Private ruling: Section 23AG exemption from income tax for foreign income
Date of advice: 19 December 2017
Published: May 2018
Ruling period: The year ended 30 June 2017
Date scheme commenced: 1 July 2016

Ruling: Question and Answer | Is the Foreign Service income you earned while deployed in X and in Y exempt from income tax under section 23AG of the Income Tax Assessment Act 1936? | Yes

Relevant facts and circumstances: You are a resident of Australia for income tax purposes You are employed by a company that is a non-government organisation and deploys personnel to emergency situations in developing countries. The company is funded by the Australian Government under a Department of Foreign Affairs and Trade (DFAT) Agreement to provide Australian official development assistance (ODA). You were deployed to X for a continuous period of more than 91 days in the 2017 financial year. Your income was not exempt from domestic taxation in X and you paid taxes in X. You were also deployed in Y for a continuous period of more than 91 days. Your income was not exempt from domestic taxation in Y and you paid taxes in Y.

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

Reasons for decision: Summary: While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision. The Foreign Service income you earned while deployed in X and Y is exempt from income tax under section 23AG of the ITAA 1936. | Detailed Reasoning - Detailed reasoning: 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 income tax in Australia. Subsection 23AG (7) of the ITAA 1936 determines foreign earnings as income consisting of salary, wages, bonuses or allowances. To qualify for the tax 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 however, they must be derived as a result of undertaking 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 Australian ODA by the taxpayer's employer; ● the activities of the taxpayer's employer in operating a public fund covered by the deductible gift recipient categories overseas aid fund and developed country disaster relief fund; ● the activities of the taxpayer's employer where they are a charitable institution or religious institution which is income tax exempt because they are a prescribed institution located outside Australia or pursuing objectives principally outside Australia; ● the taxpayer's deployment outside Australia as a member of a disciplined force of Australia (generally considered to be the Australian Defence Force or Australian Federal Police); or ● an activity of a kind specified in the regulations. The deployment was directly attributable to the delivery of Australian ODA to X and Y by the company. Therefore you satisfy one of the conditions for exemption under subsection 23AG (1AA) of the ITAA 1936. The salary you receive is derived from your foreign service and is foreign earnings from foreign service for the purposes of subsection 23AG (1) of the ITAA 1936. The exemption in subsection 23AG (1) of the ITAA 1936 will not apply where income is exempt from income tax in the foreign country. This applies where the income is exempt in the foreign country because of a tax treaty (paragraphs 23AG (2)(a) and 23AG(2)(b) of the ITAA 1936). There is no tax treaty between Australia and X or Australia and Y. Therefore, paragraphs 23AG (2)(a) and 23AG(2)(b) of the ITAA 1936 will not apply. As the laws of X and Y 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. You were engaged in employment overseas for a continuous period of not less than 91 days, and none of the reasons listed in subsection 23AG (2) of the ITAA 1936 apply in your situation. Therefore the salary you earned during your deployment to X and Y is exempt from income tax in Australia. | Detailed Reasoning - Note:: 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 employment income in your Australian tax return.

Reasons for decision: These reasons for decision accompany the Notice of private ruling .