• 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.

    Disciplined force refers to the Australian Defence Force (including a peacekeeping force), Australian Federal Police and the state and territory police forces, or an authority of the Commonwealth, a state or a territory.

    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 employee of the Australian Federal Police, of a state or a territory police force, or of an authority of the Commonwealth or of a state or a territory deployed on an International Deployment Group mission
    • subject to 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, an 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.

    See also:

    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.

    See also:

    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:

    • the absences do not exceed one-sixth of your total period of foreign service
    • they are absences that still count as foreign service and so do not break the continuity of foreign service.

    Find out about:

    See also:

    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

    See also:

    Foreign service straddling income years

    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:

    • exempt foreign employment income provisions
    • approved overseas projects provisions.

    Example: Foreign service straddling income years

    Claudia is an Australian resident who worked in England as a nanny for the period 12 April 2009 – 16 August 2010; a continuous period of 492 days.

    Before 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 – 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 – 16 August 2010 will be taxed in Australia. She may be entitled to claim a foreign income tax offset in respect of the foreign tax paid on that income.

    End of example

    Find out about:

    See also:

    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 foreign service (the absence is permitted by the employer, whether in an employment contract or under a separate arrangement) and for any of the following reasons:

    • recreation leave on full pay that is attributable to the period of foreign service
    • because of an accident or illness you suffer
    • because of an accident or illness of another person other than you, including the death of another person
    • in the course of carrying out either duties or training by your employer under a continuing foreign service engagement (work-related trips directly related to your foreign service) provided the absences are not excessive by comparison with the scheduled period of your foreign service
    • short breaks such as weekends, public holidays, rostered days off, days off due to part-time arrangements, compulsory lay-off or layover days, grounded days, flexidays and days off in lieu – provided the break is part of the normal working conditions for your foreign service.

    Example: Absence counting as foreign service

    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 part of the normal working conditions of Tim's scheduled 365 days foreign service. So it forms part of Tim’s period of foreign service, even though that time is spent in Australia.

    End of example

    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.

      Last modified: 03 Nov 2016QC 16739