Private ruling: Exempt Foreign Source Income
Date of advice: 13 April 2016
Published: June 2016
Ruling period: Year ended 30 June 2015 | Year ending 30 June 2016
Date scheme commenced: 1 July 2014

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

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. You were deployed to Country X for the period. You travelled on a diplomatic passport with a visa. You were performing diplomatic duties whilst in Country X. You were in Country for a period greater than 91 days.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5 | Income Tax Assessment Act 1936 Section 23AG | International Tax Agreement Act 1953 Vienna Convention on Diplomatic Relations 1961

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 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 exempt foreign employment income. | Detailed Reasoning - Exempt 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(1) is subject to subsection 23AG(2) so that the exemption from tax in Australia in subsection 23AG(1) does not apply if the income is exempt from taxation in the foreign country only because of any of the reasons set out in subsection 23AG(2). 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 your case as you meet the conditions of subsection 23AG(1AA) your foreign earnings are eligible for exemption pursuant to section 23AG, subject to the conditions contained in subsection 23AG(2). | Detailed Reasoning - Certain foreign earnings not exempt: In accordance with subsection 23AG(2) of the ITAA 1936, the exemption under subsection 23AG(1) of the ITAA 1936 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 double tax agreement or a law of a country that gives effect to such an agreement (paragraphs 23AG(2)(a) and (b)); • 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 (paragraphs 23AG(2)(c) and (d)); or • a law or international agreement dealing with diplomatic or consular privileges and immunities, or privileges and immunities of persons connected international organisations (paragraphs 23AG(2)(e), (f) and (g)). In your case, your income is exempt in Country X solely because you are a diplomatic passport holder and therefore as a member of the diplomatic staff you are afforded the rights and privileges as set out in the Vienna Convention on Diplomatic Relations (VCDR). The VCDR sets out the special rules, that is privileges and immunities, which apply to diplomatic missions. Article 34 of the VCDR provides an exemption from all dues and taxes having its source in Country X. The VCDR is an international agreement to which Australia is a party and that deals with diplomatic or consular privileges and immunities, and as such, the reason for this exemption from tax in Country X is because of one of the reasons listed in subsection 23AG(2). As you are exempt from income tax in Country X solely because of one of the reasons listed in subsection 23AG(2), your foreign earnings are not exempt from tax in Australia under subsection 23AG(1).