Class Ruling CR 2006/19
Date of effect: 1 July 2005

What this ruling is about: 1. This Ruling sets out the Commissioner's opinion on the way in which the relevant taxation provision(s) identified below apply to the defined class of entities, who take part in the scheme to which this Ruling relates. Relevant taxation provision(s) 2. The relevant taxation provisions dealt with in this Ruling are section 23AG of the Income Tax Assessment Act 1936 (ITAA 1936) and section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997). Changes to section 23AG of the ITAA 1936 came into effect on 19 December 2005. The Commissioner's interpretation on the treatment of absences in respect of section 23AG of the ITAA 1936 prior to the latest amendments is contained in Taxation Ruling TR 96/15. Class of entities 3. The class of entities to which this Ruling applies are: deployed to the Solomon Islands as part of the Participating Police Force (PPF) under the Regional Assistance Mission to the Solomon Islands (RAMSI). The deployment is under the Agreement between Solomon Islands, Australia, New Zealand, Fiji, Papua New Guinea, Samoa and Tonga concerning the operations and status of the police and armed forces and other personnel deployed to Solomon Islands to assist in the restoration of law and order and security. 4. Those deployed as described in paragraph 3 of this Ruling to whom this Ruling applies will be collectively referred to in this Ruling as AFP employees. 5. AFP employees remain Australian residents throughout the period of deployment. 6. AFP employees include employees who while on deployment to the Solomon Islands return to Australia for a period during which they utilise leave that has wholly accrued from their service in the Solomon Islands. 7. The class of entities does not include AFP employees who while on deployment to the Solomon Islands return to Australia for a period during which they utilise leave that has wholly or partly accrued from service in Australia. Qualifications 8. The Commissioner makes this Ruling based on the precise scheme identified in this Ruling. 9. The class of entities defined in this Ruling may rely on its contents provided the scheme actually carried out is carried out in accordance with the scheme described in paragraphs 13 to 27 of this Ruling. 10. If the scheme actually carried out is materially different from the scheme that is described in this Ruling, then: 11. This work is copyright. Apart from any use as permitted under the Copyright Act 1968 , no part may be reproduced by any process without prior written permission from the Commonwealth. Requests and inquiries concerning reproduction and rights should be addressed to:

Class of entities or scheme: 3. The class of entities to which this Ruling applies are: deployed to the Solomon Islands as part of the Participating Police Force (PPF) under the Regional Assistance Mission to the Solomon Islands (RAMSI). The deployment is under the Agreement between Solomon Islands, Australia, New Zealand, Fiji, Papua New Guinea, Samoa and Tonga concerning the operations and status of the police and armed forces and other personnel deployed to Solomon Islands to assist in the restoration of law and order and security. 4. Those deployed as described in paragraph 3 of this Ruling to whom this Ruling applies will be collectively referred to in this Ruling as AFP employees. 5. AFP employees remain Australian residents throughout the period of deployment. 6. AFP employees include employees who while on deployment to the Solomon Islands return to Australia for a period during which they utilise leave that has wholly accrued from their service in the Solomon Islands. 7. The class of entities does not include AFP employees who while on deployment to the Solomon Islands return to Australia for a period during which they utilise leave that has wholly or partly accrued from service in Australia. | Qualifications: 8. The Commissioner makes this Ruling based on the precise scheme identified in this Ruling. 9. The class of entities defined in this Ruling may rely on its contents provided the scheme actually carried out is carried out in accordance with the scheme described in paragraphs 13 to 27 of this Ruling. 