia and the Government of the Foreign Country A • Two letters signed by Head of Defence Staff • Defence Annual Report 2014 - 2015 • Department of Defence Pay and Conditions Manual (PACMATE) Part 3 Division 1 - General The documents say the position you hold in Foreign Country A is established under the auspices of the Defence Cooperation Program (DCP) and the Defence Cooperation Arrangement (DCA). There is a double tax agreement between the Government of Australia and the Government of the Foreign Country A. Foreign Country A normally taxes income derived in the capacity of an employee.

Relevant legislative provisions: Income Tax Assessment Act 1936 Section 23AG

Reasons for decision: Summary: Subsection 23AG(1) of the ITAA 1936 provides that foreign earnings are exempt from income tax in Australia if all of the following requirements are satisfied: • You are a resident of Australia and a natural person; and • You are engaged in Foreign Service; and • The Foreign Service is for a continuous period of not less than 91 days; and • You derive foreign earnings from that Foreign Service. In your case, you satisfy all of the requirements under subsection 23AG(1) of the ITAA 1936. However, regardless of whether an individual satisfies the requirements listed above, the exemption provided by subsection 23AG(1) of the ITAA 1936 is not available unless: • From 1 July 2009 onwards, the foreign service is 'directly attributable' to an activity listed in subsection 23AG(1AA) of the ITAA 1936 (the listed activities include deployment outside Australia as a member of a disciplined force); and • The foreign earnings are exempt from taxation in the foreign country for a reason other than, or in addition to, any of the following reasons that are listed in subsection 23AG(2) of the ITAA 1936: • A double tax agreement or a law of the foreign country giving effort to a double tax agreement; • The foreign country does not impose tax on employment; • A law of the foreign country that corresponds to the International Organisations (Privileges and Immunities) Act 1963 or to the regulations under that Act; • An International agreement to which Australia is a party that deals with diplomatic or consular privileges and immunities, or privileges and immunities for people connected with international organisations. • A law of the foreign country which gives effect to an agreement to which Australia is a party and which deals with diplomatic or consular privileges and immunities, or privileges and immunities for people connected with international organisations. In your case, you are a full time member of the Australian Defence Force; you are deployed to the Foreign Country A, you satisfy the requirement under subsection 23AG(1AA) of the ITAA 1936. In reference to subsection 23AG(2) of the ITAA 1936, there is a double tax agreement between the Government of Australia and the Government of the Foreign Country A. The employment income you receive in relation to your posting to Foreign Country A is exempt in the Foreign Country A under Article 19 of the double tax agreement. Consequently, one of the reasons listed in subsection 23AG(2) of the ITAA 1936 is satisfied. You were requested to provide written confirmation from the Australian Defence Force Tax Management office that your foreign service is exempt in Foreign Country A for a reason other than the double tax agreement. In your response to this request, you have indicated that you are unable to obtain this. You have sent supporting documents which are listed in the relevant facts and circumstances section. However, the Commissioner is not satisfied that your income is exempt in Foreign Country A under the DCP and/or the DCA. As your employment income is exempt in Foreign Country A only because of the double tax agreement, subsection 23AG(2) of the ITAA 1936 does apply. Accordingly, the employment income that you derive from your overseas deployment in Foreign Country A is not exempt from income tax in Australia under section 23AG of the ITAA 1936.