Private ruling: Foreign employment income
Published: January 2014
Ruling period: Year ended 30 June 2011 | Year ended 30 June 2012 | Year ended 30 June 2013 | Year ending 30 June 2014 | Year ending 30 June 2015
Date scheme commenced: 1 July 2010

Ruling: Question and answer | 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)? | Yes.

Relevant facts and circumstances: You are an Australian resident for taxation purposes. You are a permanent member of the Australian Public Service (APS). You took leave without pay to take up a position with an Australian government agency based in the Australian Embassy (the embassy) in country X for more than 91 continuous days. While employed at the embassy, you will be subject to the same rules as locally engaged staff. You will return to your position in the APS when the position ends. You have not been posted or sent from Australia as someone in a diplomatic position. You receive gross salary payments without any deductions for taxation and it is your responsibility to meet any country X and/or Australian income tax requirements. You have provided a copy of a letter from a representative of your employer at the embassy which states that your employment relates to capability building and the delivery of Australian assistance in country X. You are also subject to the same rules of conduct and work under the same command structure as other employees of the Australian government agency at the embassy. Australia and country X are party to an agreement on development co-operation. Under the agreement, country X exempts Australian personnel from income taxes on salaries and wages derived from activities or assignments performed in country X under a 'subsidiary arrangement', as long as the subsidiary arrangement makes specific reference to the agreement on development co-operation. Your role in country X includes activities that are contained in a subsidiary arrangement . The agreement on development co-operation is listed in the subsidiary arrangement.

Relevant legislative provisions: Income Tax Assessment Act 1936 Section 23AG | International Tax Agreements Act 1953

Reasons for decision: Summary: Subsection 23AG(1) of the Income Tax Assessment Act 1936 (ITAA 1936) states 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. However, 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: · deployment outside Australia as a member of a disciplined force by the Commonwealth, a State or Territory, or an authority of the Commonwealth, a State or Territory; · 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; or · an activity of a kind specified in the regulations. Subsection 23AG(2) of the ITAA 1936 specifies that your foreign employment income derived in a foreign country will not be exempt in Australia if it is exempt from income tax in the foreign country only because of one or more of the following: · a tax treaty with Australia or a law giving effect to a treaty agreement; · the foreign country does not impose tax on employment; · a law of the foreign country that corresponds to the International Organisations (Privileges and Immunities ) Act 1963 or an international agreement to which Australia is a party that deals with: o diplomatic or consular privileges and immunities, or o privileges and immunities for people connected with international organisations, such as the United Nations; or · a law of the foreign country which gives effect to an agreement to which Australia is a party which deals with diplomatic or consular privileges and immunities or privileges and immunities for people connected with international organisations, such as the United Nations. If your foreign employment income derived in a foreign country is exempt for a reason other than, or in addition to, the conditions listed above, then it will still be exempt from taxation in Australia. The Commissioner's interpretation of section 23AG of the ITAA 1936 is contained in Taxation Ruling TR 2013/7 Income tax: foreign employment income: interpretation of subsection 23AG(1AA) of the Income Tax Assessment Act 1936 (TR 2013/7) . TR 2013/7 explains that the agency you work for is considered to be a 'disciplined force' and that a person is 'deployed' if, and only if, they have been directed to perform duties overseas by the Commonwealth, a State or a Territory or an authority thereof in their capacity as a member of a disciplined force. TR 2013/7 provides that any person subject to the strict code of conduct governing a disciplined force is a 'member' for the purposes of section 23AG. Employees of a disciplined force who have undertaken the oath or affirmation required to perform operational duties are 'members'. However, APS appointees deployed alongside the disciplined force are 'members' of a 'disciplined force' where they are effectively integrated into the disciplined force and are subject to the same command structure and the same rules of conduct as the members. | Detailed Reasoning - Application to your circumstances: In your case, you are an Australian resident for tax purposes who has been engaged in foreign service (and earning foreign earnings) for more than 91 continuous days. You are a permanent employee of the APS who was appointed to undertake a deployment to country X as a member of an Australian government agency based at the embassy in country X. Your employer has stated that you answer directly to and take direction from Australian government agency personnel. You are also subject to the same rules of conduct and work under the same structure as members of the Australian government agency. Therefore, your deployment is as a member of a disciplined force and you satisfy one of the conditions for exemption under subsection 23AG(1AA) of the ITAA 1936. Your employer has also stated that the work you are undertaking is directly attributable to the delivery of Australian assistance in country X. Consequently, you satisfy another exemption criteria under subsection 23AG(1AA) of the ITAA 1936. However, the exemption from taxation does not apply if the income is exempt from tax in country X only because of any of the reasons listed in subsection 23AG(2) of the ITAA 1936, as listed above. 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 which operates to avoid the double taxation of income received by Australian and country X residents. 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 resident of country X who is a citizen or national of country X, or did not become a resident of country X solely for the purpose of performing the services. Therefore, the employment income you receive in relation to your deployment to country X is taxable only in Australia, and exempt from tax in country X under 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 not be exempt from tax in Australia. However, the income you earn while posted in country X is also exempt from tax in country X because of the terms of the agreement on development co-operation. Under the agreement on development co-operation, country X exempts Australian personnel from income taxes on salaries and wages derived from activities or assignments performed in country X under a subsidiary arrangement, as long as the subsidiary arrangement makes specific reference to the agreement on development co-operation. Your role in country X includes activities that are contained in a subsidiary arrangement . The agreement on development co-operation is listed in the subsidiary arrangement so the income you earn in country X is exempt from tax. The exemption provided by the agreement on development co-operation does not fall under any of the other exemption categories under subsection 23AG(2) of the ITAA 1936. Accordingly, as your foreign employment income is not exempt from income tax in country X only because of a tax treaty, the salary you earn while posted to country X is 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.