Private ruling: Foreign employment income
Published: March 2012
Ruling period: Year ended 30 June 2009 | Year ended 30 June 2010
Date scheme commenced: 1 July 2008

Ruling: Q1: Is the salary you received during deployment to Country A exempt in Australia under subsection 23AG(1) of the Income Tax Assessment Act 1936 (ITAA 1936)? | A1: Yes.

Relevant facts and circumstances: You are an Australian resident and employed by AusAID. Since July 2008 under the technical cooperation for development Memorandum of Understanding (MOU) between Australia and Country A you have worked in Country A as Australian project personnel. According to the MOU your foreign services are directly attributable to the delivery of Australian official development assistance by AusAID and you are exempt from the payment of income tax on payments derived from performing these services.

Relevant legislative provisions: Income Tax Assessment Act 1936 section 23AG | Income Tax Assessment Act 1936 subsection 23AG(1) | Income Tax Assessment Act 1936 subsection 23AG(1AA) Income Tax Assessment Act 1936 subsection 23AG(2) Income Tax Assessment Act 1936 subsection 23AG(7)

Reasons for decision: Summary: Your foreign service in Country A fulfils the requirement of paragraph 23AG(1AA)(a) of the ITAA 1936 as it promotes sustainable development by your employer, the Australian Agency for International Development (AusAID). Your salary is foreign earnings from foreign service for the purposes of subsection 23AG of the ITAA 1936 and is therefore exempt from tax in Australia. | 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. Foreign earnings includes income consisting of salary, wages, bonuses or allowances (subsection 23AG(7) of the ITAA 1936). 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 result of the undertaking of that foreign service. Subsection 23AG(2) of the ITAA 1936 provides that the exemption in subsection 23AG(1) of the ITAA 1936 will not apply where the income is exempt from income tax in the foreign country only because of any of the reasons listed in that subsection. One of the reasons listed is 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 Country A. Therefore, paragraphs 23AG(2)(a) and 23AG(2)(b) of the ITAA 1936 will not apply. As the laws of Country A 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 listed in subsection 23AG(2) of the ITAA 1936 apply to your situation. In your case, you were engaged in employment overseas for a continuous period of not less than 91 days. Income derived in Country A from 1 July 2008 to 30 June 2009 Therefore, the salary you earned in Country A is exempt from income tax in Australia under subsection 23AG(1) of the ITAA 1936. Income derived in Country A from 1 July 2009 to 30 June 2010 New subsection 23AG(1AA) of the ITAA 1936, which took effect from 1 July 2009, provides that those foreign earnings will not be exempt under section 23AG of the ITAA 1936 unless the continuous period of foreign service is directly attributable to the following: · the delivery of Australian official development assistance by the taxpayer's employer (generally provided by AusAID or the Department of Foreign Affairs and Trade); · 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. In your case, you have been appointed to undertake duties in Country A on an AusAID project. As your deployment is directly attributable to the delivery of Australian official development assistance by AusAID, you satisfy one of the conditions for exemption under subsection 23AG(1AA) of the ITAA 1936. As you received a salary from your foreign employment, this salary is considered to be derived from your foreign service. Therefore, your salary is foreign earnings from foreign service for the purposes of subsection 23AG(1) of the ITAA 1936 and the salary you earned in Country A is exempt from income tax in Australia under subsection 23AG(1) of the ITAA 1936. | 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.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet.