Private ruling: foreign earnings
Published: May 2014
Ruling period: Year ending 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Q1: Are the salary and allowances you earned while employed overseas exempt from income tax in Australia? | A1: Yes.

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 are an Australian resident for income tax purposes. You were employed to carry out work in a foreign county for an aid agency. The work you undertook was directly related to official development assistance (ODA). Your term of employment was for approximately five months. Your employer required a shut down period during your period of foreign service for approximately 16 days. You were directed to take this period as leave. This period included a week of recreational leave. Your recreation leave accrues at 1.67 days per month. You accrued just over seven days of annual leave during your foreign service.

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

Reasons for decision: Summary: You satisfy the requirements for your foreign earnings to be exempt from income tax. | Detailed Reasoning - Detailed reasoning: Subsection 23AG(1) of the Income Tax Assessment Act 1936 (ITAA 1936) provides that foreign earnings are exempt from income tax where all of the following requirements are satisfied: • you are a resident of Australia and a natural person, • you are engaged in foreign service, • the foreign service is for a continuous period of at least 91 days, • you derive foreign earnings from that foreign service, • the foreign service is directly attributable to an activity that is listed in subsection 23AG(1AA) of the ITAA 1936, and • the foreign earnings are not exempt from income tax in the foreign country only because of one of the reasons listed in subsection 23AG(2) of the ITAA 1936. Foreign earnings include income consisting of salary, wages, bonuses and allowances (subsection 23AG(7) of the ITAA 1936). To qualify for the exemption the foreign earnings must be derived from foreign service. That does not mean that the foreign earnings need to be derived at the time of engaging in foreign service. The important test is that the foreign earnings, when derived, need to be derived as a result of the undertaking of that foreign service. 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. You are a resident of Australia for taxation purposes and your employment in the foreign country is directly related to ODA. Your employment in the foreign country was for approximately five months. You returned to Australia for a 16 day period in the middle. Subsection 23AG(6) of the ITAA 1936 treats certain temporary absences from foreign service as forming part of the period of foreign service. The Commissioner's view on the application of that subsection is reflected in Taxation Determination TD 2012/8 Income tax: what types of temporary absences from foreign service form part of a continuous period of foreign service under section 23AG of the Income Tax Assessment Act 1936? (TD 2012/8) . Absences which are accepted as continuing to form part of the period of foreign service include absences taken in accordance with the terms and conditions of employment because of either accident, illness, or recreation leave. In the case of accident or illness, there is no limit to the amount of absence that can be treated as part of a period of foreign service under paragraph 23AG(6)(b) of the ITAA 1936, providing the leave is taken during the scheduled period of foreign service and is allowed under the terms and conditions of the foreign service. In the case of recreation leave, any leave taken during a period of foreign service must be leave that accrued during the period of foreign service to be treated part of the period of foreign service under paragraph 23AG(6)(a) of the ITAA 1936. Recreation leave does not include: • leave that is not in the nature of paid holidays, such as weekends, public holidays, rostered days off, days off due to part time arrangements, flex-days, 'compulsory lay-off/over days', 'grounded days' and days off in lieu', • purchased leave, • maternity and parental leave, • leave wholly or partly attributable to a period of service or employment other than the foreign service (that is, leave which is accrued prior to the period of foreign service), • long service leave, furlough, extended leave or leave of a similar kind (however described), or • leave without pay or on reduced pay. You started your foreign service and then returned to Australia. You were in Australia for 16 days including 7 days of recreation leave. The 7 days of recreation leave did not fully accrue until the end of your foreign service. However, paragraph 2 of TD 2012/8 states that for section 23AG purposes, leave does not have to be applied in the order in which it accrues. A period of leave is treated as leave that accrued during that period of foreign service, and that is attributable to that period of foreign service, to the extent that it does not exceed the amount of leave of that type that has accrued during the foreign service In your case, you took all the annual leave that was due to accrue during your period of foreign service before the end of that foreign service. Therefore, your recreation leave forms part of your continuous period of foreign service. Your income from foreign service meets the requirements under 23AG(1) of the ITAA 1936 to be exempt from income tax.