Private ruling: Foreign employment income
Date of advice: 23 June 2016
Published: August 2016
Ruling period: Year ended 30 June 20ww | Year ending 30 June 20xx | Year ending 30 June 20yy
Date scheme commenced: 1 July 20vv

Ruling: Questions and answers | 1. Is your foreign employment income exempt from income tax in Australia under section 23AG of the Income Tax Assessment Act 1936 (ITAA 1936) until 30 June 20xx? | Yes | 2. Is your foreign employment income exempt from income tax in Australia under section 23AG of the ITAA 1936 after 1 July 20xx? | No

Relevant facts and circumstances: You are an Australian resident for taxation purposes. You are employed by the X as an employee under the X Act 2011 . You were initially employed by the X complete a compulsory pre-deployment program with the Y You were then employed by X as a full-time employee; you are deployed to Foreign Country X. Your deployment is intended for 12 months with the possibility of a 12-month extension. Your foreign service is directly attributable to the delivery of Australian official development assistance (ODA) by your employer. You are engaged in continuous Foreign Service for more than 91 days. You took annual leaves to visit your family in Australia; attend your child's wedding and attend an international conference. You took leave to have medical tests and minor surgeries in Australia as these were not available in Foreign Country X. You provided relevant leave forms and doctor's certificates for each leave. You did not perform any work duties while in Australia. There is no double tax agreement between the Government of Australia and the Government of Foreign Country X. Under its domestic law, Foreign Country X taxes employment income. Your foreign employment income is exempt from taxation in Foreign Country X under the terms of the Memorandum of Understanding between the Government of Australia and the Government of Foreign Country X (MOU).

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

Reasons for decision: Summary: Section 23AG of the ITAA 1936 provides that where you are working overseas and earning foreign employment income, the income is exempt from income tax in Australia if all of the following applies: • you are an Australian resident; • you are engaged in continuous foreign services as an employee for 91 days or more; • your foreign service is directly attributable to the delivery of Australian official development assistance (ODA) by your employer; and • you are not exclude from the exemption by specific conditions listed in the law. Subsection 23AG(2) of the ITAA 1936 provides that no exemption is available in circumstances where an amount of foreign earnings derived in a foreign country is exempt from tax in the foreign country solely because of: • a double tax agreement or a law of a country that gives effects to such an agreement (paragraphs 23AG(2)(a) and (b)); • a law of that foreign country which generally exempts from, or does not provide for, the imposition of income tax on income derived in the capacity of an employee, income from personal services or any other similar income (paragraphs 23AG(2)(c) and (d)); and • a law or international agreement dealing with diplomatic or consular privileges and immunities, or privileges and immunities of persons connected with international organisations (paragraphs 23AG(2)(e), (f) and (g)). If your foreign employment income is exempt for a reason other than, or in addition to, the conditions listed above, then it will still be exempt from taxation in Australia. You are an Australian resident; you are an X employee who is deployed to Foreign Country X; you are engaged in continuous foreign services as an employee for 91 days or more and your foreign service is directly attributable to the delivery of Australian ODA by your employer. Therefore, your employment income will be exempt from tax in Australia as long as you are not caught by the non-exemption conditions as listed in subsection 23AG(2) of the ITAA 1936. In your situation, there is no double tax agreement between the Government of Australia and the Government of Foreign Country X. Therefore, paragraphs 23AG(2)(a) and 23AG(2)(b) of the ITAA 1936 will not apply. As the laws of Foreign Country X provide for the imposition of income tax and do not generally exempt employment income from income tax, paragraphs 23AG(2)(c) and (d) of the ITAA 1936 will not apply. None of the other reasons in subsection 23AG(2) of the ITAA 1936 apply to your situation. However, Chapter 2 of the Explanatory Memorandum to the Tax and Superannuation Laws Amendment (2015 Measures No.4) Bill 2015 (the EM) provides that from the 20xx-yy income year and later income years, employees of an Australian government agency who are undertaking ODA in overseas employment for a period not less than 91 days are no longer exempt from income tax in Australia. You are employed as an X employee under the X Act 2011, you are considered to be an Australian Government employee. Moreover, you are not a member of the Y. Accordingly, your foreign employment income is exempt from income tax in Australia under section 23AG of the ITAA 1936 until 30 June 20xx. Your foreign employment income is not exempt from income tax in Australia under section 23AG of the ITAA 1936 from 1 July 20xx. | Detailed Reasoning - Additional information: If a taxpayer has income in a financial year which is only partially exempt, there is a requirement to apportion the income. Salary and wages which are not exempt foreign earnings should be declared as normal at salary and wages when lodging. Foreign earnings exempt under section 23AG of the ITAA 1936 need to be included as exempt foreign salary and wage income in an individual's tax return. These amounts 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. It is advisable to include a note with lodgement, explaining the method of calculation and reference any applicable private rulings for the periods.