Private ruling: Foreign income
Published: March 2015
Ruling period: 1 July 2015 to 30 June 2016.
Date scheme commenced: 1 July 2015.

Ruling: Question and answer: | Will the salary and allowances you receive from employment in another country be exempt from income tax in Australia under section 23AG of the Income Tax Assessment Act 1936 (ITAA 1936)? | Yes.

Relevant facts and circumstances: You are an Australian Public Service employee. You are working overseas on an Australian aid project and your salary and allowances are funded from Australia's official development assistance program. Your income is not be taxable in the country you are working in because of a reason in addition to those listed in section 23AG(2) of the ITAA 1936.

Relevant legislative provisions: Income Tax Assessment Act 1936 Section 23AG

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 (subsection 23AG(7) of the ITAA 1936). Only allowances that are paid to cover expenditure while the employee is in the foreign country and engaged in a period of foreign service can be classed as foreign earnings. 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 will work overseas for a period of not less than 91 days. Your employment is funded from Australia's ODA budget and the salary and allowances you derive will be derived as part of an Australian overseas aid project. As your period of foreign service will be directly attributable to the delivery of an Australian overseas aid program, you will satisfy one of the conditions for exemption under subsection 23AG(1AA) of the ITAA 1936. However, the exemption is not available if the provisions of subsection 23AG(2) of the ITAA 1936 apply. Subsection 23AG(2) of the ITAA 1936 specifies that that no exemption is available 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 double tax agreement (DTA) or a law of a country that gives effect to such an agreement, • 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, or • a law or international agreement dealing with privileges and immunities of diplomats or consuls or of persons connected with international organisations applies. The salary and allowances you will earn from your employment in the foreign country are exempt from taxation in that country for a reason in addition to those listed in section 23AG(2) of the ITAA 1936. Accordingly, subsection 23AG(2) of the ITAA 1936 will not apply to you. As you will be engaged in foreign service for a continuous period of not less than 91 days, your salary and allowances will be exempt from tax under subsection 23AG(1) of the ITAA 1936.