Private ruling: International - foreign source income
Published: May 2012
Ruling period: 1 July 2011 to 30 June 2015

Ruling: Question and Answer | Is your salary and allowances from employment in Country X exempt from tax in Australia under section 23AG of the Income Tax Assessment Act 1936 ? | Yes. | Is the lump sum payment to cover relocation expenses exempt from tax in Australia under section 23AG of the Income Tax Assessment Act 1936 ? | No.

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. You are working under an employment agreement with a registered non-profit organisation. You contract is for a three year period. You will receive an additional lump sum amount at the beginning and end of the work contract to cover relocation expenses. You will be based in Country X, for the duration of your employment. You may need to travel to other countries for short work meetings on occasion. Your employment will be continuous with annual and personal leave totalling 22 days per year. You intend to spend some, but not all, of your leave in Australia on holiday with family and friends. Under your employment agreement your employer will pay the appropriate tax provisions for Country X. You will be engaged in continuous Foreign Service as an employee for more than 91 days. Your Foreign Service is directly attributed to activities of your employer as a prescribed charitable institution which is exempt from Australian income tax because it is located outside Australia and is pursuing objectives outside Australia. Your employer has an arm of its organisation registered in Australia as a foreign company. Your employment is classified by the organisation as an international assignment. Your employment agreement and payroll arrangements are exclusively administered through Country Y's registered non-profit organisation headquarters in Country Y.

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(7) | Income Tax Assessment Act 1997 subsection 6-5(2) | Income Tax Assessment Act 1997 Section 11-15 | Income Tax Assessment Act 1997 subsection 11-15

Reasons for decision: Summary: Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources during the income year. Salary and wages and allowances are ordinary income for the purposes of subsection 6-5(2) of the ITAA 1997. Subsection 6-15(2) of the ITAA 1997 provides that if an amount is exempt income then it is not assessable income. Section 11-15 of the ITAA 1997 lists those provisions dealing with income which may be exempt. Included in this list is section 23AG of the Income Tax Assessment Act 1936 (ITAA 1936) which deals with overseas employment income. Subsection 23AG(1) of the ITAA 1936 provides that where a resident is engaged in foreign service for a continuous period of not less than 91 days, foreign earnings derived from that service will be exempt. 'Foreign service' includes service in a foreign country in the capacity as an employee and 'foreign earnings' include salary and wages bonuses or allowances (subsection 23AG(7) of the ITAA 1936). Your foreign employment income is exempt from tax if all of the following applies; · you are a resident of Australia · you are engaged in continuous foreign service as an employee for 91 days or more · your 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 · activities of your employer in operating a public fund established and maintained to provide monetary relief to people in a developing foreign country who are distressed as a result of 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 and · you are not excluded from exemption by the non-exemption conditions. | Detailed Reasoning - Non-exemption conditions: Under section 23AG(2) your foreign employment income is not exempt from Australian if you did not have to pay tax in the country where you earned that income because of any of the following; · A tax treaty with Australia or a law giving effect to a treaty agreement · The foreign country does not impose tax on employment or personal services income - for example, Saudi Arabia · A law of the foreign country or an international agreement to which Australia is a party that deals with; · Diplomatic or consular privileges and immunities or · Privileges and immunities for people connected with international organisations, such as the United Nations. | Detailed Reasoning - Relocation assistance: Allowances paid in respect to relocation is not exempt from income tax under subsection 23AG(1) of the ITAA 1936 as it is not derived from the foreign service. | Detailed Reasoning - Exempt income: You are a resident of Australia. You will be engaged in continuous foreign services as an employee for 91 days or more. Your foreign service is directly attributed to 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. There is no double tax agreement between Australia and Country X. Therefore, paragraphs 23AG(2)(a) and 23AG(2)(b) of the ITAA 1936 will not apply. The laws of country X provide for the imposition of income tax and do not generally exempt income from income tax, paragraphs 23AG(2)(c) and 23AG(2)(d) fo the ITAA 1936 do not apply None of the other reasons in subsection 23AG(2) of the ITAA 1936 apply to your circumstances. Accordingly, the income you receive for services performed in Country X will be exempt from income tax under section 23AG of the ITAA 1936 and are not assessable under subsection 6-5(2) of the ITAA 1997. | Detailed Reasoning - Relocation assistance: You will receive relocation assistance, paid in a lump sum, up front and again at the end of your assignment. The allowance is paid to cover costs associated with relocating from and repatriation to Australia for your international assignment. This assistance is not paid to cover costs arising from the performance of your foreign service. It is paid to cover costs arising prior to and after the end of the international assignment. Therefore, this allowance is not considered to be derived from your foreign service. As this allowance is not exempt under subsection 23AG(1) of the ITAA 1936, it is assessable under subsection 6-5(2) of the ITAA 1997.

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.