Private ruling: Foreign source income - 23AG - 1/6 legislative rule
Published: November 2014
Ruling period: Year ending 30 June 2015
Date scheme commenced: 1 July 2014

Ruling: Q1: Is the foreign employment income you derived from working in Ukraine exempt income in Australia under section 23AG of the Income Tax Assessment Act 1936 (ITAA 1936)? | A1: Yes

Relevant facts and circumstances: You are an Australian resident for income tax purposes. You were deployed to work in Country A for 13 days, four months after your deployment in Country B. You were deployed by your employer - a member of the disciplined force. Prior to your deployment to Country A, you were deployed by your employer to Country B for the 2011 to 2014 financial year You were engaged in foreign employment in Country B for more than 2 years. During your deployment in Country B, you took a one week break. You were not liable to tax in Country A due to the bilateral agreement between Australian and Country A A Memorandum of Understanding exists between the Australian and Country A Government.

Relevant legislative provisions: Income Tax Assessment Act 1936 Subsection 23AG (1) | Income Tax Assessment Act 1936 Subsection 23AG (6) | Income Tax Assessment Act 1936 Subsection 23AG (7) | Income Tax Assessment Act 1936 Section 23AG | Income Tax Assessment Act 1936 Subsection 23AG (2)

Reasons for decision: Summary: Subsection 23AG(1) of the Income Tax Assessment Act 1936 (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 salary, wages, bonuses or allowances (subsection 23AG (7) of the ITAA 1936). 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 1 July 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: • 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. • Deployment outside Australia by an Australian government (or an authority thereof) as a member of a disciplined force. Subsection 23AG (6A) of the ITAA 1936 outlines the 1/6 legislative rule. This allows two or more periods of foreign service to be added together and treated as a continuous period of foreign service, unless, at any time, the total period of absence (in days) between the periods of foreign service exceeds 1/6 of the total number of days of foreign service. If the period of absence exceeds 1/6 of the total period of foreign service at any time, continuity of foreign service is broken. An employee will begin a new period of foreign service when he or she next engages in foreign service and must determine whether that period of foreign service lasts for at least 91 continuous days. In your case, you were appointed to undertake a deployment to Country A. As your deployment was as a member of a disciplined force, you satisfy one of the conditions for exemption under subsection 23AG (1AA) of the ITAA 1936. However, 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 contained in the International Tax Agreements Act 1953 (Agreements Act) (paragraph 23AG (2)(b) of the ITAA 1936). Australia does not have a tax treaty with Country A however; the income you earned is subject to the condition that exits in the Memorandum of Understanding (MOU) between Country A and Australia. The exemption provided by the MOU does not fall under any of the other exemption categories under subsection 23AG (2) of the ITAA 1936. The period of absence did not exceed 1/6 of the total period of your total foreign service at any time. The continuity of foreign service is therefore not broken because you were deployed to the Country B as a disciplined force for in excess of 91 days and in accordance with a class ruling your foreign salary and wages were exempt under 23AG(2) of the ITAA 1936. Accordingly, the salary and allowances you earned while posted to The Country A are exempt from tax in Australia under section 23AG of the ITAA 1936. | Detailed Reasoning - Note: It is important to note that foreign earnings exempt under section 23AG of the ITAA 1936 are taken into account in calculating the tax payable on other income derived by a taxpayer. This method of calculation referred to as exemption with progression prevents the exempt income from reducing the Australian tax payable on the other income. This income needs to be included as exempt foreign salary and wage income in your Australian tax return.