Private ruling: Exempt foreign employment income
Published: March 2014
Ruling period: Year ending 30 June 2015 | Year ending 30 June 2016
Date scheme commenced: 1 July 2014

Ruling: Question and answer | Is the salary you derive from your foreign service in Country A exempt from income tax in Australia? | Yes.

Relevant facts and circumstances: You are a resident of Australia for tax purposes. You will be engaged in foreign service in Country A for a continuous period of more than 91 days. You have taken up a non-diplomatic role in Country A. The funding of your role is through an official development assistance program. Your income is exempt from tax in Country A because of a memorandum of understanding between Country A and Australia. You have a letter accepting your deployment to Country A. Your employment in Country A was initially for the period from Date 1 to Date 2 but has been extended for two more years. Otherwise, the terms of your employment remain unchanged.

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

Reasons for decision: Summary: Subsection 23AG(1) of the Income Tax Assessment Act 1936 (ITAA 1936) provides that, where Australian resident individuals are engaged in foreign service for a continuous period of not less than 91 days, foreign earnings derived from this foreign service are exempt from Australian tax. In your case, you are a resident of Australia and you will be engaged in foreign service for a continuous period of more than 91 days. Foreign earnings derived on or after 1 July 2009 from foreign service performed on or after 1 July 2009 must satisfy subsection 23AG(1AA) of the ITAA 1936 in order to be eligible for the exemption. The foreign service must be for a continuous period and be directly attributable to any of the following: • the delivery of Australian official development assistance 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 if the employer is a prescribed institution that is exempt from Australian income tax • the individual's deployment outside Australia by an Australian government (or an authority thereof) as a member of a disciplined force, or • an activity of a kind specified in the regulations. You have taken up a non-diplomatic role in Country A as an advisor. The funding of your role is through an official development assistance program, and you have been deployed to undertake this role. Therefore, your foreign service is directly attributable to the delivery of Australian official development assistance by your employer. Subsection 23AG(2) of the ITAA 1936 provides that the exemption from Australian tax will not apply where the foreign earnings derived in a foreign country are only exempt from income tax in the foreign country because of any of the following: • a double tax agreement or a law of a country giving effect to such an agreement • the foreign country exempts from income tax, or does not provide for the imposition of income tax on, income derived in the capacity of an employee, income from personal services or similar income • a law or international agreement dealing with privileges and immunities of diplomats or consuls or of persons connected with international organisations applies. In your case, your income is exempt from tax in Country A because of a memorandum of understanding between Country A and Australia. Therefore, your income is not exempt from tax for any of the reasons set out in subsection 23AG(2) of the ITAA 1936. You meet all the requirements of section 23AG of the ITAA 1936. Therefore, the income you derive from your foreign service is exempt from income tax in Australia. | 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.