Private ruling: Assessability of foreign salary and allowances
Published: November 2012
Ruling period: Year ending 30 June 2013 | Year ending 30 June 2014 | Year ending 30 June 2015
Date scheme commenced: 1 July 2012

Ruling: Question and answer | Are the salary and allowances you earn while posted to Country X exempt from income tax in Australia? | No.

Relevant facts and circumstances: You are an Australian resident for income tax purposes. You are a full-time member of the Australian Defence Force (ADF). You have been posted to Country X for a period greater than 91 days. While posted in Country X, you receive a salary and allowances, including an attraction allowance, hardship allowance, and overseas living allowance. You will accrue recreation leave of 30 days per year as a result of your posting in Country X. You are likely to expend this recreation leave primarily in Australia. While in Australia on leave, you will not perform any work-related duties. Your foreign earnings are exempt from taxation in Country X because of a Treaty between the Government of Australia and the Government of Country X. Country X taxes employment income under its domestic laws. There is a tax treaty between Australia and Country X.

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

Reasons for decision: Summary: 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 purpose 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 included in assessable income. Section 11-15 of the ITAA 1997 lists those provisions dealing with income that may be exempt. Included in this list is section 23AG of the Income Tax Assessment Act (ITAA 1936), which deals with foreign earnings. Subsection 23AG(1) of the ITAA 1936 provides that where Australian resident individuals are engaged in foreign service for a continuous period of not less than 91 days, foreign earnings derived from that foreign service are exempt from tax in Australia. In your case, you are an Australian resident individual engaged in foreign service for a continuous period of not less than 91 days. Therefore, your foreign earnings are exempt under section 23AG of the ITAA 1936, provided that all of the conditions in that section are met. Subsection 23AG(1AA) of the ITAA 1936, which took effect from 1 July 2009, provides that those foreign earnings will not be exempt under section 23AG of the ITAA 1936 unless the continuous period of foreign service is directly attributable to any of the following: (e) delivery of Australian official development assistance by your employer; (f) activities of your employer in operating a public fund declared by the Treasurer to be a developing country relief fund, or a public fund established and maintained to provide monetary relief to people in a developing foreign country that has experienced a disaster (a public disaster relief fund); (g) activities of your employer as a prescribed charitable or religious institution exempt from Australian income tax because it is located outside Australia or the institution is pursuing objectives outside Australia; or (h) deployment outside Australia by an Australian government (or an authority thereof) as a member of a disciplined force. In your case, you were posted to Country X as a member of the ADF. Paragraph 23AG(1AA)(a) of the ITAA 1936 does not apply to your as your foreign service was not directly attributable to the delivery of Australian official development assistance by your employer. Paragraph 23AG(1AA)(b) of the ITAA 1936 does not apply to you as your employer was not operating a public fund. Paragraph 23AG(1AA)(c) of the ITAA 1936 does not apply to you as your employer is not a prescribed charitable or religious institution. Paragraph 23AG(1AA)(d) of the ITAA 1936 does not apply to you, because although you are a member of the ADF and therefore a member of a disciplined force, you have not been "deployed" outside Australia. In your case you have been "posted" to Country X. As paragraph 23AG(1AA)(d) of the ITAA 1936 specifically states that a taxpayer's service must be directly attributable to "deployment outside of Australia" and you have been posted to Country X and not deployed there, you have not met the conditions set out in this paragraph. Your income is therefore not exempt under section 23AG of the ITAA 1936.

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