• Exempt foreign employment income

    If you're 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 your foreign service – unless it's exempt from Australian tax.

    From 1 July 2009, there's a limited exemption for foreign employment income from particular types of foreign service.

    From 1 July 2016, Australian government employees who earn foreign income while delivering Australian official development assistance (ODA) are not eligible for exemption from Australian income tax on their foreign employment income.

    Members of a disciplined force, such as Australian Defence Force (ADF) and Australian Federal Police (AFP), delivering ODA are still eligible for exemption from Australian income tax on their foreign employment income.

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    Foreign income exempt from tax

    Your foreign employment income is exempt from tax if all of the following applies:

    • you're an Australian resident
    • you're 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 (except if your employer is an Australian government agency)
      • 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 impacted by 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's 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
    • you're not excluded from exemption by the non-exemption conditions.

    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.

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    Australian official development assistance

    Australian official development assistance (ODA) is assistance delivered through the Australian Government's overseas aid program administered by the Department of Foreign Affairs and Trade (DFAT).

    DFAT 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 people who are not APS employees.

    Australian official development assistance

    Example 1

    Michelle is an Australian resident employed by DFAT. On 1 April 2016, she is posted to the Solomon Islands for 190 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.

    Michelle's foreign earnings before 1 July 2016 are eligible for exemption from tax in Australia. However, as an Australian government employee delivering ODA from 1 July 2016, her foreign earnings are not eligible to be exempt from Australian income tax.

    Michelle's foreign income from her service for the period 1 July 2016 to 7 October 2016 will be taxed in Australia and she may be entitled to claim a foreign income tax offset in respect of any foreign tax paid on that income.

     

    Example 2

    Eric is an Australian resident motor mechanic employed by Nordic Engineering Pty Ltd, a private company contracted by DFAT 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. Therefore, his foreign earnings are eligible for exemption, subject to the non-exemption conditions.

    Example 3

    Jamie is an Australian resident member of the Australian Civilian Corps who has been deployed to Papua New Guinea to provide specialist assistance. She is deployed to Papua New Guinea from 1 February 2016 to 5 August 2016.

    Jamie's foreign service is directly attributable to the delivery of Australian ODA by her employer which is an Australian government agency.

    The foreign employment income she derives from 1 February to 30 June 2016 is eligible for the exemption, subject to the non-exemption conditions. The foreign employment income she derives from 1 July to 5 August 2016 is not exempt, due to the withdrawal of the exemption for Australian government employees from 1 July 2016.

    End of example

    Australian Government agency

    An Australian Government agency means:

    • the Commonwealth, a state or a territory
    • an authority of the Commonwealth or of a state or a territory.

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    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.

    Example: Developing country relief fund

    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.

    End of example

    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're unsure if you work for a developing country relief fund or a public disaster relief fund, you should seek advice from your employer.

    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're unsure if 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
    • subject to a Commander's Orders to achieve operational policing outcomes.

    Non-exemption conditions

    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 or categorises income of this type as generally exempt
    • a law of the foreign country that corresponds to the International Organisations (Privileges and Immunities) Act 1963 or an international agreement to which Australia is a party that deals with either  
      • diplomatic or consular privileges and immunities
      • privileges and immunities for people connected with international organisations, such as the United Nations
    • a law of the foreign country that gives effect to an agreement to which Australia is a party, which deals with either  
      • diplomatic or consular privileges and immunities
      • 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.

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    Approved overseas projects

    Your foreign employment income may also be exempt if it is paid for foreign service in connection with an overseas project approved by Austrade. Details of approved projects are on the Austrade website.

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    Continuous foreign service

    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:

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    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 1: One-sixth test – continuous service

    Noral is engaged in foreign service that is broken by an absence as follows:

    Period of foreign service 1:

    185 days

    Absence:

    24 days

    Period of foreign service 2:

    50 days

    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, so her period of foreign service is 235 days (185 plus 50).

    Example 2: One-sixth test – broken service

    Bob is engaged in foreign service that is broken by an absence as follows:

    Period of foreign service 1:

    185 days

    Absence:

    38 days

    Period of foreign service 2:

    50 days

    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.

    End of example

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    • Last modified: 31 Aug 2016QC 16739