Foreign service and foreign earnings
Foreign service is service you undertake in a foreign country as an employee or an office holder.
An employee includes a person who is either:
- employed by a government or an authority of a government
- employed by an international organisation
- a member of a disciplined force.
If you work overseas and earn fees for independent services you provide – for example, as a doctor, lawyer or architect – you are not considered to be an employee or an office holder in the foreign country.
Service on a ship in international waters is not foreign service because the international waters do not form part of the territory of a foreign country.
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What are foreign earnings?
Foreign earnings includes income you earn such as salary, wages, commissions, bonuses, allowances and income assessed under the employee share scheme provisions.
You will need to include any foreign income that is subject to tax as assessable income in your tax return for the year you earned it. You may be entitled to a foreign income tax offset for amounts of foreign tax you have paid, when you lodge your tax return.
Foreign earnings do not include:
- continuing pensions, annuities or superannuation payments
- foreign termination payments
- the tax-free amount of a genuine redundancy payment or an early retirement scheme payment
- payments made as an advance loan, restraint of trade payments or payments for personal injury
- transfers between superannuation funds.
A payment can still qualify as foreign earnings even if it is paid in Australia or not derived at the time you worked overseas – however, the payment must be attributable to a period of foreign service.
Income from certain types of foreign employment and approved overseas projects may be exempt from tax.
For assistance applying this information to your own circumstances, phone us on 13 28 61.
Foreign service that straddles income years
Foreign service is not measured on a year-of-income basis. Where it straddles two income years, your entire period of service is taken into account in applying both the:
- exempt foreign employment income provisions
- approved overseas projects provisions.
You need to declare any income subject to these provisions in your tax return for the year in which you earned it.
Example: Foreign service that straddles income years
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.
End of example
Annual leave that accrues while you are working overseas for an Australian employer but is not paid until you take the leave (even after you return to Australia) is still taken to be foreign earnings derived from that foreign service.
If your period of foreign service qualifies you for exemption from Australian tax, your leave payment is also exempt, even if you are paid while you are in Australia. Other leave payments, such as long service leave taken after your foreign service ends, could also be exempt.
Supplements paid under the Australian Staffing Assistance Scheme
The remuneration package of an Australian resident performing foreign service in a foreign country under the Australian Staffing Assistance Scheme (ASAS) or a similar arrangement usually consists of a base salary as well as a supplement paid in Australia.
Although the base salary is taxed in the foreign country and the supplement is not, the supplement (in common with the base salary) is still considered to be foreign earnings derived from foreign service. The supplement is exempt from Australian tax if the other earnings from your service are also exempt.
Information about what is foreign service and when it straddles income years, and income that is included as foreign earnings.