Private ruling: Exempt foreign income
Date of advice: 26 September 2017
Published: February 2018
Ruling period: Year ended 30 June 2014 | Year ended 30 June 2015 | Year ended 30 June 2016
Date scheme commenced: 13 February 2014

Ruling: Q1: Is the amount of foreign earnings derived in Country X during the years ended 30 June 2014, 2015 and 2016 exempt foreign income under section 23AG ITAA 1936? | A1: Yes.

Relevant facts and circumstances: You are a member of an Australian Service. You were deployed by your employer (the AFP) to work overseas. Your period of foreign service is directly attributable to deployment as a member of a disciplined force by the Commonwealth. You travelled on an official passport. During your deployment, you worked various countries: In your assignment of duties it states: “Your primary area of responsibility is Country X; Country A; Country B; Country C; Country D; Country E; Country F and any other countries as directed or assigned from time to time”. During your deployment you accrued “international leave”. This leave accrued only during your deployment and at the end of your deployment, any unused leave was lost. Your previous leave entitlements accrued prior to your deployment were frozen while you were deployed.

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 Subsection 23AG(6) | Income Tax Assessment Act 1936 Subsection 23AG(7)

Reasons for decision: Detailed Reasoning - Assessable income – general: As a general rule, and under the provisions of section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997), the assessable income of an Australian resident taxpayer includes all the ordinary income they earn from all sources, in or out of Australia in an income year. Income in the form of salary, wages and allowances are all types of ordinary income. Although a payment may be considered ordinary income and will generally be assessable under the provisions of section 6-5 of the ITAA 1997, there are some instances where ordinary income may be excluded from an individual’s assessable income in Australia. This will be the case for example if a specific provision of the tax law makes the income exempt from taxation in Australia. Exemption from taxation under section 23AG of the Income Tax Assessment Act 1936 Subsection 23AG(1) of the ITAA 1936 provides that foreign earnings are exempt from income tax in Australia 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. ● From 1 July 2009 onwards, the foreign service is directly attributable to an activity that is listed in subsection 23AG(1AA) of the ITAA 1936. ● The foreign earnings must not be exempt in the foreign country only for one or more of the reasons covered by subsection 23AG(2) of the ITAA 1936. | Detailed Reasoning - Your circumstances: You are a member of the AFP who was deployed to work overseas. Your assignment of duties stated that you were to work in various countries during your deployment. You ended up working in various countries during your deployment however spent the majority of your time in Country X. | Detailed Reasoning - Application of 23AG to your circumstances: Foreign service is defined in s 23AG(7) as: “service in a foreign country as the holder of an office or in the capacity of an employee” The implication in this definition is that foreign service is carried out in one country only. However Justice Graham in Overseas Aircrew Basing Limited v Commissioner of Taxation [2009] FCA 7; (2009) 175 FCR 449 (Overseas Aircrew) appeared to suggest in his reasoning that this may not always be the case. The following paragraph is relevant: 93. Section 23AG exempts salaries from tax in Australia where they are derived by persons engaged in service in a particular foreign country and the particular foreign country is the base from which they derive those salaries. In Graham J’s view, when a particular foreign country is considered the person’s “base country”, then service based in that country does not preclude parts of that service being carried out in other countries. You spent the majority of your time in Country X. You spent less than 15% of your deployment elsewhere for work purposes and the remainder on recreation leave. Your longest stay in another country for work purposes was 8 days and your average stay was 4 days. While your directive does not state that you specifically have a “home base country”, it lists Country X first and then other countries in alphabetical order. Further, the amount of time you spent in Country X and your travel patterns indicate that Country was in fact your operational base. Based on these facts, we conclude that Country X was the “base country” of your foreign service. As Country X is considered your base country, we consider that the reasoning in Overseas Aircrew case supports the position that your work trips to other countries outside Country X were part of your foreign service. | Detailed Reasoning - Temporary Leave Absences: Temporary leave absences from foreign service can be included in the total foreign service if they are accordance with the terms and conditions of that foreign service and constitute recreation leave on full pay that is attributable to the period of foreign service. You undertook periods of leave during your foreign service. This leave was termed “international leave” by your employer. This leave was accrued during your foreign service as your previous leave entitlements were frozen when you were deployed to Country X. The leave also had to be used during your employment as any unused leave was lost at the end of your deployment. As this leave constituted recreation leave attributable to your foreign service within the meaning of subparagraph 23AG(6)(a)(i), it does not count as absences which can break the continuity of your foreign service. The entire period of your posting was continuous foreign service and exceeded 91 days. | Detailed Reasoning - Application of 23AG(2) to your circumstances: Subsection 23AG(2) of the ITAA 1936 provides that no exemption is available under subsection 23AG(1) of the ITAA 1936 in circumstances where an amount of foreign earnings derived from service in a foreign country is exempt from tax in the foreign country solely because of: ● a tax treaty or a law of a country that gives effect to such an agreement (paragraphs 23AG(2)(a) and (b) of the ITAA 1936); ● the law of a foreign country generally exempts from, or does not provide for the imposition of income tax on income derived in the capacity of an employee, income from personal services or any other similar income (paragraphs 23AG(2)(c) and (d) of the ITAA 1936), or ● a law or international agreement dealing with privileges and immunities of diplomats or consuls or of persons connected with international organisations applies (paragraphs 23AG(2)(e), (f) and (g) of the ITAA 1936). In order for your employment income to be exempt from tax in Australia under section 23AG of the ITAA 1936, the income must not be exempt from tax in Country X only because of one of the reasons listed in subsection 23AG(2) of the ITAA 1936. It is noted that this subsection is premised on the notion that all of a taxpayer’s foreign service is undertaken in the one foreign country. Therefore it becomes an issue when a taxpayer undertakes the foreign service in multiple countries. However if a taxpayer can show that they had a foreign country as a base country then it may be appropriate to treat all their foreign service as having been carried out in relation to the base country. Although you frequently travelled to other foreign countries for work purposes, all of these trips were of minor length compared to your presence in Country X. We therefore consider it appropriate to treat your entire period of foreign service as being undertaken in Country X for the purposes of section 23AG(2). Australia has no Double Tax Agreement with Country X therefore (a) and (b) do not apply. Country X has no general law that exempts or does not tax employment, personal services or similar income, so (c) and (d) do not apply. You were not an official or representative of an international organisation or participating in the work of such an organisation, so any law of Country X corresponding to the IOPI Act would not apply. You were also on an official passport, not a diplomatic passport, so were not covered by the Vienna Convention for Diplomatic Relations or the Vienna Convention for Consular Relations. Therefore (f) and (g) do not apply. | Detailed Reasoning - Conclusion: Since none of the circumstances listed in subsection 23AG(2) applies, it is not necessary to consider if your foreign earnings were exempt in Country X for a reason not included in subsection 23AG(2). Your foreign earnings derived during your whole period of foreign service are exempt from income tax in Australia under section 23AG of the ITAA 1936.