Private ruling: Are foreign earnings exempt from tax in Australia
Published: June 2012
Ruling period: Year ending 30 June 2012.
Date scheme commenced: 1 July 2011

Ruling: Q1: Are the foreign earnings you derived in Country A as an employee engaged in foreign service by Company A, on a specific Australian agency aid funded program, exempt from income tax in Australia under subsection 23AG of the Income Tax Assessment Act TAA 1936 (ITAA 1936 ) ? | A1: Yes.


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(1AA) | Income Tax Assessment Act 1936 Subsection 23AG(2) | Income Tax Assessment Act 1997 Subsection 6-5(2) | Income Tax Assessment Act 1997 Subsection 6-15(2) | Income Tax Assessment Act 1997 Subsection 6-20(1)

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, whether in or out of Australia, during the income year. Salary and wages are ordinary income for the purpose of subsection 6-5(2) of the ITAA 1997. However, subsection 6-15(2) of the ITAA 1997 provides that if an amount is exempt income then it is not assessable. Subsection 6-20(1) of the ITAA 1997 provides that an amount of ordinary income is exempt income if it is made exempt by a provision of the ITAA 1997 or another Commonwealth law. Under the provisions of subsection 23AG(1) of the ITAA 1936, where Australian resident individuals are engaged in foreign service for a continuous period of not less than 91 days, the foreign earnings derived from that foreign service will be exempt from income tax in Australia. However, from 1 July 2009, subsection 23AG(1AA) of the ITAA 1936 took effect and provides that those foreign earnings will not be exempt under section 23AG of the ITAA 1936 unless the continuous period of foreign service is directly attributable to, among other things, the delivery of Australian official development assistance by the person's employer (paragraph 23AG(1AA)(a) of the ITAA 1936). | Detailed Reasoning - Delivery of Australian official development assistance by the person's employer:: The term 'Australian official development assistance' is not defined for the purposes of section 23AG of the ITAA 1936. However, the Explanatory Memorandum (EM) which accompanied Tax Laws Amendment (2009 Budget Measures No. 1) Bill 2009 introducing subsection 23AG(1AA) of the ITAA 1936 provides guidance on the meaning of the phrase. The relevant paragraphs are below: | Detailed Reasoning - Australian official development assistance:: 1.19 Australian official development assistance (ODA) is assistance delivered through the Australian Government's overseas aid program, as administered by the Department of Foreign Affairs and Trade and/or the Australian agency aid program and Australian ODA aims to reduce poverty and achieve sustainable development in developing counties, in line with Australia's national interest. 1.20 In addition to providing Australian ODA directly, the Australian agency aid program also competitively contracts aid work to Australian and international entities. Thus, in practice, individuals involved in the delivery of Australian ODA can include both Australian Public Service (APS) employees and non-APS employees. 1.21 For the purposes of subsection 23AG(1AA) of the ITAA 1936 the delivery of Australian ODA must be undertaken by the person's employer, which includes the Australian agency aid program and an entity contracted by them to assist in the delivery of Australian ODA. The EM and the examples in the EM reveal that paragraph 23AG(1AA)(a) of the ITAA 1936 is intended to restrict the section 23AG of the ITAA 1936 exemption to foreign earnings derived by: · Australian Public Service (APS) employees providing assistance that is classified as Australian official development assistance and is delivered through the Australian Government's aid program which is administered by the Australian agency aid program or the Department of Foreign Affairs and Trade (DFAT); or · other employees delivering Australian official development assistance on behalf of their employers who in turn have been contracted by the Australian Government to assist in the delivery of Australian official development assistance under the aid program that is administered by Australian agency aid program or DFAT. Accordingly, for non-APS employees to be eligible for exemption pursuant to paragraph 23AG(1AA)(a) of the ITAA 1936, their employer must have been contracted directly by the Australian Government to assist in the delivery of Australian official development assistance under the overseas aid program that is administered by Australian agency for aid program or DFAT. In your particular situation, we consider that your employer, Company A, did directly provide Australian official development assistance in accordance with the provisions of paragraph 23AG(1AA)(a) of the ITAA 1936. | Detailed Reasoning - Conditions for non-exemption: 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. Some of the reasons listed within 23AG(2) are considered in respect of your circumstances. There is a tax treaty between Australia and Country A. However the Country A Agreement does not exempt your foreign earnings in Country A from income tax. Therefore, paragraphs 23AG(2)(a) and 23AG(2)(b) of the ITAA 1936 will not apply. The laws of the Country A provide for the imposition of income tax from income sourced in its country and does not exempt employment income from income tax, paragraphs 23AG(2)(c) and 23AG(2)(d) of the ITAA 1936 will not apply. None of the other reasons in subsection 23AG(2) of the ITAA 1936 apply to your situation. In your case, you were engaged in foreign service (employment) for a continuous period of not less than 91 days, you meet the conditions of 23AG(1AA)(a) and none of the reasons listed in subsection 23AG(2) of the ITAA 1936 apply in your situation. Therefore, the salary and wages you derived during your employment in Country A by Company A in respect of the delivery of a specific Australian agency for aid program is exempt income in Australia under subsection 23AG(1) of the ITAA 1936. | Detailed Reasoning - Note:: It is important to note that even though your foreign employment income is exempt, it is used in calculating the amount of tax payable on your non-exempt income. Subsection 23AG(3) of the ITAA 1936 provides a formula for calculating the tax payable when a taxpayer has derived exempt income as well as non-exempt income. The income which is exempt under section 23AG of the ITAA 1936 is added to the non-exempt income to determine a notional taxable income. This notional taxable income is used to work out an average tax rate which is then applied to the non-exempt income. This is called exemption with progression.

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. | Relevant facts: You are an Australian resident for income tax purposes. | You are employed in a particular role with Company A, in Country A, on a specific aid program. | A contract between the Commonwealth of Australia represented by aid funded program and Company A was established for the delivery of the specific program which has an agreement number. | The specific program's overall goal is to sustainably increase employment and income for poor women and men in rural and urban areas in Country A. | Your assignment commenced in Country A some time early in the 2011-12 income year and ceased later in that same income year. After the cessation, you returned to Australia. | Your salary was paid by Company A and deposited into your Australian Bank Account. | You were employed for a period of not less than 91 days. | Country A has a tax system in place that generally taxes employment income. | There is a tax treaty between Australia and Country A, however, according to the agreement - your income is not exempt from income tax in Country A. | The foreign income you derived from your foreign service in Country A is exempt from income tax under a Memorandum of Understanding (MOU) between the Government of Australia and Country A relating to a specific development co-operation.