Private ruling: Foreign income – 23AG exemption
Date of advice: 21 May 2018
Published: July 2018
Ruling period: Year ended 30 June 201X
Date scheme commenced: 1 July 201X

Ruling: Q1: Is the foreign employment income you derive from working in the overseas country exempt income in Australia under section 23AG of the 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 statutory body and were deployed as part of a disciplined force You have been engaged in foreign employment for more than 91 days Your foreign service is in a unit that receives funding through a development program which itself is an Official Development Assistance (ODA) funded initiative. You have been advised that your employer will be seeking specific ODA funding for your role in the next budget cycle There is an agreement between Australia and the overseas country that exempts the income from taxation in the overseas country Your employer has advised your deployment is in accordance with the agreement between Australia and the overseas country The Australian government department are currently withholding tax on your foreign employment income The programs you are involved in are delivered pursuant to Memorandums of Understanding You have provided details of your role scope There is a taxation treaty between the Australian government and the overseas country

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 (6) | Income Tax Assessment Act 1936 Subsection 23AG (7)

Reasons for decision: Summary: Subsection 23AG(1) of the ITAA 1936 provides that foreign earnings are exempt from income tax where all of the following requirements are satisfied: ● you are a resident of Australia and a natural person, ● you are engaged in foreign service, ● the foreign service is for a continuous period of at least 91 days, ● you derive foreign earnings from that foreign service, ● the foreign service is directly attributable to an activity that is listed in subsection 23AG(1AA) of the ITAA 1936, and ● the foreign earnings are not exempt from income tax in the foreign country only because of one of the reasons listed in subsection 23AG(2) of the ITAA 1936. In your case, you are a resident of Australia and a natural person who is engaged in foreign service for a continuous period of at least 91 days and you have derived foreign earnings from that service. | Detailed Reasoning - Foreign deployment as a member of a disciplined force: Paragraph 23AG(1AA)(d) of the ITAA 1936 provides that foreign earnings will not be exempt under section 23AG of the ITAA 1936 unless the continuous period of foreign service is directly attributable to any of the following: ● the person’s deployment outside Australia as a member of a disciplined force by the Commonwealth, a State or a Territory (or an authority of one of these). The expression 'disciplined force' is not defined in the ITAA 1936 or in the ITAA 1997. However, the Explanatory Memorandum (EM) which accompanied Tax Laws Amendment (2009 Budget Measures No. 1) Bill 2009 introducing paragraph 23AG(1AA)(d) of the ITAA 1936 provides some guidance on this (see subparagraph 15AB(1)(b)(i) and paragraph 15AB(2)(e) of the Acts Interpretation Act 1901 ). It relevantly states: 1.31 A person's foreign earnings will be eligible for exemption if the foreign service is directly attributable to that person's deployment outside Australia as a member of a disciplined force by an Australian government, or an authority thereof. A disciplined force is intended to refer to a defence force, including a peacekeeping force, and a police force. 1.32 In a defence force context, the exemption would apply to a person's deployment outside Australia as part of a non-warlike operation. The Second Reading Speech to Tax Laws Amendment (2009 Budget Measures No. 1) Bill 2009 in the House of Representatives provides some additional guidance (see subparagraph 15AB(1)(b)(i) and paragraph 15AB(2)(f) of the Acts Interpretation Act 1901 ). In this speech, the Treasurer relevantly stated: From 1 July 2009, an exemption will apply to income earned as an aid worker, a charitable worker or under certain types of government employment such as a defence or police deployment . It will also apply to income earned as prescribed under regulations. You were deployed to the overseas country as a member of a disciplined force. As your deployment was as an appointee of a disciplined force, you satisfy one of the conditions for exemption under subsection 23AG (1AA) of the ITAA 1936. | Detailed Reasoning - Foreign earnings are not exempt from income tax in the foreign country only because of one of the reasons listed in subsection 23AG(2): The foreign earnings of individuals engaged in foreign service that are directly attributable to one of the activities referred to in subsection 23AG(1AA) will not be exempt if one of the conditions for non-exemption contained in subsection 23AG(2) applies. Subsection 23AG(2) applies, to deny an exemption, if the foreign earnings are exempt from tax in the foreign country only because of one or more of the following reasons: ● a double tax agreement with Australia or a law giving effect to a double tax agreement (paragraphs 23AG(2)(a) and 23AG(2)(b) of the ITAA 1936); ● a law of that foreign country which generally exempts from, or does not provide for, the imposition of tax on income derived in the capacity of an employee, income from personal services or any other similar income (paragraphs 23AG(2)(c) and 23AG(2)(d) of the ITAA 1936), or ● a law or international agreement dealing with privileges and immunities of diplomats or consuls or of persons connected with international organisations (paragraphs 23AG(2)(e), 23AG(2)(f) and 23AG(2)(g) of the ITAA 1936). Australia has a double tax agreement with the overseas country therefore paragraphs 23AG(2)(a) and 23AG(2)(b) of the ITAA 1936 apply. Your employer has advised that your deployment is in accordance with the Development Agreement. It can be inferred from you role scope that you fall under the Agreement. As your deployment is in accordance with the Agreement, it applies to you and exempts your income from taxation in the overseas country. This reason is not listed in subsection 23AG(2) of the ITAA 1936. Therefore, the income you derived whilst on foreign service in the overseas country is not excluded from section 23AG only because of one of the reasons listed in subsection 23AG(2) of the ITAA 1936. It is accepted that you meet the above criteria and the income referable to your foreign service is exempt from income tax in Australia under section 23AG of the ITAA 1936.