Private ruling: Application of section 23AG of the ITAA 1936 and exempt income
Date of advice: 14 December 2015
Published: February 2016
Ruling period: Year ending 30 June 2016 | Year ending 30 June 2017
Date scheme commenced: 26 October 2015

Ruling: Question and answer: | Is your foreign employment income exempt from taxation in Australia under section 23AG of the Income Tax Assessment Act 1936 ? | No.

Relevant facts and circumstances: You are an Australian resident for tax purposes. You are a full time member of an Australian disciplined force. You have been posted to Country T to undertake military training. Your posting is fulltime and will commence. While posted to Country T you will not be a member of the Australian Embassy and do not have diplomatic status. During your posting to Country T, you will conduct no other official duties other than your training, and do not intend to return to Australia. In addition to your normal base salary you will receive a number of allowances. There is a number of agreements between Australia and Country T. The position that you will hold in Country T is established under the auspices of one of those agreements. There is a Development Cooperation Agreement between Australia and Country T. There is a double tax agreement between Australia and Country T. Country T normally taxes income derived in the capacity of an employee.

Relevant legislative provisions: Income Tax Assessment Act 1936 Section 23AG. | Income Tax Assessment Act 1997 Subsection 6-15(2). | Income Tax Assessment Act 1997 Subsection 6-5(2)

Reasons for decision: Detailed Reasoning - Assessable income: Subsection 6-5(2) 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 an income year. Salary and wages are ordinary income for the purpose of subsection 6-5(2) of the ITAA 1997. Subsection 6-15(2) of the ITAA 1997 provides that if an amount is exempt income then it is not included in assessable income. Section 11-15 of the ITAA 1997 lists those provisions dealing with income that may be exempt. Included in this list is section 23AG of the Income Tax Assessment Act 1936 (ITAA 1936), which deals with foreign earnings. Exemption from taxation under section 23AG of the Income Tax Assessment Act 1936 Subsection 23AG(1) of the ITAA 1936 provides that foreign earnings are exempt from income tax in Australia if all of the following requirements are satisfied: • You are a resident of Australia and a natural person; and • You are engaged in foreign service; and • The foreign service is for a continuous period of at least 91 days; and • You derive foreign earnings from that foreign service. In your case, you satisfy all of requirements under subsection 23AG(1) of the ITAA 1936. However, regardless of whether an individual satisfies the requirements listed above, the exemption provided by subsection 23AG(1) of the ITAA 1936 is not available unless: • From 1 July 2009 onwards, the foreign service is 'directly attributable' to an activity listed in subsection 23AG(1AA) of the ITAA 1936 (the listed activities include deployment outside Australia as a member of a disciplined force by the Commonwealth). • The foreign earnings are exempt from taxation in the foreign country for a reason other than, or in addition to, any of the following reasons that are listed in subsection 23AG(2) of the ITAA 1936: • 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 (IO(PI) Act 1963)or to the regulations under the IO(PI) Act 1963. • An international agreement to which Australia is a party that deals with: • diplomatic or consular privileges and immunities, or • privileges and immunities for people connected with international organisations, such as the United Nations. • A law of the foreign country which gives effect to an agreement to which Australia is a party and which deals with diplomatic or consular privileges and immunities, or privileges and immunities for people connected with international organisations, such as the United Nations. In your case, as you are a member of a disciplined force and will be deployed outside of Australia you satisfy the requirement under subsection 23AG(1AA) of the ITAA 1936. However in reference to subsection 23AG(2) of the ITAA 1936, you were requested to provide confirmation from your employer that your foreign service is not taxable in Country T for a reason other than those listed above. In your response to this request you have indicated that you are unable to obtain this. Therefore the Commissioner must rule based on the information that you have provided and conclude that you do not satisfy subsection 23AG(2) of the ITAA 1936. | Detailed Reasoning - Conclusion: Accordingly, as you do not satisfy all the exemption conditions provided for under section 23AG of the ITAA 1936, the income that you derive from your overseas deployment in Country T is assessable in Australia under section 6-5 of the ITAA 1997.