• Foreign employment income and section 23AG – employees

    If you work overseas continuously for 91 days or more, this information may apply to you if you earned foreign employment income. This answers some common questions about the income tax and super treatment of your foreign income in Australia.

    On this page, 'foreign resident' is the same as 'non-resident'.

    Tax treatment of foreign employment income

    Australian residents for tax purposes are taxed on their worldwide income, so if you have foreign employment income, including salary, wages, commission, bonuses allowances or you receive non-cash benefits, you may need to include it in your tax return.

    If you have paid tax in another country, you may be entitled to claim a foreign income tax offset (FITO) in your Australian tax return, which provides relief from double taxation.

    Foreign earnings derived on or after 1 July 2009, from foreign service performed on or after 1 July 2009 may be exempt from tax in Australia, but the exemption for foreign employment income is limited to certain types of employment.

    Foreign employment income exemptions

    Section 23AG of the Income Tax Assessment Act 1936 (ITAA 1936) sets out what foreign employment income is eligible for exemption from income tax in Australia. Changes were made to section 23AG with effect from 1 July 2009 which limits the exemption. You should take particular care in applying section 23AG where your period of overseas employment includes 1 July 2009.

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

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    Foreign employment income – general questions

    Does working overseas affect my tax?

    It can, because working overseas may or may not change your residency status for tax purposes and your residency status affects how we tax you.

    As an Australian resident we tax you on your worldwide income, although if you meet some conditions you may be eligible for an exemption for your foreign employment income. Foreign residents are taxed only on their Australian-sourced income.

    When will my foreign employment income be exempt?

    Your foreign employment income may be exempt from tax if you satisfy all of the following conditions:

    • you are an Australian resident
    • you are engaged in continuous foreign service as an employee for 91 days or more
    • your foreign earnings are from employment in one of five categories of foreign service
    • your foreign employment income will not be exempt if a non-exemption condition applies.

    You will not be exempt from income tax in Australia if you did not have to pay tax in the country where you earned the income, and the only reason for this was because:

    • Australia has a tax treaty (also called a double tax agreement) with the other country or there is a law giving effect to a treaty agreement
    • the other country does not impose tax on employment personal services income or similar income
    • a law of the other country, or an international agreement to which Australia is a party, deals with privileges and immunities for diplomats, consular staff and people connected with international organisations (such as the United Nations).

    If there was another or additional reason that your income wasn't taxed in the other country, you may still qualify for an exemption from tax in Australia. Other or additional reasons may include:

    • your income was less than the amount at which tax starts in the other country
    • your income falls into a special category that the other country exempts (for example, payments to visiting aid project workers)
    • a memorandum of understanding (MOU) between Australia and the other country exempts the payments (for example, a MOU between Australia and a developing country for Australians to assist that country)
    • your income comprises supplements paid in Australia under the Australian Staffing Assistance Scheme (ASAS) for overseas service.

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    What types of employment qualify for exemption?

    From 1 July 2009, your foreign employment income may be exempt from tax in Australia if it is directly attributable to one of the following:

    • the delivery of Australian official development assistance by your employer (except if your employer is an Australian government agency)
    • the activity of your employer in operating a public fund declared by the Treasurer to be a developing country relief fund; or a public fund operated by a public benevolent institution solely to provide relief to people in a foreign country other than one which has been declared to be a developing country by the Foreign Affairs Minister
    • the activities of your employer, being a prescribed institution that is exempt from Australian income tax
    • deployment outside Australia by an Australian Government (or an Australian Government authority) as a member of a disciplined force
    • an activity of the kind specified in the regulations.

    If you are uncertain if your employment activity falls within one of these you can:

    The changes made to limit the exemption for foreign employment income to certain types of employment applies to foreign earnings derived on or after 1 July 2009, from foreign service performed on or after 1 July 2009. You should take particular care in applying the exemption where your period of overseas employment includes 1 July 2009.

    From 1 July 2009, there are two instances where the new rules to limit the exemption won't apply:

    • foreign earnings paid before 1 July 2009 relating to foreign service performed before, on or after 1 July 2009, and
    • foreign earnings paid on or after 1 July 2009 relating to foreign service performed before 1 July 2009.

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

    What does 'directly attributable' mean?

    The law states that the foreign employment exemption is available to you if your employment activity is 'directly attributable to' one of the five categories listed above.

    ATO interpretative decision ATO ID 2010/117 considers the meaning of 'directly attributable to'.

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    What if I get my pay on or after 1 July 2009?

    If you were eligible for the foreign employment income exemption up to 1 July 2009 and you receive a payment on or after that date for foreign service performed before that date, the payment will qualify for exemption.

