Private ruling: Foreign income
Published: April 2014
Ruling period: Year ending 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Q1: Are the salary and allowances you earned while employed overseas exempt from income tax in Australia? | A1: No.

Relevant facts and circumstances: You are an Australian resident for income tax purposes. You were employed by organisation X who were contracted by Organisation Y to carry out work overseas for AusAID. The work you undertook was directly related to AusAID Official Development Assistance (ODA). Your employment was for a total of 90 days. You took 16 days of annual leave between contracts and you returned to Australia. Organisation Y required that organisation X not invoice for work completed during the 16 day period, and organisation X directed you to take this time as annual leave and return to Australia. Under your employment contract with organisation X you accrue a stated number of days per month annual leave.

Relevant legislative provisions: Income Tax Assessment Act 1936 Section 23AG | Income Tax Assessment Act 1936 Section 23AG(1) | Income Tax Assessment Act 1936 Section 23AG(6)

Reasons for decision: Summary: Subsection 23AG(1) of the Income Tax Assessment Act 1936 (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. Foreign earnings include income consisting of salary, wages, bonuses and 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 a result of the undertaking of that foreign service. 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 Australia's overseas aid program 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 being a prescribed institution that is exempt from Australian tax; or • the individual's deployment outside Australia by an Australian government or an authority thereof) as a member of a disciplined force. You are a resident of Australia for taxation purposes and your employment overseas is directly related to AusAID's ODA. Your employment was for two separate and distinct periods according to your contract with Organisation Y. Your first period was for a total of X days with a Y day period where you returned to Australia on annual leave, your second period was for a total of Z days. Subsection 23AG(6) of the ITAA 1936 treats certain temporary absences from foreign service as forming part of the period of foreign service. The Commissioner's view on the application of that subsection is reflected in Taxation Determination TD 2012/8 Income tax: what types of temporary absences from foreign service form part of a continuous period of foreign service under section 23AG of the Income Tax Assessment Act 1936? Absences which are accepted as continuing to form part of the period of foreign service include absences taken in accordance with the terms and conditions of employment because of either accident, illness, or recreation leave. In the case of accident or illness, there is no limit to the amount of absence that can be treated as part of a period of foreign service under paragraph 23AG(6)(b) of the ITAA 1936, providing the leave is taken during the scheduled period of foreign service and is allowed under the terms and conditions of the foreign service. In the case of recreation leave, any leave taken during a period of foreign service must be leave that accrued during the period of foreign service to be treated part of the period of foreign service under paragraph 23AG(6)(a) of the ITAA 1936. Recreation leave does not include: • leave that is not in the nature of paid holidays, such as weekends, public holidays, rostered days off, days off due to part time arrangements, flex-days, 'compulsory lay-off/over days', 'grounded days' and days off in lieu', • purchased leave, • maternity and parental leave, • leave wholly or partly attributable to a period of service or employment other than the foreign service (that is, leave which is accrued prior to the period of foreign service), • long service leave, furlough, extended leave or leave of a similar kind (however described), or • leave without pay or on reduced pay. Organisation Y specifically would not allow invoicing of work carried out between contracts. You were not employed for the period between your contracts when you were on annual leave as your contract specifically outlines two periods of employment which covers 90 days. The total foreign service of 90 days does not meet the requirements under 23AG(1) for the exemption. The 1/6 legislative rule in subsection 23AG(6A) allows periods of foreign service before and after a break in foreign service to be added together and treated as a continuous period of foreign service. Subsection 23AG(6A) states: 2 or more periods in which a person has been engaged in foreign service are together taken to constitute a continuous period of foreign service until: (a) the end of the last of the 2 or more periods; or (b) a time (if any), since the start of the first of the 2 or more periods, when the person's total period of absence exceeds 1/6 of the person's total period of foreign service; whichever happens sooner. Subsection 23AG(6B) states In subsection (6A): total period of absence , in relation to a particular time, means the number of days, in the period starting at the start of the first of the 2 or more periods and ending at that time, for which the person was not engaged in foreign service. total period of foreign service , in relation to a particular time, means the number of days, in the period starting at the start of the first of the 2 or more periods and ending at that time, for which the person was engaged in foreign service. In applying the 1/6 legislative rule at a particular time, the numerator is the number of days absent from foreign service that do not constitute foreign service up to that time, and the denominator is the total number of days of foreign service up to that time. The 1/6 legislative rule in subsection 23AG(6A) permits two or more periods of foreign service to constitute a continuous period of foreign service if continuity would be otherwise broken. Breaks between the periods of foreign service under the 1/6 legislative rule do not form part of the continuous period of foreign service. The period of 16 days between your foreign service does not meet the 1/6 rule under 23AG(6) as the 16 days exceeds this rule. Consequently your salary earned while employed by organisation Y to carry out ODA for AusAID is not exempt under 23AG as your foreign service was less than 91 days as specified under the legislation.