Private ruling: Foreign employment income
Date of advice: 2 November 2018
Published: January 2019
Ruling period: Year ended 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Is your income derived from your deployment in country A exempt from income tax in Australia under section 23AG of the Income Tax Assessment Act 1936 (ITAA 1936)? | A1: No.


Relevant legislative provisions: Income Tax Assessment Act 1997 Subsection 6-1(3) | Subsection 6-5(2) | Income Tax Assessment Act 1936 Section 23AG | Subsection 23AG(1) | Subsection 23AG(1AA) | Paragraph 23AG(1AA)(d) | Subsection 23AG(2) | Paragraph 23AG(2)(b) | Subsection 23AG(7) | International Tax Agreements Act 1953 Section 4

Reasons for decision: Summary: Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of an Australian resident includes the ordinary income derived directly or indirectly from all sources, whether in or out of Australia, during the income year. Salary and wages are generally regarded as ordinary assessable income. However where an amount is exempt income, it is not assessable income (subsection 6-1(3) of the ITAA 1997). Section 23AG of the Income Tax Assessment Act 1936 (ITAA 1936) refers to exemption of income earned in overseas employment. Subsection 23AG(1) provides that where a resident taxpayer is engaged in foreign service for a continuous period of not less than 91 days, any foreign earnings derived from the foreign service will be exempt from tax in Australia. The term 'foreign service' means service in a foreign country as the holder of an office or in the capacity of an employee; the term 'foreign earnings' includes income consisting of salary and wages and allowances; and the term ‘employee’ includes a person employed by a government or an authority of a government: subsection 23AG(7) of the ITAA 1936. Foreign earnings derived from the foreign service must be directly attributable to an activity that is listed in subsection 23AG(1AA) of the ITAA 1936 in order for those earnings to be exempt from tax. Relevantly, paragraph 23AG(1AA)(d) refers to the person’s deployment outside Australia as a member of a disciplined force by (i) the Commonwealth, a State or a Territory; or (ii) an authority of the Commonwealth, State or Territory. Subsection 23AG(2) of the ITAA 1936 applies where one or more reasons listed in that subsection for exempting the income from foreign tax are satisfied, provided there are no other reasons for exempting the income. One of the reasons listed is at paragraph 23AG(2)(b) where it provides ‘an amount of foreign earnings derived in a foreign country is not exempt from tax under section 23AG if the amount is exempt from income tax in the foreign country only because of a double tax agreement. In your case, you carried out foreign service and you derived foreign earnings in country A. The continuous period of your foreign service is directly attributable to your deployment in country A. However, the exemption from tax in Australia to your foreign earnings under subsections 23AG(1) and (1AA) is subject to subsection 23AG(2) to the effect that the exemption does not apply if the income is exempt from taxation in country A only because of any of the reasons set out in subsection 23AG(2). It is noted that in determining liability to Australian tax, it is necessary to consider not only the Australian income tax laws, but also any applicable double tax agreement contained in the International Tax Agreements Act 1953 (Agreements Act). Section 4 of the Agreements Act incorporates that Act with the ITAA 1936 and the ITAA 1997 so that the Acts are read as one. The relevant Article of the relevant double tax agreement provides that your foreign earnings are exempt from tax in country A. Instead that income is assessable only in Australia. The Memorandum of Understanding between country A and Australia does not provide for any exemption from tax on the income you derived from your deployment to country A. As such there are no other reasons for exempting your foreign service income other than what is relevantly provided in paragraph 23AG(2)(b) exempting that income in country A based on the Double Tax Agreement. Therefore, your income derived from your deployment in country A is not exempt from income tax in Australia under section 23AG of the ITAA 1936.

Relevant facts: You are an Australian resident for income tax purposes. | You were deployed to country A. You derived income from the deployment as an employee. | You carried out more than 91 days of continuous days of foreign service in country A. During your time in country A you accrued recreation leave entitlements which were required to be taken prior to returning to Australia. | You took this accrued recreation leave. You were on full pay during this leave. | Country A has a taxation system that taxes employment income. | Your income is exempt from taxation in country A because of the relevant double tax agreement. | The Memorandum of Understanding (MOU) between the Government of country A and the Government of Australia does not provide for any exemption from tax on the income you derived from your deployment in country A.