Private ruling: Exemption of foreign earnings
Published: December 2011
Ruling period: Year ending 30 June 2012
Date scheme commenced: 1 July 2011

Ruling: Q1: Are the foreign earnings which will be derived by you from your foreign service exempt from tax in Australia under section 23AG of the Income Tax Assessment Act 1936 (ITAA 1936)? | A1: 

Relevant facts and circumstances: You are an employee of a government department (your employer). You have recently been selected for a position in an International Program. This position is to be taken up in a foreign country. Your employer is the primary agency responsible for the management/implementation of the international program. The program is one covered by a Subsidiary Arrangement between the Government of Australia and the Government of the foreign country which is provided for in the General Agreement on Development Cooperation between the Government of Australia and the Government of the foreign country (GADC) which came into force in the middle of 1999. AusAID is a party to the GADC and delivers Australian Official Development Assistance in accordance with the GADC. AusAID has engaged your employer to undertake the program. Article XI of the GADC deals with the income tax liability of Australian firms and Australian personnel and states that this will be borne by the Government of the foreign country. There is a double tax agreement between Australia and the foreign country. You are being posted overseas for a number of years. You are a resident of Australia for tax purposes and will remain an Australian resident while working overseas.

Relevant legislative provisions: Income Tax Assessment Act 1936 Section 23AG | Income Tax Assessment Act 1936 subsection 23AG(1) | Income Tax Assessment Act 1936 paragraph 23(1AA)(a) | Income Tax Assessment Act 1936 subsection 23AG(2) | Income Tax Assessment Act 1936 paragraph 23AG(2)(b) | Income Tax Assessment Act 1936 subsection 23AG(7) | Income Tax Assessment Act 1997 section 6-5 | Income Tax Assessment Act 1997 section 6-15(2) | Income Tax Assessment Act 1997 section11-15

Reasons for decision: Summary: Section 6-5 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 allowances are ordinary income for the purposes of section 6-5 of the ITAA 1997 and consequently subject to income tax unless they are exempt under the ITAA 1936 or the ITAA 1997. Subsection 6-15(2) of the ITAA 1997 provides that if an amount is exempt income then it is not assessable income. Section 11-15 of the ITAA 1997 lists those provisions dealing with income which may be exempt. Included in this list is section 23AG of the ITAA 1936, which deals with overseas employment income. 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 generally exempt from tax in Australia. 'Foreign service' includes service in a foreign country in the capacity as an employee and 'foreign earnings' includes income consisting of salary, wages and allowances (subsection 23AG(7) of the ITAA 1936). You are an employee of a government department and you are taking a position to work in a foreign country for approximately a number of years. As you will receive salary and allowances from this employment, this income is considered to be derived from your foreign service. Therefore, your salary and allowances are foreign earnings from foreign service for the purposes of subsection 23AG(1) of the ITAA 1936. However, subsection 23AG(1AA) of the ITAA 1936 provides that the exemption in subsection 23AG(1) of the ITAA 1936 will not apply to income derived on or after 1 July 2009 unless the continuous period of service is directly attributable to one of the activities listed in that subsection. Paragraph 23AG(1AA)(a) of the ITAA 1936 lists as one of those activities the delivery of Australian official development assistance by the person's employer. | 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 the 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 for International Development (AusAID). Australian ODA aims to reduce poverty and achieve sustainable development in developing countries, in line with Australia's national interest. 1.20 In addition to providing Australian ODA directly, AusAID 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) the delivery of Australian ODA must be undertaken by the person's employer, which includes AUSAID and an entity contracted by AUSAID to assist in the delivery of Australian ODA. 1.22 Foreign service directly attributable to the delivery of Australian ODA does not include diplomatic or consular duties carried out by Australian residents. The examples in the EM reveal that paragraph 23AG(1AA)(a) of the ITAA 1936 is intended to restrict the section 23AG exemption to foreign earnings derived by: Australian Public Service (APS) employees providing assistance that is classified as Australian official development assistance and is administered by AusAID or the Department of Foreign Affairs and Trade (DFAT); or Other employees delivering Australian ODA on behalf of their employers who in turn have been contracted by theAustralian Government to assist in the delivery of Australian ODA under the aid program that is administered by AusAID or DFAT. Your employer has been contracted by AusAID to undertake an activity under a Subsidiary Arrangement between the Government of Australia and the Government of the foreign country relating to a specific program in the foreign country. Accordingly, you will derive income from services provided in the foreign country for a continuous period of more than 91 days and the continuous period of foreign service will be directly attributable to your work in the foreign country as a result of the contracting of your employer by AusAID for the activity. Consequently, the provision of subsection 23AG(1AA) of the ITAA 1936 will not apply to prevent the application of the exempt status under subsection 23AG(1) 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 even though the conditions stipulated under subsection 23AG(1AA) of the ITAA 1936 are met. One of the listed conditions is where the income earned by the resident in the foreign country is made exempt by the operation of a double tax agreement (paragraph 23AG(2)(b) of the ITAA 1936). Therefore, it is necessary to consider not only the income tax laws but also any applicable tax treaty. Australia has a tax treaty with the foreign country (Agreement between the Government of Australia and the Government of the foreign country for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income - the foreign country Agreement) which operates to avoid the double taxation of income received by Australian and the foreign country residents. An article of the foreign country 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. You are an Australian resident for income tax purposes and the income is paid by Australia in respect of services rendered in the discharge of governmental functions. Consequently, the employment income you will receive in relation for your work in the foreign country is taxable only in Australia under Article 19 of the foreign country Agreement. As the employment income you will receive while working in the foreign country is exempt from tax in the foreign country because of the operation of a double tax treaty, paragraph 23AG(2)(b) of the ITAA 1936 would normally apply and the income would therefore, not be exempt from tax under subsection 23AG(1) of the ITAA 1936. However, the Subsidiary Agreement at Article 9 states that tax exemption and relief will be in accordance with the relevant provisions contained in the GADC. Article XI of the GADC states that the income tax liability of Australian firms and Australian personnel shall be borne by the Government of the foreign country. The exemption provided by the GADC does not fall under any of the other exemption categories listed in subsection 23AG(2) of the ITAA 1936. As such, the exemption in subsection 23AG(1) of the ITAA 1936 continues to apply, provided the other requirements of section 23AG of the ITAA 1936 are satisfied. As you satisfy the conditions for exemption under section 23AG of the ITAA 1936, the salary and the overseas allowances received by you from services performed in the foreign country is exempt from income tax under this section and not assessable under section 6-5 of the ITAA 1997.

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