    The exemption does not apply to foreign earnings derived on or after 1 July 2009 from foreign service performed on or after 1 July 2009 where your foreign service is not directly related to one of the above types of employment that qualify for exemption.

    Example: Foreign earnings after 1 July 2009

    Natalie is an Australian resident who works as an engineer in Germany. She began work in Germany on 1 February 2009 and was eligible to claim exemption for her foreign employment income at that time. From 1 July 2009, following the changes to the law, Natalie's foreign employment income no longer qualifies for exemption.

    Natalie received her salary for June on 5 July 2009. Although it was paid after 1 July 2009 Natalie's June salary is exempt from income tax in Australia because it was for foreign service before 1 July 2009.

    Any salary Natalie receives on or after 1 July 2009 from her foreign service performed on or after 1 July 2009 will not be exempt because her foreign employment income no longer qualifies for the exemption.

    End of example

    What if I get my pay on or after 1 July 2016?

    If you are an Australian government employee who earns foreign income while delivering ODA and were eligible for the foreign employment income exemption up to 1 July 2016 and you receive a payment on or after that date for foreign service performed before that date, the payment will qualify for exemption.

    The exemption does not apply to foreign earnings derived on or after 1 July 2016 from foreign service performed on or after 1 July 2016 where your foreign service is not directly related to one of the above types of employment that qualify for exemption.

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    How do I work out my 'continuous period of foreign service' if my foreign income stops being exempt?

    A requirement of the foreign employment income exemption is a continuous period of foreign service of 91 days or more.

    If you ceased to be eligible for the foreign employment exemption as of 1 July 2009 because of the changes to the law, you can still include the days you remained in foreign employment after that date in your calculation for your period of continuous foreign service. Where you meet the 91 days minimum service requirement, you can claim the exemption on both:

    • foreign earnings paid before 1 July 2009 relating to foreign service performed before, on or after 1 July 2009
    • foreign earnings paid on or after 1 July 2009 relating to foreign service performed before 1 July 2009.

    Example: 91-day minimum requirement

    Wallace, an Australian resident, is employed by a Thai company to work in Bangkok from 1 June 2009 to 30 September 2009, a total of 122 days. His foreign employment income was exempt when he began to work in Bangkok, but he did not qualify for exemption after the law changed on 1 July 2009.

    However, Wallace's total service period (122 days) meets the 'continuous foreign service' requirement so he can claim an exemption from tax for foreign earnings both:

    • derived before 1 July 2009 from foreign service performed before, on or after 1 July 2009
    • derived on or after 1 July 2009 from foreign service performed before 1 July 2009.

    Wallace cannot claim the tax exemption for foreign employment income derived on or after 1 July 2009 for foreign service performed on or after 1 July 2009.

    End of example

    What if Australia has a tax treaty with the other country?

    Australia has tax treaties with a number of other countries. These treaties (also known as double tax agreements) may affect the way we tax your foreign employment income. A tax treaty will only apply to you if you are an Australian resident or resident of the other country.

    If your foreign employment income was not taxed in the other country solely because of a tax treaty (or a law giving effect to a treaty agreement), the foreign employment exemption will not apply and that income will be taxable in Australia.

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    What if I am working on an approved project?

    Your foreign income may be exempt from tax if you are working on an 'approved overseas project'. This exemption is separate to the foreign employment exemption.

    You will be able to claim the approved overseas project exemption if you meet the conditions, including working 91 days or more on the project.

    Your employer will advise you if you are working on an approved overseas project.

    The Minister for Trade (Austrade) is responsible for approving 'eligible projects'.

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    Does my exempt income affect my Medicare levy and surcharge?

    Yes. Your exempt foreign employment income is included in the calculation of your liability for Medicare levy and Medicare levy surcharge.

    Your total reportable fringe benefits amount and reportable employer superannuation contribution amount are also added to your taxable income to work out your liability for the Medicare levy surcharge.

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    Is my exempt income included in the income tests?

    Yes. We take your exempt foreign employment income into account when we work out your adjusted taxable income (ATI), which is one of the income tests that apply from 1 July 2009. We use your ATI to determine if you are eligible for some tax offsets.

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    Does my exempt income affect my student loan repayments?

    Yes. We include your exempt foreign employment income when we work out your repayment income as part of working out your Higher Education Loan Program (HELP) debt for the year.

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    Are my employee share scheme benefits exempt?

    A benefit you receive under an employee share scheme (ESS) forms part of your foreign employment income. If your foreign employment income is tax exempt, the benefit is also exempt. If your foreign employment income is not eligible for the exemption, the benefit you receive under an ESS will not be exempt.

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      Last modified: 24 Aug 2016QC 23115