Edited version of private ruling

Authorisation Number: 1011483391467

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Ruling

Subject: Foreign income

Question

Are the salary and allowances you receive from the Australian government while posted to the foreign country assessable in Australia?

Answer

No.

This ruling applies for the following period

Year ended 30 June 2010

Year ended 30 June 2011

The scheme commenced on

1 July 2009

Relevant facts

You are an Australian resident for taxation purposes.

You are employed by the Australian government.

You are employed during 2010 and 2011 income year.

You will accrue a number of days annual leave during this period.

You are paid a salary, an overseas living and hardship allowance.

There is no tax treaty between Australia and the foreign country.

Your income is subject to tax under the foreign country domestic taxation laws.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 6-5(2).

Income Tax Assessment Act 1936 Subsection 23AG(1).

Income Tax Assessment Act 1936 Subsection 23AG(1AA)(d).

Income Tax Assessment Act 1936 Subsection 23AG(2).

Income Tax Assessment Act 1936 Paragraph 23AG(2)(b).

Income Tax Assessment Act 1936 Subsection 23AG(7).

Reasons for decision  

Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources, whether in or out of Australia, during the income year.

Salary and allowances are ordinary income for the purposes of subsection 6-5(2) of the ITAA 1997.

Subsection 23AG(1) of the ITAA 1936 provides that the foreign earnings of an Australian resident derived during a continuous period of not less than 91 days employment in a foreign country will be exempt from tax in Australia.

However, section 23AG of the ITAA 1936 has been amended so that foreign employment income derived by Australian residents will only be exempt in certain circumstances. These amendments are effective from 1 July 2009.

Subsection 23AG(1AA) of the ITAA 1936 provides that foreign earnings are not exempt from tax unless the continuous period of foreign service is directly attributable to any of the following:

- the delivery of Australian official development assistance by the taxpayer's employer (generally provided by AusAID or the Department of Foreign Affairs and Trade);

- the activities of the taxpayer's employer in operating a public fund covered by the deductible gift recipient categories overseas aid fund and developed country disaster relief fund;

- the activities of the taxpayer's employer where they are a charitable institution or religious institution which is income tax exempt because they are a prescribed institution located outside Australia or pursuing objectives principally outside Australia;

- the taxpayer's deployment outside Australia as a member of a disciplined force of Australia (generally considered to be the Australian Defence Force (ADF) or Australian Federal Police); or

- an activity of a kind specified in the regulations.

Paragraph 23AG(1AA)(d) of the ITAA 1936 provides that such earnings are only exempt from income tax if the foreign service is directly attributable to that person's deployment outside Australia as a member of a disciplined force by an Australian government, or an authority thereof.

A disciplined force is intended to refer to a defence force, including a peacekeeping force, and a police force. In a defence force context, the exemption would apply to a person's deployment outside Australia as part of a non-warlike operation.

'Foreign service' includes service in a foreign country in the capacity as an employee and 'foreign earnings' includes income consisting of salary, wages, bonuses or allowances (subsection 23AG(7) of the ITAA 1936).

To qualify for the exemption the foreign earnings must be derived from the foreign service. That does not mean that the foreign earnings need to be derived at the time of engaging in foreign service. The important test is that the foreign earnings, when derived, need to be derived as result of the undertaking of that foreign service.

In your case, you stated that you are employed by the ADF and you are posted in the foreign country. During this posting, you continued to receive your normal salary from your employer. Therefore, your foreign employment is a deployment as a member of a disciplined force of Australia and the salary is considered to be derived from the foreign service.

In addition to your salary, you received an overseas living and hardship allowances while posted to country X.

As these allowances are paid for the duration of your overseas posting, for the purposes of subsection 23AG(7) they are considered to be derived from your foreign service.

Therefore, your salary and allowances are foreign earnings from foreign service for the purposes of paragraph 23AG(1AA)(d) of the ITAA 1936.

However, subsection 23AG(2) of the ITAA 1936 provides that the exemption in subsection 23AG(1) of the ITAA 1936 will not apply where the income is exempt from income tax in the foreign country only because of any of the reasons listed in this section.

One of the listed conditions is where the income earned by the resident in the foreign country is made exempt by the operation of a tax treaty (paragraph 23AG(2)(b) of the ITAA 1936).

There is no tax treaty between Australia and the foreign country. However, your income is subject to tax in the foreign country under their domestic law.

As you are engaged in an overseas employment for a continuous period of not less than 91 days and your income from that employment is not exempt from tax in the foreign country, the restrictions under section 23AG(2) of the ITAA 1936 do not apply. Therefore, the income is exempt from Australian income tax under subsection 23AG(1) of the ITAA 1936.

Accordingly, the salary and allowances you receive from employment in the foreign country is not assessable under subsection 6-5(2) of the ITAA 1997.

Note

It is important to note that foreign earnings exempt under section 23AG of the ITAA 1936 are taken into account in calculating the tax payable on other income derived by a taxpayer. This method of calculation - referred to as 'exemption with progression' prevents the exempt income from reducing the Australian tax payable on the other income. This income needs to be included as exempt foreign salary and wage income in your Australian tax return.

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