10. If the scheme actually carried out is materially different from the scheme that is described in this Ruling, then: 11. This work is copyright. Apart from any use as permitted under the Copyright Act 1968 , no part may be reproduced by any process without prior written permission from the Commonwealth. Requests and inquiries concerning reproduction and rights should be addressed to: 12. This Ruling applies from 1 July 2005. However, the Ruling does not apply to taxpayers to the extent that it conflicts with the terms of a settlement of a dispute agreed to before the date of issue of the Ruling (see paragraphs 21 and 22 of Taxation Ruling TR 92/20). Furthermore, the Ruling only applies to the extent that: 13. The scheme that is the subject of the Ruling is described below. This description is based on the following documents which are attached to the file record maintained by the Australian Taxation Office for this Ruling. These documents, or relevant parts of them, as the case may be, form part of and are to be read with this description. The relevant documents or parts of documents incorporated into this description of the scheme are: 14. AFP employees will be deployed to the Solomon Islands as members of the PPF under the Treaty as part of the Regional Assistance Mission. 15. The terms and conditions in each AFP employee's AWA will be the same, the only difference being that the amount of remuneration and benefits may vary from one employee to another. 16. The period of deployment is for a minimum period of 12 months. 17. It is anticipated that AFP employees will return to Australia to reside on a permanent basis on completion of their deployment after which they will continue to remain employees of the AFP in Australia. 18. AFP employees will be members of either the Commonwealth Superannuation Scheme or the Public Sector Superannuation scheme. 19. The remuneration for AFP employees takes the form of an annual salary entitlement, a potential performance bonus and the payment of various allowances. Salary and allowances will continue to be paid into the employee's nominated account on a fortnightly basis. 20. AFP employees are entitled to the following allowances: 21. Allowances will be paid while an AFP employee is on leave accrued during the deployment period. 22. Performance bonus payments are made to AFP employees at the discretion of the Commissioner of Police of the AFP. The amount of any performance bonus payment may take the form of: 23. The AFP employees are also entitled to certain compensation payments either on resignation or retirement under sections 30, 31 and 32 of the AFP Act, or on termination of engagement under sections 22 or 28 of the AFP Act prior to the expiry of the term of engagement. 24. AFP employees will accrue 20 days of recreation leave per year. In addition, AFP employees will receive 10 days additional recreation leave per annum or pro-rata for part year of deployment. All recreation leave accrued during the term of deployment will be utilised before the cessation of the term of deployment. Miscellaneous leave may also be granted for special circumstances (for example, death of a close family member). 25. Leave will be approved subject to operational requirements and with approval from national management. 26. It is expected that only recreation leave accrued while on deployment will be taken by AFP employees. If an employee chooses to return to Australia on recreation leave they would not be expected or required to perform any work related duties in Australia. 27. Article 16.6 of the Government Treaty grants an exemption to members of the Visiting Contingent which includes AFP employees from taxation by the Government of the Solomon Islands on their pay and other emoluments. 28. The salary, performance bonus and allowances referred to in paragraphs 19, 20 and 22 of this Ruling, derived by AFP employees described in paragraphs 3 to 6 of this Ruling deployed to the Solomon Islands are exempt from tax under section 23AG of the ITAA 1936 where:

Ruling: 28. The salary, performance bonus and allowances referred to in paragraphs 19, 20 and 22 of this Ruling, derived by AFP employees described in paragraphs 3 to 6 of this Ruling deployed to the Solomon Islands are exempt from tax under section 23AG of the ITAA 1936 where: | Example: 29. In the 2005-2006 income year, Daniel, an AFP employee derives the following types of income: Assume that Daniel has appropriate private patient hospital cover for Medicare levy surcharge purposes. The total amount of Australian tax payable will be calculated with reference to the following formula: (Notional gross tax/Notional gross taxable income) x Other taxable income | Step 1: Daniel's notional gross taxable income is $90,000 ([$60,300 - $300] + [$30,100 - $100]). | Step 2: The notional gross tax is $27,450 (the normal Australian income tax and Medicare levy payable on a taxable income of $90,000). | Step 3: The other taxable income is $60,000 (Australian employment income). | Step 4: The Australian tax payable (including Medicare levy) on Daniel's Australian income is: ($27,450/$90,000) x $60,000 = $18,300 Commissioner of Taxation 22 March 2006


