Private ruling: Foreign Source Income - 23AG
Published: July 2014
Ruling period: Year ending 30 June 2012 | Year ending 30 June 2013 | Year ending 30 June 2014
Date scheme commenced: 1 July 2011

Ruling: Q1: Is the foreign employment income you derive from working in Country X exempt income 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 income tax purposes. You were deployed to work in Country X. You were deployed by the Australian Government as a member of a disciplined force. Your deployment was for more than 91 continuous days. Country X taxes employment income under its domestic law. You did not have diplomatic or consular privileges and immunities. A Memorandum of Understanding exists between the Australian and Country X Government.

Relevant legislative provisions: Income Tax Assessment Act 1936 Subsection 23AG (1) | Income Tax Assessment Act 1936 Subsection 23AG (7) | Income Tax Assessment Act 1936 Section 23AG | Income Tax Assessment Act 1936 Subsection 23AG (2) | International Tax Agreements Act 1953 Paragraph Sch37-Art19 (1)

Reasons for decision: Summary: Subsection 23AG(1) of the 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 salary, wages, bonuses or allowances (subsection 23AG (7) of the ITAA 1936). Section 23AG of the ITAA 1936 has been amended so that foreign employment income derived by Australian residents will only be exempt in certain circumstances. These amendments are effective from 1 July 2009. 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: • 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, or a public fund established and maintained to provide monetary relief to people in a developing foreign country that has experienced 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. In your case, you were deployed by the Australian government to Country X as a member of a disciplined force. As your deployment was as a member of a disciplined force, you satisfy one of the conditions for exemption under subsection 23AG (1AA) of the ITAA 1936. However, 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 contained in the International Tax Agreements Act 1953 (Agreements Act) (paragraph 23AG (2)(b) of the ITAA 1936). Australia has a tax treaty with Country X (Country X Agreement) which operates to avoid the double taxation of income received by Australian and Country X residents. Article xx of the Country X 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. However, such remuneration will be taxable only in Country X if the services are rendered in Country X and the individual is a citizen of Country X, or did not become a resident of Country X solely for the purpose of performing the services. The employment income you received in relation to your deployment to Country X is taxable only in Australia, and exempt from tax in Country X under Article xx of the Country X Agreement as you are an Australian resident and the income was paid by Australia in respect of services rendered in the discharge of governmental functions. As the employment income you receive while posted in Country X is exempt from tax in Country X because of the operation of a tax treaty, paragraph 23AG (2)(b) of the ITAA 1936 would normally apply and the income would therefore not be exempt from tax in Australia under subsection 23AG (1) of the ITAA 1936. However, the income you earn is subject to the condition that exits in the Memorandum of Understanding (MOU) between Country X and Australia. The exemption provided by the MOU does not fall under any of the other exemption categories under subsection 23AG (2) of the ITAA 1936. Accordingly, the salary and allowances you earn while posted to Country X are exempt from tax in Australia under section 23AG 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 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.