Private ruling: Foreign source income and Medicare levy surcharge
Date of advice: 4 June 2018
Published: August 2018
Ruling period: Year ended 30 June 2018 | Year ended 30 June 2019 | Year ended 30 June 2020 | Year ended 30 June 2021
Date scheme commenced: 1 June 2018

Ruling: Q1: Is income from your employment with an overseas deployment assistance program (ODA) exempt from income tax in Australia under section 23AG of the Income Tax Assessment Act 1936 ? | A1: Yes. | Q2: Does exempt income earned under section 23AG contribute to the Medicare Levy Surcharge income threshold? | A2: Yes. | Q3: Is exempt income earned under section 23AG assessed as taxable income and liable for Medicare Levy Surcharge? | A3: No.

Relevant facts and circumstances: You have been offered a two year employment contract with an ODA. You are exempt from taxation due to a reason other than that contained in subsection 23AG(2) of the ITAA 1936. You are an Australian resident. Your family are likely to earn income in the next financial year that is not exempt income. In aggregate your family income is likely to be in excess of the Medicare levy surcharge threshold level. You do not currently have any private health cover.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subsection 6-5(2) | Income Tax Assessment Act 1936 Section 23AG | Income Tax Assessment Act 1936 Subsection 23AG(1) | Income Tax Assessment Act 1936 Subsection 23AG(1AA) | Income Tax Assessment Act 1936 Subsection 23AG(2) | Income Tax Assessment Act 1936 Subsection 23AG(6A)

Reasons for decision: Detailed Reasoning - Exempt foreign 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. Section 11-15 of the ITAA 1997 lists those provisions dealing with income that may be exempt. Included in the list is section 23AG of the Income Tax Assessment Act 1936 (ITAA 1936) which deals with exempt foreign employment income. Subsection 23AG(1) of the ITAA 1936 provides an exemption from Australian tax on the foreign earnings derived by an Australian resident individual from foreign service in which they have been engaged continuously for at least 91 days. Subsection 23AG(6) of the ITAA 1936 provides, a period during which a person is engaged in foreign service includes any period during which the person is, in accordance with the terms and conditions of that service: (a) absent on recreation leave, other than: (i) leave wholly or partly attributable to a period of service or employment other than that foreign service; (ii) long service leave, furlough, extended leave or leave of a similar kind (however described); or (iii) leave without pay or on reduced pay; or (b) absent from work because of accident or illness. 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: ● delivery of Australian official development assistance by your employer; ● 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); ● 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 ● deployment outside Australia by an Australian government (or an authority thereof) as a member of a disciplined force. You were contracted to deliver Australian official development assistance. As your foreign service directly relates to the delivery of Australian official development assistance, 23AG(1AA) of the ITAA 1936 will apply to exempt from tax any income derived as a result of your foreign service. 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 effect 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 specific conditions listed above, then subsection 23AG(2) of the ITAA 1936 will not operate to deny you an exemption from income tax in Australia. Your employment income that you derive from your foreign service is exempt from taxation by the due to an official agreement between Australia and the foreign government. As such, your foreign employment income is exempt for a reason other than those listed in subsection 23AG(2) of the ITAA 1936. Therefore, subsection 23AG(2) of the ITAA 1936 will not operate to deny an exemption from taxation in Australia of the foreign sourced income derived for the period 1 June 2018 – 30 June 2021 Therefore, you satisfy all the exemption conditions and your foreign employment income is exempt from tax in Australia under section 23AG of the ITAA 1936. | Detailed Reasoning - Medicare Levy Surcharge (MLS): Taxpayers without adequate private patient hospital cover through health insurance are liable to pay an additional MLS if their income for MLS purposes exceeds the relevant threshold. The MLS is imposed by sections 8B to 8G of the Medicare Levy Act 1986 (MLA). Section 8D of the MLA provides for the imposition of the MLS in relation to a "person who is married during whole or part of the financial year" and states: (1) This section applies to a person during a period if during the whole of the period: (a) the person is a married person; and (b) the person or at least one of the person’s dependants (other than a dependant who is, or would, apart from subsection 251U(2) of the Assessment Act, be taken to be, a prescribed person) is not covered by an insurance policy that provides private patient hospital cover; and (c) the person is not, or is taken under section 251VA of the Assessment Act not to be, a prescribed person. (2) For the purposes of paragraph (1)(b), a person to whom section 251VA of the Assessment Act applies is taken to be covered during the whole of the period by an insurance policy that provides private patient hospital cover. Where a person satisfies all the above tests for the whole of the year of income and their combined family taxable income exceeds the relevant threshold, they will be liable for a surcharge in addition to the amount of Medicare Levy otherwise payable. The MLS rate calculated is applied to your taxable income to work out your MLS liability. In your circumstances, your exempt foreign income will be used to determine your income for MLS purposes. This will determine the MLS rate that applies to you. This rate will then be applied to your taxable income.