Appendix: 30. Subsection 6-5(2) of the ITAA 1997 provides that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources, whether in or out of Australia, during the income year. 31. Salary and wages are ordinary income for the purposes of subsection 6-5(2) of the ITAA 1997. 32. Subsection 6-15(2) of the ITAA 1997 provides that if an amount is exempt income then it is not assessable income. 33. 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 ITAA 1936 which deals with exempt foreign employment income. 34. Section 23AG of the ITAA 1936 provides an exemption from Australian tax on the foreign earnings derived by an Australian resident who has been engaged in foreign service continuously for 91 days or more. 35. Subsection 23AG(1) of the ITAA 1936 states: Where a resident, being a natural person, has been engaged in foreign service for a continuous period of not less than 91 days, any foreign earnings derived by the person from that foreign service is exempt from tax. 36. The basic tests for the exemption of foreign employment income in subsection 23AG(1) of the ITAA 1936 are: However, certain foreign earnings that meet these tests may not be exempt from tax (see paragraphs 69 to 74 of this Ruling). | Resident of Australia: 37. The determination of a person's residency status depends on that person's circumstances and is a determination made in relation to each year of income. For further information see Taxation Ruling IT 2650. This Ruling only applies to the class of entities described in paragraphs 3 to 6 of this Ruling who remain Australian residents for tax purposes during their deployment to the Solomon Islands. 38. This Ruling is based on the assumption that AFP employees deployed to the Solomon Islands will remain Australian residents for tax purposes throughout the period of their deployment. | Engaged in foreign service: 39. 'Foreign service' is defined as 'service in a foreign country as the holder of an office or in the capacity of an employee' (subsection 23AG(7) of the ITAA 1936). 40. The term 'employee' is defined within subsection 23AG(7) of the ITAA 1936 to include 'a person employed by a government or an authority of a government or by an international organisation'. 41. AFP employees referred to in paragraphs 3 to 6 of this Ruling are considered to meet the above definition of an 'employee'. 42. Deployment of AFP employees to the Solomon Islands constitutes 'foreign service' as each employee is undertaking 'service in a foreign country as a holder of an office or in the capacity of an employee'. | For a continuous period of not less than 91 days: 43. Each AFP employee based in the Solomon Islands is expected to serve continuously in the Solomon Islands for a period of at least 91 days. These periods of 'foreign service', if met, satisfy the test that Australian residents working overseas must be engaged in foreign service 'for a continuous period of not less than 91 days'. 44. Should an AFP employee depart the Solomon Islands prior to the completion of 91 days of continuous service, that employee will normally be ineligible for the exemption. 45. However, in certain instances, an employee who departs the Solomon Islands prior to serving the necessary number of days, may still qualify for exemption if they return to continue their posting at a later date (refer paragraphs 9 to 16 of Taxation Ruling TR 96/15). | Temporary absences forming part of a period of foreign service: 46. 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 paragraphs 9 to 11 of TR 96/15. 47. Absences which form part of the period of foreign service include absences taken in accordance with the terms and conditions of employment because of accident or illness or recreation leave, other than: 48. A period in which an employee is absent on extended leave (see paragraph 47(b) of this Ruling) is not a period of 'foreign service' for the purposes of subsection 23AG(1) of the ITAA 1936. Additional recreation leave entitlements granted to employees posted overseas will not be considered to constitute extended leave where the additional leave is reasonable. 49. The deployed AFP employees are granted 10 days additional recreation leave per annum or pro-rata for part year of deployment. 50. Given the nature of the overseas deployment, it is considered that the additional recreation leave granted to AFP employees deployed the Solomon Islands is reasonable. Therefore, the period of additional recreation leave will form part of a continuous period of 'foreign service' for the purposes of subsection 23AG(1) of the ITAA 1936. 