Private ruling: Assessability of foreign employment income
Date of advice: 8 September 2016
Published: November 2016
Ruling period: The year ended 30 June 2016
Date scheme commenced: 1 July 2015

Ruling: Q1: Is the foreign service income you earned while deployed in Country X exempt from income tax under section 23AG of Income Tax Assessment Act 1936 (ITAA 1936)? | A1: Yes

Relevant facts and circumstances: You are an Australian resident for income tax purposes. You are employed by an Australian organisation. Your employer is a non-government organisation that provides emergency assistance to communities devastated by conflict or major natural disasters by selecting, training and providing competent and effective personnel to humanitarian relief programs worldwide. Your employer 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 Country X for a period of X days during the relevant financial year to deliver ODA. Your income is not exempt from taxation in Country X for any of the reasons mentioned in subsection 23AG(2) of the ITAA 1936. Country X taxes employment income under its domestic law. There is no tax treaty between Australia and Country X.

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

Reasons for decision: Summary: The Foreign Service income you earned while deployed in Country X is exempt from income tax under section 23AG of 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. 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. Section 23AG of the ITAA 1936 has been amended so that foreign employment income derived by Australian residents will only be exempt in certain circumstances. These amendments are effective from 29 June 2009. 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. In your case, you were deployed to Country X by your employer to provide ODA. As your deployment is directly attributable to the delivery of Australian ODA by your employer, you satisfy one of the conditions for exemption under subsection 23AG(1AA) of the ITAA 1936. As you receive 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. 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 X. Therefore, paragraphs 23AG(2)(a) and 23AG(2)(b) of the ITAA 1936 will not apply. As the laws of Country X 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. In your case, you are 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. Consequently, the salary you earned during your deployment to Country X are 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.