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  • How exempt foreign employment income affects your tax

    If your income from foreign employment is exempt from tax in Australia, you must still include it in your tax return. Although you have to include this income, it will not be taxed. But it will affect the tax you are liable to pay on any other income you earn.

    This is to ensure that taxpayers with exempt foreign employment income are levied a similar rate of tax on their other income as compared to taxpayers earning the same overall income from assessable sources.

    However, don't include income in your tax return if it is exempt for either of the following reasons:

    • a privileges and immunities agreement or a law covering persons connected with international organisations
    • specific exemptions for the pay and allowances of members of the Australian Defence Force, related to qualifying service in a declared operational area.

    Apportioning deductions

    In calculating tax payable on taxable income where there is exempt foreign employment income, certain deductions must be apportioned between the exempt and assessable income.

    Apportionable deductions are those that can't be appropriately related to the earning of the assessable income, such as gifts to specified institutions and funds. The deduction is apportioned between the exempt and assessable income based on the amount of each you received.

    Deductions for tax agent fees and superannuation contributions are not apportionable, and are therefore treated as relating exclusively to assessable income.

    For more information, see TD 2000/12 Income tax: Do allowable deductions in respect of tax agents' fees and superannuation contributions relate exclusively to assessable income, for the purposes of the 'other taxable income' calculations in sections 23AF and 23AG of the Income Tax Assessment Act 1936?

    Not exempt from tax

    Australian resident individuals are taxed on their worldwide income. This means you must include all foreign-source income in your 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 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.

    Completing your tax return

    Generally, you must still declare foreign employment income you earn that is exempt from Australian tax. This is because it is taken into account to work out the amount of tax you have to pay on your assessable income.

    You should convert your foreign employment income to Australian dollars at the exchange rate prevailing on the day that the income is received. An average rate can be used in certain circumstances.

    You are not entitled to a foreign income tax offset for any foreign tax you pay on your exempt foreign employment income.

    For more tax determinations, rulings and decisions, see:

    • 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.
    • TR 2013/7 Income tax: foreign employment income: interpretation of subsection 23AG(1AA) of the Income Tax Assessment Act 1936.
    • CR 2012/16 Income tax: assessable income: Australian Federal Police personnel deployed to the republic of South Sudan as part of the United Nations peacekeeping force.
    • ATO ID 2013/27 Income tax: application of section 23AG of the Income Tax Assessment Act 1936 to sick leave accrued during a period of foreign service and taken after the period of foreign service has ceased.
      Last modified: 09 Jun 2022QC 16739