51. Miscellaneous leave granted to the AFP employee because of the accident, illness or death of another person will also form part of the employee's period of continuous foreign service where the leave is for a short period. | Temporary absences not breaking the period of foreign service: the one-sixth administrative test: 52. In certain limited circumstances, breaks other than those specified in paragraph 47 of this Ruling are also taken to form part of a period of foreign service. Such breaks include weekends, public holidays, rostered days off, and days off in lieu of such, where such breaks are authorised by the terms and conditions of the deployment. However, where such breaks are used to return to Australia they must not be excessive. Where the break is excessive the period of foreign service will still not be broken if continuity of the foreign service period can be maintained by application of the rules outlined in paragraph 54 of this Ruling. 53. Breaks taken to visit or return to Australia are considered excessive when the total of such breaks are more than one-sixth of the period of scheduled foreign service or, if the period of foreign service is ongoing, more than one-sixth of the income year. This one-sixth administrative test is different to the 1/6 legislative rule covered in paragraphs 55 to 57 of this Ruling. | Temporary absences not breaking the period of foreign service: the legislative rules: 54. In determining whether the continuity of foreign service can be maintained, the AFP employee should consider the application of: Alternatively, the AFP employee could seek professional advice from their taxation adviser or the Australian Taxation Office. | Continuity of the period of foreign service: 1/6 legislative rule: 55. The 1/6 legislative rule allows two or more continuous periods of foreign service to be joined as a total period of foreign service, unless, at any time, the total period of absence (in days) from foreign service between the continuous periods of foreign service exceeds 1/6 of the number of days of the total period of foreign service. 56. If the period of absence exceeds 1/6 of the total period of foreign service at any time, continuity of foreign service is broken. The AFP employee will begin a new period of foreign service when he or she next engages in foreign service and must determine whether that period of foreign service lasts for at least 91 continuous days (subsections 23AG(6A) of the ITAA 1936). 57. The 1/6 legislative rule should not be confused with the one-sixth administrative test outlined at paragraphs 52 and 53 of this Ruling. 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 where continuity would be otherwise broken by absence. Absences between the periods of foreign service under the 1/6 legislative rule do not form part of the continuous period of foreign service. In contrast, the one-sixth rule is an administrative test which permits what would otherwise be a break in the foreign service to be included in a continuous period of foreign service. | Foreign earnings: 58. The definition of 'foreign earnings' is contained in subsection 23AG(7) of the ITAA 1936, which provides that: 59. Subject to paragraph 60 the exclusions to the definition of 'foreign earnings' in paragraph 58 are not, however, relevant to this scheme as they relate to pensions, annuities, eligible termination payments and other similar amounts. 60. AFP employees who are entitled to the termination payments should seek professional advice from their taxation adviser or the Australian Taxation Office about the application of section 23AG of the ITAA 1936 to their circumstances. 61. The remuneration of deployed AFP employees takes the form of an annual salary entitlement, a potential performance bonus and the payment of various allowances. 62. These salary, bonuses and allowances which are described in paragraphs 19, 20 and 22 of this Ruling come within the definition of 'foreign earnings' in subsection 23AG(7) of the ITAA 1936. 63. Whilst the salary of AFP employees may be paid into financial institutions in Australia, those 'earnings' are still considered 'foreign earnings'. | From that foreign service: 64. 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. 65. In the case of allowances paid after the taxpayer returns to Australia that relate to the period of foreign service, such allowances are treated as foreign earnings derived from that foreign service. Also, any advances against salary or allowances paid to the taxpayer prior to the undertaking of foreign service arising from the undertaking of that foreign service would be treated as foreign earnings from foreign service. 66. The receipt of the following allowances: are considered to be foreign earnings from the foreign service as they relate to engaging in foreign service in the Solomon Islands. 