Private ruling: Exempt foreign employment income
Published: June 2012
Ruling period: Year ended 30 June 2007 | Year ended 30 June 2008
Date scheme commenced: 1 July 2006

Ruling: Questions and answers: | 1. Does the income earned by you as a result of foreign service rendered during the year ended 30 June 2007 qualify for an exemption from income tax pursuant to Section 23AG of the Income Tax Assessment Act 1936 (ITAA 1936)? | Yes. | 2. Does the income earned by you as a result of foreign service rendered during the year ended 30 June 2008 qualify for an exemption from income tax pursuant to Section 23AG of the ITAA 1936? | Yes. | 3. Notwithstanding the above, in the event that Section 23AG of the ITAA 1936 is deemed not to apply to the income earned by you as a result of foreign service rendering during the year ended 30 June 2007, will you be entitled to claim a foreign tax credit in relation to taxes paid overseas based on a reasonable calculation of such taxes? | Not applicable.

Relevant facts and circumstances: During the years ended 30 June 2007 and 30 June 2008 you were a resident of Australia for taxation purposes. You entered into an employment contract with an overseas company for a period of 1 year. The contract was subsequently extended for a further period of 2 years. In addition, the contract provided for an automatic extension for an additional year upon your consent. You commenced this contract with no leave entitlements from previous employment. The employment arrangement was terminated by you before the completion of the extended period. Under the terms of the agreement: · you were to operate as an employee within the organisation and were to report to the stated officer; · the place of performance of the duties was country X however, this was subject to change based on mutual agreement between the parties; · you were initially based in country X but were on various occasions required to travel to perform employment duties in country Z; · you were to be remunerated for your personal labour and skills and were to perform the services personally (that is, there was no right of delegation); · you were paid an annual salary for your services net of all applicable taxes in country X; · pursuant to the contract your employer was to remit all appropriate taxes to the relevant country X tax authorities; · the agreement stipulated a standard working week, however it was understood by both parties this may not be the case in reality and in fact, the hours of work would be determined by the employer as required; · it was understood by you that you would often be required to work weekends, public holidays and hours much longer than the working day dictated in your employment contract; · the contract provided that you would be compensated for such additional work by means of equal amount of leave or pay; · the contract further provided that notwithstanding that additional leave may be granted as described above, you were also entitled to a stipulated amount of days of annual leave for a 12 month period; The employment contract states that the foreign company reserves the right to adjust your hours according to the needs of their operation. In addition, the contract states that the company's situation might require you to work additional time in order to cover necessary demands. You often worked in excess of the agreed days and hours, including working public holidays and weekends. You were granted additional annual leave by your employer. This additional leave was recorded and treated by your employer in their records as annual leave and was entirely paid for by them. You utilised the extra leave accrued for carrying out additional work to return to your family in Australia. During your time in Australia you were not available for duty and you were not required to work from your home. There were no other breaks in your employment period. During the years under consideration you were subject to income tax in country X in relation to your employment income for the work you carried out both in country X and in country Z. Your employer has represented that the correct taxes have been deducted and remitted in relation to salary and other remuneration paid to you. The foreign company is based in country X.

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 | Income Tax Assessment Act 1936 Section 23AG | Income Tax Assessment Act 1936 Subsection 23AG(1) | Income Tax Assessment Act 1936 Subsection 23AG(2) | Income Tax Assessment Act 1936 Subsection 23AG(6) | International Tax Agreements Act 1953

Reasons for decision: Detailed Reasoning - Assessable income: Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) advises that the assessable income of an Australian resident taxpayer includes ordinary income derived directly or indirectly from all sources, whether in or out of Australia, during the income year. Salary and wages earned from employment are ordinary income for the purposes of subsection 6-5(2) of the ITAA 1997. Subsection 6-15(2) of the ITAA 1997 goes further to explain that if an amount is exempt income it is not assessable income. 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 Income Tax Assessment Act 1936 (ITAA 1936) which deals with overseas employment income. Subsection 23AG(1) ITAA 1936 explains that where an Australian resident taxpayer is engaged in foreign service for a continuous period of not less than 91 days, any foreign earnings derived from foreign service will be exempt from tax in Australia. The exemption does not apply if the income is exempt from tax in the foreign country only because of any of the reasons listed in subsection 23AG(2) of the ITAA 1936. One of these reasons is the existence of a tax treaty contained in the International Tax Agreements Act 1953. You entered into a contract of employment with a foreign company for a period of 1 year. The contract was subsequently extended for a further period of 2 years. Australia has a tax treaty with country X which operates to avoid the double taxation of income received by residents of Australia and country X. The country X agreement provides that the salary and wages income of an Australian resident will be taxable only in Australia unless the employment is exercised in country X. If the employment is exercised in country X then country X may tax the income. However the country X agreement states that where the employment is exercised in country X the income will not be taxable in country X if one of the following conditions applies: · the taxpayer is present in country X for a period or periods not exceeding 183 days in any consecutive period of 12 months; or · the remuneration is paid by an employer who is not a country X resident; and the remuneration is not borne by a permanent establishment or fixed base that the employer has in country X. Your employer is based in country X, you were employed within the organisation and you were also based in country X. However this was subject to change based on mutual agreement between you and your employer. Your employment contract stated that your employer was to remit all appropriate taxes to the relevant country X tax authorities and you were paid an annual salary for your services net of all applicable taxes in country X. As your income was not exempt from tax in country X subsection 23AG(2) of the ITAA 1936 does not apply. | Detailed Reasoning - Exempt foreign employment income: To obtain the exemption from Australian tax under section 23AG of the ITAA 1936, you must be engaged in foreign service for a continuous period of 91 days or more. However, the continuity of the 91-day period is not broken by certain kinds of temporary absence from the foreign service. Section 23AG(6) of the ITAA 1936 provides that absences from work on recreation leave that is wholly attributable to that foreign service do not break the 91-day continuous foreign service period. Under the terms of your employment contract you agreed to work a standard amount of hours per week. The contract states that your employer reserves the right to adjust those hours according to the needs of their operation. In addition, the contract states that the company's situation might require you to work additional time in order to cover necessary demands. In such cases, it was your employer's policy to compensate you by means of equal amounts of leave or pay. You were often required to work in excess of the agreed days and hours including working public holidays and weekends and as a result you were granted additional annual leave. This leave was recorded and treated by your employer in their records as annual leave and was entirely paid for by them. | Detailed Reasoning - Conclusion: As you were engaged in foreign service for a continuous period of not less than 91 days for the years ended 30 June 2007 and 30 June 2008 and because your income was subject to tax in country X, the income derived is exempt from Australian income tax under section 23AG of the ITAA 1936. | Detailed Reasoning - Note:: 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 other income derived by a taxpayer. This method of calculation - referred to as 'exemption with progression', prevents the exempt income from reducing the Australian tax payable on the other income. This income needs to be included as exempt foreign salary and wage income in your Australian tax return.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet.