Your foreign employment income is exempt from tax (under section 23AG of the Income Tax Assessment Act 1936) if you meet all 4 of the following conditions:
- you're an Australian resident for tax purposes
- 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 Minister 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 developed 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 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 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.
Your foreign employment income may also be exempt if it is paid for Working on an overseas project approved by Austrade. There are different rules for this exemption.
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 employees of an Australian government agency and people who are not government employees.
Employees of an Australian government agency 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.
An 'Australian government agency' means:
- the Commonwealth, a state or a territory
- an authority of the Commonwealth or of a state or territory.
Example: employed by Australian government agency
Michelle is an Australian resident employed by the Department of Education and Training. 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.
As an Australian government employee delivering ODA, her foreign earnings are not exempt from Australian income tax. Michelle's foreign income from her service will be taxed in Australia, and she may be entitled to claim a foreign income tax offset for any foreign tax paid on that income.End of example
Example: contracted by Australian government agency
Eric is an Australian resident motor mechanic. He is employed by 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.End of example
For more information, see List of departments and agenciesExternal Link.
A developing country relief fund is a fund established by an organisation solely to provide relief to people in a developing country.
The organisation must be an approved organisation as declared by the Minister for Foreign Affairs. 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
If you're unsure if your work relates to a developing country relief fund, ask your employer.
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 your work relates to a public disaster relief fund, ask your employer.
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, ask your employer.
You may be eligible for exemption if your foreign service is directly attributable to deployment outside Australia as a member of a disciplined force.
When we say:
- 'disciplined force', we mean the Australian Defence Force (ADF), Australian Federal Police (AFP) and state and territory police forces.
- 'member', we mean you have taken an oath or affirmation required to perform operational duties of the disciplined force you are employed in.
The exemption will apply if you are a part of an international peacekeeping force in your capacity as an ADF, AFP or state or territory police force member.
If you obtain civilian employment directly with an international peacekeeping force you are not deployed as a member of a disciplined force. Your income will not be exempt from tax in Australia.
As a member of a defence force, the exemption applies to your deployment outside Australia as part of a non-warlike operation. (For warlike operations see Australian defence forces deployed overseas.)
To be eligible for exemption from Australian tax, your foreign service must be for a continuous period of 91 days or more.
Any period of absence from foreign service breaks the continuity of your foreign service, unless either:
- the absence does not exceed one-sixth of your total period of foreign service
- the absence counts as foreign service and so does not break the continuity of foreign service.
The continuous service rules for foreign service are different from the continuous service rules for qualifying service on an approved overseas project.
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 absence does not exceed one-sixth of your period of service up to that point, the absence won’t break the continuity of your service.
Example: one-sixth test – continuous service
Kate is engaged in foreign service that is broken by an absence as follows:
First period of foreign service
Second period of foreign service
The absence does not exceed one-sixth of Kate's first period of foreign service of 185 days. This means the 2 periods of foreign service are treated as continuous foreign service. However, the 24 days absence does not count as foreign service, so Kate's period of foreign service is 235 days (185 + 50).End of example
Example: one-sixth test – broken service
David is engaged in foreign service that is broken by an absence as follows:
First period of foreign service
Second period of foreign service
After 31 days, the absence exceeds one-sixth of David's first period of foreign service of 185 days. The absence therefore breaks the continuity of service. David's second 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
Foreign service straddling income years
Foreign service is not measured on a year-of-income basis. If your foreign service begins in one income year and continues into the next, you take into account the entire period of your service.
Some temporary absences during a period of foreign service still count as foreign service and will not affect your continuity of service. These are periods where you are absent:
- within your scheduled period of foreign service
- in accordance with the terms and conditions of your foreign service
- for any of the following reasons:
- recreation leave on full pay that is attributable to the period of foreign service
- an accident or illness you suffer
- an accident or illness of a person other than you, or the death of another person
- you carry out duties or undertake training in Australia (work-related trips directly related to your foreign service), provided the absences are not excessive compared to 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, flex days and days off in lieu – provided the break is part of the normal working conditions for your foreign service.
Longer absences during a period of foreign service will affect your continuity of service and not count as foreign service. An example of this is maternity leave and long service leave.
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 2-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
Person dies while on foreign service
If a person dies while on foreign service, they are 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.
Your foreign employment income is not exempt from Australian tax if you did not have to pay tax in the country where you earn 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 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.
For more information about the eligibility rules for foreign service, 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.
If your income is exempt foreign employment income from foreign service (section 23AG) or working on approved overseas projects (section 23AF), 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 pay a similar rate of tax on their other income as taxpayers who earn the same overall income.
If you have both assessable income and exempt foreign employment income, you must apportion certain deductions between the assessable and exempt foreign employment income.
The deductions you must apportion are those that can't be appropriately related to earning your assessable income, such as deductible gifts. You apportion the deduction 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. You treat these as relating exclusively to your 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?
Income 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.
You are not entitled to a foreign income tax offset for any foreign tax you pay on your exempt foreign employment income.
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.Your income may be exempt from Australian tax (under section 23AG) if you're engaged in foreign service.