Private ruling: Foreign employment income
Date of advice: 10 August 2016
Published: September 2016
Ruling period: Year ended 30 June 2017 | Year ended 30 June 2018
Date scheme commenced: 1 July 2016

Ruling: Q1: Will your foreign employment income be exempt from income tax in Australia under section 23AG of the Income Tax Assessment Act 1936 (ITAA 1936)? Answer Yes

Relevant facts and circumstances: You are a resident of Australia for taxation purposes. You are employed in an overseas country. You will be engaged in foreign employment for more than 91 continuous days. Your foreign service is directly attributable to the delivery of Australian official development assistance (ODA). You pay withholding tax in the overseas country. There is no double tax agreement between the Government of Australia and the Government of the overseas country.

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

Reasons for decision: Summary: Section 23AG of the Income Tax Assessment Act 1936 (ITAA 1936) provides that where you are working overseas and earning foreign employment income, the income is exempt from income tax in Australia if all of the following applies: • you are an Australian resident; • you are engaged in continuous foreign services as an employee for 91 days or more; • you foreign service is directly attributable to the delivery of Australian official development assistance (ODA) by your employer; and • you are not excluded from the exemption by specific conditions listed in the law. Subsection 23AG(2) of the ITAA 1936 provides that no exemption is available in circumstances where an amount of foreign earnings derived in a foreign country is exempt from tax in the foreign country solely because of: • a double tax agreement or a law of a country that gives effects to such an agreement (paragraphs 23AG(2)(a) and (b)); • a law of that foreign country which 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)); and • a law or international agreement dealing with diplomatic or consular privileges and immunities, or privileges and immunities of persons connected with international organisations (paragraphs 23AG(2)(e), (f) and (g)). If your foreign employment income 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. In your case, you are a resident of Australia for tax purposes. You are employed in the overseas country as part of Australian official development assistance which falls into one of the five categories of foreign service listed in section 23AG of the ITAA 1936. You will be engaging in foreign service for a continuous period greater than 91 days. Therefore, your employment income will be exempt from tax in Australia as long as you are not caught by the non-exemption conditions as listed in subsection 23AG(2) of the ITAA 1936. In your situation, there is no double tax agreement between the Government of Australia and the overseas country. Therefore, paragraphs 23AG(2)(a) and 23AG(2)(b) of the ITAA 1936 will not apply. As the laws of the overseas country provide for the imposition of income tax and do not generally exempt employment income from income tax, paragraphs 23AG(2)(c) and (d) of the ITAA 1936 will not apply. None of the other reasons in subsection 23AG(2) of the ITAA 1936 apply to your situation. You have confirmed the income you earn while working in the overseas country is subject to withholding tax in that country. Therefore, subsection 23AG(2) of the ITAA 1936 does not apply. Accordingly, your foreign employment income is exempt from income tax in Australia under subsection 23AG(1) of the ITAA 1936. | Detailed Reasoning - Additional information: Although income subject to exemption under section 23AG of the ITAA 1936 is not taxable in Australia, the amount still needs to be declared as 'exempt foreign employment income' at the appropriate label in your tax return. This is because the amount of exempt foreign earnings it taken into account in calculating the tax payable on other income that you, derive.