Private ruling: Foreign Source Income
Published: March 2014
Ruling period: Year ending 30 June 2014 | Year ending 30 June 2015 | Year ending 30 June 2016
Date scheme commenced: 1 July 2013

Ruling: Question and answer | 1. Is the salary you derive from working in Country X exempt income in Australia under section 23AG of the Income Tax Assessment Act 1936 (ITAA 1936)? | Yes. | 2. Are the cost of posting allowance, hardship allowance and home maintenance assistance you derive from working in Country X exempt income in Australia under section 23AG of the ITAA 1936? | Yes. | 3. Is the transfer allowance you have been paid associated with working in Country X exempt income in Australia under section 23AG of the ITAA 1936? | No.

Relevant facts and circumstances: You are an Australian resident for income tax purposes. You were appointed to work in Country X from a couple of years. You were appointed by your employer to work on a program which is classified as official development assistance (ODA). Your allowances include cost of posting allowance, hardship allowance, transfer allowance and home maintenance assistance. According to your Overseas Deployment Conditions Agreement, your cost of posting allowance is "for loss incurred" by you "as a result of deployment, other than relocation costs, or costs covered by other allowances". Your transfer allowance is for "one-off costs incurred" by you "associated with embarking on the assignment and returning back to Australia at the end of the assignment, such as hotel accommodation after uplift of goods and taxi fares to and from airports". Your transfer allowance is going to be paid "in two instalments - the first at the beginning of the period of the assignment; the second at the end". Your home maintenance assistance is for your accommodation in Country X.

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

Reasons for decision: Summary: 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. Foreign earnings include salary, wages, bonuses or allowances (subsection 23AG (7) of the ITAA 1936). In your case, you were a resident of Australia for tax purposes and engaged in foreign service (and derived foreign earnings from that service) for a continuous period of more than 91 days. However, subsection 23AG(1AA) of the ITAA 1936, which took effect from 1 July 2009, provides that 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 the Australian government (or an authority thereof) as a member of a disciplined force. You have been appointed to Country X to work on a program which is classified as official development assistance (ODA). Further, subsection 23AG(2) of the ITAA 1936 provides that the exemption in subsection 23AG(1) of the ITAA 1936 will not apply where the income is exempt from income tax in the foreign country only because of any of the reasons listed in that subsection. There is an agreement (a Memorandum of Understanding) between Australia and Country X that exempts your income from taxation in Country X. This reason is not listed in subsection 23AG(2) of the ITAA 1936. Therefore, the salary and allowances you derive whilst on foreign service in Country X is not excluded from section 23AG because of the provisions of subsection 23AG(2) of the ITAA 1936. However, according to ATO Interpretative Decision 2011/52 Assessability of allowances received from employment in a foreign country ( ATO ID 2011/52), in regard to an allowance, only the part of the allowance that is attributable to the period that you are engaged in foreign service is exempt under subsection 23AG(1) of the ITAA 1936 as it is only foreign earnings actually derived from foreign service. Accordingly, an allowance received by you in respect of expenses that are attributable to a period prior to the commencement or after the completion of the foreign service, is not exempt from tax under subsection 23AG(1) of the ITAA 1936 as it is not derived from foreign service. Your cost of posting allowance, hardship allowance and home maintenance assistance are attributable to the period that you are engaged in your foreign services. Your transfer allowance is attributable to the period prior to the commencement and after the completion of the foreign service. | Detailed Reasoning - Conclusion: The salary, cost of posting allowance, hardship allowance and home maintenance assistance you earn while in Country X are exempt from tax in Australia under section 23AG of the ITAA 1936. The transfer allowance you receive for this foreign service assignment is not 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.