Private ruling: foreign earnings
Published: February 2015
Ruling period: Year ended 30 June 2015 | Year ended 30 June 2016 | Year ended 30 June 2017
Date scheme commenced: 20 April 2015

Ruling: Question and Answer | Are your foreign earnings exempt from tax in Australia under section 23AG of the Income Tax Assessment Act 1936 ? | No

Relevant facts and circumstances: You are a resident of Australia. Between 2015 and the financial year ended 30 June 2017 you will be located outside Australia. You are a member of a disciplined force. You are partaking in an exchange program. You will not be performing diplomatic or consular duties. You will be in the outside Australia for a period exceeding 91 days. You will not perform any work in international waters or international airspace. There is a Double Taxation Agreement between Australia and your destination.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5 | Income Tax Assessment Act 1936 Section 23AG | International Tax Agreement Act 1953

Reasons for decision: Detailed Reasoning - Income: 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, whether in or out of Australia, during the income year. Salary and wages 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 then 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. | Detailed Reasoning - Exempt foreign 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 employment in a foreign country are exempt from income tax in Australia. Foreign earnings includes income consisting of salary, wages, bonuses or allowances (subsection 23AG(7) of the ITAA 1936). Subsection 23AG(1AA) of the ITAA 1936 provides that foreign earnings are not exempt from tax unless the continuous period of foreign service is directly attributable to any of the following: • the delivery of Australia's overseas aid program by the individual's employer; • the activities of the individual's employer in operating a developing country relief fund or a public disaster relief fund; • the activities of the individual's employer being a prescribed institution that is exempt from Australian tax; or • the individual's deployment outside Australia by an Australian government (or an authority thereof) as a member of a disciplined force. In accordance with subsection 23AG(2) of the ITAA 1936, the exemption will not apply if the income is exempt from income tax in the foreign country only because of one or more of the following conditions: • a tax treaty with Australia or a law giving effect to a treaty agreement • the foreign country exempts from income tax, or does not provide for the imposition of income tax on, income derived in the capacity of an employee, income from personal services or similar income, or • a law or international agreement dealing with privileges and immunities of diplomats or consuls or of persons connected with international organisations applies. In determining your liability to pay tax in Australia it is necessary to consider not only the domestic income tax laws but also any applicable double tax agreements. Section 4 of the International Tax Agreements Act 1953 (Agreements Act) incorporates that Act with the ITAA 1936 and the ITAA 1997 so that all three Acts are read as one. Section 5 of the Agreements Act states that, subject to the provisions of the Agreements Act, any provision in an Agreement listed in section 5 has the force of law. | Detailed Reasoning - Double Tax Agreement: The Double Tax Agreement provides that remuneration paid by Australia to an individual in respect of services rendered in the discharge of governmental functions shall be taxable only in Australia. Consequently, Australia retains the sole taxing right to your salary and allowances and the income is exempt from tax in the destination country. Paragraph 23AG(2)(b) of the ITAA 1936 provides that where income is exempt in a foreign country solely as a result of the operation of a tax treaty, the income will not be exempt in Australia under subsection 23AG(1). Your salary and allowances are exempt in Thailand because of Article 19 of the Thai Agreement. | Detailed Reasoning - Conclusion: Consequently, as your income is exempt in the destination country solely because of the Double Tax Agreement, your salary and allowances will not be exempt from income tax in Australia under subsection 23AG(1) of the ITAA 1936.