Private ruling: Assessability of foreign income
Published: June 2012
Ruling period: Year ended 30 June 2009 | Year ended 30 June 2010 | Year ending 30 June 2011
Date scheme commenced: 1 July 2008

Ruling: Q1: Is the salary you receive from employment in an overseas country exempt from income tax 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 taxation purposes. You are employed by X. You were deployed to an overseas country. Your foreign earnings are directly attributable to the delivery of Australian official development assistance by your employer. The service is for more than 91 continuous days. Australia and the overseas country have a General Agreement on Development Cooperation.

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 1936 Paragraph 23AG(2)(b) | Income Tax Assessment Act 1936 Subsection 23AG(6) Income Tax Assessment act 1936 Subsection 23AG(7)

Reasons for decision: Summary: Subsection 23AG(1) of the ITAA 1936 provides that the 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 and allowances (subsection23AG(7) of the ITAA 1936). To qualify for the exemption the foreign earnings must be derived from the foreign service. That does not mean that the foreign earnings need to be derived at the time of engaging in foreign service. The important test is that the foreign earnings, when derived, need to be derived as a result of the undertaking of that foreign service. 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: · the delivery of Australia's overseas aid program by the individual's employer; · the activities of the individual's employer in operating a developing country relief fund or a public disaster relief fund; · the activities of the individual's employer being a prescribed institution that is exempt from Australian tax; or · the individual's deployment outside Australia by an Australian government or an authority thereof) as a member of a disciplined force. In your case, you have been deployed to an overseas country. As your deployment is directly attributable to the delivery of an Australian overseas aid program, you satisfy one of the conditions for exemption under subsection 23AG(1AA) of the ITAA 1936. 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 between Australia and the foreign country. The exemption of income provided for in subsection 23AG(1) of the ITAA 1936 is subject to subsection 23AG(2) of the ITAA 1936 so that the exemption from tax in Australia in subsection 23AG(1) of the ITAA 1936 does not apply if the income is exempt from taxation in the foreign country only because of any of the reasons set out in subsection 23AG(2) of the ITAA 1936. Paragraph 23AG(2)(b) of the ITAA 1936 will not apply because the employment income earned in the overseas country is not exempt in the overseas country because of a tax treaty between Australia and the overseas country. The exemption provided by the General Agreement does not fit within any of the other categories excluding exemption under subsection 23AG(2) of the ITAA 1936. As you are engaged in foreign service for a continuous period of not less than 91 days, your salary will be exempt from tax under subsection 23AG(1) 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 the 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.

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