Private ruling: Exempt income
Date of advice: 30 September 2016
Published: December 2016
Ruling period: Year ending 30 June 20XX | Year ending 30 June 20XY | Year ending 30 June 20YY | Year ending 30 June 20YZ
Date scheme commenced: 1 July 20WX

Ruling: Q1: Are the pay and allowances received in respect to your posting to Country A by an Australian Government Organisation exempt from income tax in Australia? | A1: Yes

Relevant facts and circumstances: You are a resident of Australia for tax purposes. You are a member of an Australian Government Organisation working in Country A on a X year posting, commencing in the 20XX financial year, as part of a program between Australia and Country A. Your employment in Country A is expected to cease in the 20YZ financial year. You do not intend to remain in Country A beyond your current employment contract. Whilst in Country A, you will receive the following allowances as a result of your employment: • Attraction Allowance - Country A - an incentive to attract personnel to service in Country A. • Hardship Allowance Grade E - paid in recognition of the hardship and limitations placed on personnel posted to this region. • Overseas Living Allowance - compensatory allowance to cover the additional costs associated with living in Country A. You are entitled to 30 days recreational leave per year which is accrued as a result of your service in Country A. It is likely that you will expend this recreation leave in countries other than Country A; primarily in Australia. You will not perform any work-related duties whilst on leave. A tax treaty exists between Australia and Country A. Relevant legislative provisions Income Tax Assessment Act 1936 subsection 23AG(1), Income Tax Assessment Act 1936 subsection 23AG(1AA), Income Tax Assessment Act 1936 subsection 23AG(2), Income Tax Assessment Act 1936 subsection 23AG(6) and 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 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). The pay you will receive from your foreign employment is considered to be derived from your foreign service. The allowances are designed to cover various costs and hardship of the foreign service. As they are paid to compensate for costs arising from the foreign service and for the hardship attributable to the foreign service, they are considered to be derived from your foreign service. Therefore, your pay and overseas allowances are foreign earnings from foreign service for the purposes of subsection 23AG(1) of the ITAA 1936. However, 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 conditions listed in this subsection. One of the reasons listed is where the income earned by the resident in the foreign country is made exempt by the operation of a tax treaty (subsection 23AG(2)(b) of the ITAA 1936). It is therefore necessary to consider not only the income tax laws but also any applicable tax treaty contained in the International Tax Agreements Act 1953 (the Agreements Act). Schedule 29 of the Agreements Act contains the tax treaty between Australia and Country A (the Agreement). The Agreement operates to avoid the double taxation of income received by residents of Australia and Country A. 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. Your income and allowance you will earn whilst posted in Country A is exempt from tax in Country A in accordance with the provisions of the Australian treaty between Australia and Country A which grants exemption from income taxes or other taxes on salaries and allowances. The exemption granted by this treaty does not fall under any of the exemption categories in subsection 23AG(2) of the ITAA 1936. Therefore, subsection 23AG(2) of the ITAA 1936 will not operate to deny the foreign earnings exemption under subsection 23AG(1) of the ITAA 1936. Section 23AG of the ITAA 1936 has been amended by subsection 23AG(1AA) so that foreign employment income derived by an Australian resident from 91 days continuous foreign service will only be exempt if the foreign service is directly attributable to: a) the delivery of Australia's overseas aid program by the individual's employer; b) the activities of the individual's employer in operating a developing country relief fund or an overseas public disaster relief fund; c) the activities of the individual's employer, being a prescribed institution that is exempt from Australian income tax. d) the individual's deployment outside Australia by an Australian government (or an authority thereof) as a member of a disciplined force. e) an activity of a kind specified in regulations. Since you are a member of the XXX deployed in XYZ on a X year posting, your income will fall under subsection 23AG(1AA)(d) of the ITAA 1936. Accordingly, as you will be working in XYZ for a period of not less than 91 days, as part of the XXX staff, your foreign income will be exempt from tax in Australia under subsection 23AG(1) of the ITAA 1936. | Detailed Reasoning - Note: 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 wages income in your Australian tax return.