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Edited version of private ruling

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Ruling

Subject: Foreign employment income

Is the salary you earned while posted to Country A exempt from income tax in Australia?

Yes.

This ruling applies for the following period:

Year ended 30 June 2008

Year ended 30 June 2009

The scheme commenced on:

1 July 2007

The scheme that is the subject of this ruling.

You are an Australian resident for taxation purposes.

You are a member of a government organisation deployed to Country A.

You took annual leave in Australia.

The leave was accrued during your foreign deployment and no employment activities were undertaken during the leave.

You also returned to Australia for work trips.

Country A taxes employment income under their domestic laws

You have received advice that no tax is paid by you in Country A due to the following exemptions.

Double Taxation Agreement.

The deployment is covered by the General Agreement on Development Co-operation between Australia and Country A which states in that the income tax liability of Australian personnel shall be borne by the Country A Government.

Relevant legislative provisions:

Income Tax Assessment Act 1936 Section 23AG(1)

Income Tax Assessment Act 1936 Section 23AG(2)

Income Tax Assessment Act 1936 Section 23AG(2)(b)

Income Tax Assessment Act 1936 Section 23AG(7)

Income Tax Assessment Act 1997 Section 6-5(2)

Income Tax Assessment Act 1997 Section 6-15(2)

Income Tax Assessment Act 1997 Section 11-15

International Tax Agreements Act 1953

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 wages are ordinary income for the purpose of subsection 6-5(2) of the ITAA 1997.

Subsection 6-15(2) of the ITAA 1997 provides that if an amount is exempt income then it is not included in assessable income.

Subsection 11-15 of the ITAA 1997 lists those provisions dealing with income that may be exempt. Included in this list is section 23AG of the Income Tax Assessment Act 1936 (ITAA 1936) which deals with overseas employment income.

Subsection 23AG(1) of the ITAA 1936 provides that foreign earnings of an Australian resident derived during a continuous period of foreign service of not less than 91 days employment in a foreign country are exempt from tax in Australia. