Private ruling: Foreign income
Published: November 2012
Ruling period: Year ended 30 June 2012
Date scheme commenced: 1 July 2011

Ruling: Question and answer | Are the allowances you received for volunteer work in Country X exempt from tax under section 23AG of the Income Tax assessment Act 1936 (ITAA 1936)? | Yes


Relevant legislative provisions: Income Tax Assessment Act 1936 Section 6-5 | Income Tax Assessment Act 1997 Section 6-15 | Income Tax Assessment Act 1936 Section 23AG International Tax Agreements Acts 1953

Reasons for decision: Summary: 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 during the income year. Salary and allowances are ordinary income for the purposes 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, it is not included in the assessable income of a taxpayer. Section 11-15 of the ITAA 1997 lists those provisions dealing with income which may be exempt. Included in this list is section 23AG of the Income Tax Assessment Act 1936 (ITAA 1936) which deals with overseas employment income. Section 23AG of the Income Tax Assessment Act 1936 exempts certain foreign salary and wage income from tax in Australia. The income must be from specified types of employment. 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 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 whether 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. Foreign service includes service in a foreign country in the capacity as an employee and 'foreign earnings' includes income consisting of salary, wages, bonuses and allowances (subsection 23AG(7) of the ITAA 1936). The allowances and income you earned while a volunteer is administered by AusAID and therefore falls under the first category above. In accordance with subsection 23AG(2) of the ITAA 1936, the exemption under subsection 23AG(1) of the ITAA 1936 will not apply if the income is exempt from income tax in the foreign country only because of one or more of the following conditions: · a double taxation agreement or a law of a country that gives 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, or · a law or international agreement dealing with privileges and immunities of diplomats or consuls or of persons connected with international organisations applies. In determining liability to Australian tax on foreign sourced income it is necessary to consider not only the income tax laws but also any applicable double tax agreement contained in the International Tax Agreements Acts 1953 (the Agreements Act). Section 4 of the Agreement Act incorporates that Act with the ITAA 1936 and the ITAA 1997 so that those Acts are read as one. The Agreements Act effectively overrides the ITAA 1936 and the ITAA 1997 where there are inconsistent provisions (except for some limited provisions). Country X Agreement discusses the remuneration of visiting employees and how it is to be taxed. It states that generally, salaries, wages and similar remuneration derived by a resident of Australia from employment exercised in Country X will be liable to tax in Country X. Subject to certain conditions, there is a provision that exempts from tax in Country X where visits of only a short-term nature are involved (less than 183 days). As you were present in Country X for a period in excess of 183 days during their year of income and you do not meet the other conditions for the exemption, then Country X may also tax the income. Under Country X Agreement, although your income is subject to tax in Australia, it may also be subject to tax in Country X. Therefore, your income is not exempt from tax in Country X and accordingly subsection 23AG(2) of the ITAA 1936 does not apply. As subsection 23AG(2) of the ITAA 1936 does not apply, your income earned in Country X will be exempt from tax under subsection 23AG(1) of the ITAA 1936 and is not included in your assessable income. Furthermore, your income earned in Country X is exempt because of a Memorandum of understanding (MOU) between Australia and Country X. | Detailed Reasoning - Exempt income: Although income subject to exemption under section 23AG of the ITAA 1936 is not taxable in Australia, the amount still needs to be declared as 'exempt foreign employment income' at the appropriate label in your tax return for the relevant year. This is because the amount of exempt foreign earnings is taken into account in calculating the tax payable on other income that you derive for that year.

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. | Relevant facts: You are a resident of Australia for tax purposes. | You completed a volunteer assignment in Country X. | The volunteer program is an Australian Government AID initiative. | You were paid an allowance to cover your living expenses. | You were also paid a monthly amount by your host organisation. | There is a subsidiary agreement between Australia and Country X relating to the volunteer program that provides an exemption from local taxes in respect of income provided by the Volunteer Program and/or Australian partner organisations in the form of a volunteer living and accommodation allowance.