67. The salary that is paid when taking recreational leave that accrued during the period of foreign service is also considered to be foreign earnings from that service. 68. In the case of performance bonuses paid after the person returns to Australia that relate to the period of foreign service, such bonuses are treated as foreign earnings derived from that foreign service. However, where the bonus relates to both a period of foreign service and a period of employment in Australia, the AFP employees are required to calculate their performance bonuses considered to be foreign earnings derived from that foreign service. | Certain foreign earnings not exempt: 69. Subsection 23AG(2) of the ITAA 1936 provides that no exemption is available under subsection 23AG(1) of the ITAA 1936 in circumstances where an amount of foreign earnings derived in a foreign country is exempt from tax in the foreign country solely because of: 70. There is currently no tax treaty between Australia and the Solomon islands. 71. The privileges and immunities of persons connected with an international organisation do not apply to AFP employees working in the Solomon Islands. 72. The foreign earnings derived by AFP employees in the Solomon Islands are not exempt, under the general provision, from income tax in the Solomon Islands. 73. Article 16.6 of the Government Treaty grants to members of the Visiting Contingent which includes AFP employees an exemption from taxation by the Government of the Solomon Islands on their pay and other emoluments. 74. As a result, the foreign earnings of the deployed AFP employees are exempt from tax in the Solomon Islands for a reason other than those listed in subsection 23AG(2) of the ITAA 1936. Therefore, subsection 23AG(2) will not operate to deny the exemption under subsection 23AG(1) of the ITAA 1936. | Exemption with progression: 75. The 'foreign earnings' of AFP employees that are exempt from Australian tax under section 23AG of the ITAA 1936 are nevertheless taken into account in calculating the Australian tax on other assessable income derived by the employee (subsection 23AG(3) of the ITAA 1936). 76. Tax on other assessable income will be calculated by applying to the non-exempt income (for example, Australian salary, investment income), the notional average rate of tax payable on the sum of exempt income and non-exempt income. 77. In calculating these amounts, any deductions that relate to the exempt income are allowed as if the exempt income was assessable income. That is, expenses which relate directly to earning income in the Solomon Islands are deductible from exempt income.


What this Ruling is about | A public ruling is an expression of the Commissioner's opinion about the way in which a relevant provision applies, or would apply, to entities generally or to a class of entities in relation to a particular scheme or a class of schemes. | If you rely on this ruling, we must apply the law to you in the way set out in the ruling (or in a way that is more favourable for you if we are satisfied that the ruling is incorrect and disadvantages you, and we are not prevented from doing so by a time limit imposed by the law). You will be protected from having to pay any under-paid tax, penalty or interest in respect of the matters covered by this ruling if it turns out that it does not correctly state how the relevant provision applies to you. | Appendix 2 - Detailed contents list: 78. The following is a detailed contents list for this Ruling: | What this Class Ruling is about | Appendix 2 - Detailed contents list | Not previously issued as a draft


Related rulings: TR 92/20 TR 96/15 IT 2650
Legislative references: ITAA 1936 23AG ITAA 1936 23AG(1) ITAA 1936 23AG(2) ITAA 1936 23AG(2)(a) ITAA 1936 23AG(2)(b) ITAA 1936 23AG(2)(c) ITAA 1936 23AG(2)(d) ITAA 1936 23AG(2)(e) ITAA 1936 23AG(2)(f) ITAA 1936 23AG(2)(g) ITAA 1936 23AG(3) ITAA 1936 23AG(6) ITAA 1936 23AG(6A) ITAA 1936 23AG(6E) ITAA 1936 23AG(7) ITAA 1936 Pt III Div 2 Subdiv AA ITAA 1936 27A(1) ITAA 1936 Pt III Div 13A ITAA 1997 6-5 ITAA 1997 6-5(2) ITAA 1997 6-15(2) ITAA 1997 11-15 TAA 1953 Copyright Act 1968 AFP Act 1979 40E AFP Act 1979 69D
Subject references: exempt foreign income exempt income foreign exempt employment income foreign income foreign income deductions foreign salary & wages foreign source income international tax overseas countries overseas employees overseas tax laws residence of individuals Solomon Islands
Other references: The Agreement between the Solomon Islands, Australia, New Zealand, Fiji, Papua New Guinea, Samoa and Tonga concerning the operations and status of the police and armed forces and other personnel deployed to Solomon Islands to assist in the restoration of law and order and security, 24 July 2003