Private ruling: 23AG Income
Published: August 2012
Ruling period: Year ending 30 June 2013 | Year ending 30 June 2014 | Year ending 30 June 2015 | Year ending 30 June 2016 | The scheme will commence in: | 1 July 2012

Ruling: Questions and Answers | Are the salary and wages you are entitled to receive from a deployment exempt income in Australia under section 23AG of the Income Tax Assessment Act 1936 (ITAA 1936)? | Yes. | Is the transfer allowance you are entitled to receive in relation to your deployment exempt income in Australia under section 23AG of the ITAA 1936? | No. | Are the overseas allowances you are entitled to receive from deployment exempt income in Australia under section 23AG of the ITAA 1936? | 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 a resident of Australia for tax purposes. You will be deployed as an employee of the Australian Government. Your foreign earnings will be attributable to the delivery of Australian official development assistance (ODA). You are entitled to receive salary and various allowances. The allowances will include a transfer allowance which will be received prior to posting and is associated with going on posting. The overseas allowances will be paid to compensate for costs arising from the foreign service and for the hardship attributable to the foreign service. Australia has a tax treaty with destination country. The destination country taxes employment income under their domestic law. You will not take any breaks other than your recreation leave which will accrue as the result of your foreign service. You will not be performing any work related duties during your recreation leave. Your foreign employment income will be exempt from income tax in the destination country under the terms of a Memorandum of Understanding between Australia and the destination country.

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

Reasons for decision: Summary: 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 tax in Australia. Foreign earnings include income consisting of salary, wages, bonuses or allowances (subsection 23AG(7) of the ITAA 1936). To qualify for the exemption the foreign earnings must be derived from the 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. Section 23AG of the ITAA 1936 has been amended so that foreign employment income derived by Australian residents will only be exempt in certain circumstances. These amendments are effective from 29 June 2009. 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. As your deployment will be directly attributable to the delivery of an Australian overseas aid program, you satisfy one of the conditions for exemption under subsection 23AG(1AA) of the ITAA 1936. In addition to your salary, you will receive a transfer allowance and overseas allowances. | Detailed Reasoning - Transfer allowance: The transfer allowance will be paid to you to cover costs associated with preparing for departure and returning from your deployment. This allowance is not paid to cover costs arising from the performance of your foreign service. It is paid to cover costs arising before and after the foreign service. Therefore, this allowance will not be considered to be derived from your foreign service. Accordingly, the transfer allowance will not be exempt from income tax in Australia under subsection 23AG(1) of the ITAA 1936 as it will not be derived from your foreign service. | Detailed Reasoning - Salary and overseas allowances: As you will receive a salary from your employment in the foreign country, this salary will be considered to be derived from your foreign service. The overseas allowances are designed to cover various costs and hardship of the foreign service. As they will be paid to compensate for costs arising from the foreign service and for the hardship attributable to the foreign service, they will be considered to be derived from your foreign service. Therefore, your salary and overseas allowances will be foreign earnings from foreign service for the purposes of subsection 23AG(1) of the ITAA 1936. The exemption does not apply if the income is exempt from tax in the foreign country only because of any of the reasons listed in subsection 23AG(2) of the ITAA 1936. One of these reasons is a tax treaty (paragraph 23AG(2)(b) of the ITAA 1936). Australia has a tax treaty with the destination country which operates to avoid the double taxation of income received by residents of Australia. An Article of the Agreement provides that remuneration paid by Australia to any individual in respect of services rendered in the discharge of governmental functions shall be taxable only in Australia. However, such remuneration will be taxable only in the destination country if the services are rendered there and the individual is a citizen of that country, or did not become a resident of that country solely for the purpose of performing the services. The employment income you will receive in relation to your deployment will be taxable only in Australia under the Agreement as you are an Australian resident and the income is paid by Australia in respect of services rendered in the discharge of governmental functions. As the employment income you will receive while posted to Indonesia is exempt from tax in the destination country because of the operation of a tax treaty, paragraph 23AG(2)(b) of the ITAA 1936 would normally apply and the income would therefore not be exempt from tax under subsection 23AG(1) of the ITAA 1936. However, the income you earn while on posting will also be exempt from tax in the destination country because of the terms of the General Agreement on Development Cooperation between the Government of Australia and the destination country. The exemption provided by the agreement does not fall under any of the other exemption categories under subsection 23AG(2) of the ITAA 1936. You satisfy the conditions for exemption under section 23AG of the ITAA 1936. Accordingly, the salary and overseas allowances you will receive from employment in the destination country will be exempt from income tax in Australia under subsection 23AG(1) of the ITAA 1936.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet.