Exempt foreign employment income
Exempt foreign employment income
If you are an Australian resident for tax purposes, you pay tax in Australia on your employment income, such as salary, wages, commissions, bonuses and allowances earned from foreign service unless it is exempt from Australian tax. From 1 July 2009, there is a limited exemption for foreign employment income from particular types of foreign service.
Your foreign employment income is exempt from tax if all of the following applies:
- you are a resident of Australia
- you are engaged in continuous foreign service as an employee for 91 days or more
- your foreign service is directly attributable to any of the following
- delivery of Australian official development assistance by your employer
- activities of your employer in operating a public fund declared by the Treasurer to be a developing country relief fund
- activities of your employer in operating a public fund established and maintained to provide monetary relief to people in a developing foreign country who are distressed as a result of a disaster (a public disaster relief fund)
- activities of your employer as a prescribed charitable or religious institution exempt from Australian income tax because it is located outside Australia or the institution is pursuing objectives outside Australia
- deployment outside Australia by an Australian government (or an authority thereof) as a member of a disciplined force
If your foreign service is not directly attributable to these activities, you will need to include the foreign employment income in your tax return as assessable income.
You may be entitled to a foreign income tax offset for amounts of foreign tax you have paid.
What is Australian official development assistance?
Australian official development assistance (ODA) is assistance delivered through the Australian Government's overseas aid program that is administered by the Department of Foreign Affairs and Trade or the Australian Agency for International Development (AusAID).
AusAID also contracts aid work to Australian and international entities. As a result, individuals involved in the delivery of Australian ODA can include both Australian Public Service (APS) employees and non-APS employees.
Foreign service directly attributable to the delivery of Australian ODA does not include diplomatic or consular duties carried out by Australian residents.
Michelle is employed by AusAID. She is posted to the Solomon Islands for 150 continuous days as a project advisor on an Australian ODA project aimed at improving the quality of early childhood education.
Michelle's foreign service is directly attributable to the delivery of Australian ODA by her employer. Therefore, the foreign employment income she earns during this period is eligible for the exemption.
Eric is a motor mechanic employed by Nordic Engineering Pty Ltd, a private company contracted by AusAID to provide vocational training in Vanuatu. He is posted to Vanuatu for 180 continuous days.
Eric's foreign service is directly attributable to the delivery of Australian ODA by his employer and his foreign earnings are therefore eligible for exemption pursuant to section 23AG, subject to the conditions contained in subsection 23AG(2).
Developing country relief fund
A developing country relief fund is a fund established by an organisation solely for the purpose of providing relief to people of a developing country.
The organisation must be an approved organisation as declared by the Minister for Foreign Affairs and the country must be a developing country as declared by the Minister for Foreign Affairs.
Maria is a social worker employed by Peace Group, a charitable organisation that provides assistance to developing countries. Maria is posted to Nigeria for 120 days to help provide relief to people in distress.
Peace Group is an organisation that has been approved as operating a developing country relief fund. This means Maria's foreign employment income is eligible for the exemption.
Public disaster relief fund
A public disaster relief fund is a fund established and operated by a public benevolent institution in response to an event recognised as a disaster by the Minister for Foreign Affairs.
If you are unsure of whether you work for a developing country relief fund or a public disaster relief fund, you should seek advice from your employer.
What is a prescribed institution exempt from Australian income tax?
You may be eligible for exemption if your foreign service is directly attributable to working for a prescribed charitable or religious institution that is exempt from Australian income tax.
These organisations are either located outside Australia or have a physical presence in Australia, but incur their expenditure and pursue their objectives principally outside Australia.
If you are unsure of whether you work for a prescribed charitable or religious institution, you should seek advice from your employer.
Foreign deployment as a member of disciplined force
You may be eligible for exemption if your foreign service is directly attributable to deployment outside Australia as a member of a disciplined force by the Australian Government or authority.
When we say 'disciplined force', we mean a defence force, including a peacekeeping force, and a police force.
As a member of a defence force, the exemption applies to your deployment outside Australia as part of a non-warlike operation.
As a member of a police force, the exemption applies to you if you are:
- an Australian Federal Police employee deployed on an International Deployment Group mission, and
- subject to a Commander's Orders to achieve operational policing outcomes.
Your foreign employment income is not exempt from Australian tax if you did not have to pay tax in the country where you earned that income because of any of the following:
- a tax treaty with Australia or a law giving effect to a treaty agreement
- the foreign country does not impose tax on employment or personal services income, for example, Saudi Arabia
- a law of the foreign country or an international agreement to which Australia is a party that deals with
- diplomatic or consular privileges and immunities, or
- privileges and immunities for people connected with international organisations, such as the United Nations.
Your foreign employment income may still qualify for exemption if it was not taxable in the foreign country for a reason other than, or in addition to, the non-exemption condition reasons. This may be because:
- the amount of income you earned is less than the amount at which you must start paying tax in the foreign country
- the income falls into a special category that the foreign country exempts, for example, payments to visiting aid project workers
- a memorandum of understanding (MOU) exempts the payments, for example, a MOU between Australia and a developing country for Australians to assist that country
- the income you earned includes supplements paid under the Australian Staffing Assistance Scheme (ASAS) paid in Australia for overseas service
- the foreign country levies a tax on employment income but does not have a collection system - for example, it does not have a collection system like the Australian pay as you go (PAYG) withholding system.
Your foreign employment income may also be exempt if it is paid for foreign service in connection with an overseas project approved by Austrade.
For the exemption from Australian tax to apply, your foreign service must be for a continuous period of 91 days or more. Initial travel time from Australia to a foreign country is not foreign service, except where the travel is related to an approved overseas project.
Any period of absence from foreign service breaks the continuity of your foreign service, unless either of the following applies:
The one-sixth test
Absences that would otherwise break the continuity of your period of service for the purposes of the 91 days or more requirement can be bridged by applying the one-sixth test. The one-sixth test means that as long as your absences don't exceed one-sixth of your period of service, the absences won't break the continuity of that service.
Example of the one-sixth test where continuity of service is not broken
Period of foreign service 1:
Period of foreign service 2:
The absence never exceeds one-sixth of Noral's first period of foreign service of 185 days. This means that period of foreign service 1 and 2 constitute a continuous period of foreign service. However, the 24 days absence does not count as foreign service, so her period of foreign service is 235 days (185 plus 50).
Example of the one-sixth test where continuity of service is broken
Period of foreign service 1:
Period of foreign service 2:
By the 31st day, the absence has exceeded one-sixth of Bob's first period of foreign service of 185 days. As this has broken the continuity of service, Bob's new period of foreign service after the absence is treated as a separate period to the first. The number of days of continuous service in the new period starts from the first day of that period.
Foreign service is not measured on a year-of-income basis. Where it straddles two income years, the entire period of that service is taken into account to determine the impact on your foreign earnings in applying both the:
Claudia is an Australian resident who worked in England as a nanny for the period 12 April 2009 to 16 August 2010 - a continuous period of 492 days.
Prior to 1 July 2009, Claudia's foreign earnings were eligible to be exempt from tax in Australia. However, from 1 July 2009 her foreign earnings were not eligible to be exempt, as her foreign service was not directly attributable to a qualifying activity.
Although Claudia's period of service from 12 April 2009 to 30 June 2009 was less than 91 days, as her total period of continuous foreign service is 91 days or more, her foreign earnings from that period of service still qualifies to be exempt.
Claudia's income from her service for the period 1 July 2009 to 16 August 2010 will be taxed in Australia and she may be entitled to claim a foreign income tax offset in respect of the foreign tax paid on that income.
Absences that still count as foreign service
Some temporary absences during a period of foreign service still count as foreign service and will not affect continuity of the service. These are periods where, in accordance with the terms and conditions of your service, you are absent due to one of the following:
- recreation leave that wholly relates to the current period of foreign service, but does not include long service leave, leave without pay, extended leave or similar leave
- leave for accident or illness
- compassionate leave on account of an accident to, or the illness or death of, another person
- short business trips to Australia or another country that are directly related to your foreign service, provided they are not considered to be an excessive break
- breaks taken back in Australia - such as weekends, public holidays, rostered days off, compulsory lay-off or layover days, grounded days, flexidays and days off in lieu - provided they are not considered to be an excessive break.
An 'excessive break' occurs when absences from foreign service, which are subject to the 'excessive break test', total more than either of the following:
- one-sixth of the period of scheduled foreign service
- one-sixth of the income year, if the foreign service is ongoing.
Tim is employed on a 12-month contract to work in China.
In exchange for forgoing public holidays, rostered days off and working weekends, he is given a two-week break for days off in lieu. He takes this break part way through his period of foreign service and spends it in Australia.
The 14-day break spent in Australia is not an excessive break as it is less than one-sixth of Tim's scheduled 365 days foreign service. Therefore, it forms part of Tim's period of foreign service, even though that time is spent in Australia.
Absences that do not count as foreign service
Longer absences during a period of foreign service will affect your continuity of the service and not count as foreign service. An example of this is maternity leave.
Taxpayers who die while on foreign service
A taxpayer who dies while on foreign service is taken to have been engaged in that foreign service for a continuous period of 91 days or more if the period of service would have been at least that long had they not died.
Australian resident individuals are taxed on their worldwide income. This means you must include all foreign-source income in your income tax return. If you have paid foreign tax on this income, you may be entitled to a non-refundable foreign income tax offset for the foreign tax you paid.
If your Australian employer is still paying you while you are working overseas, they must withhold tax from any non-exempt foreign employment income. This also applies to any foreign employer that is registered for Australian pay as you go (PAYG) withholding.
If you are employed by a foreign employer that is not registered for Australian PAYG withholding, it is unlikely that any amount will be withheld for Australian tax purposes.
Generally, you must declare foreign employment income you earn that is exempt from Australian tax as it is taken into account to work out the amount of tax you have to pay on your assessable income.
You are not entitled to a foreign income tax offset for any foreign tax you pay on your exempt foreign employment income.
If you need help to work out whether or not your foreign income is exempt from Australian income tax, phone us on 13 28 61.
Last Modified: Thursday, 28 June 2012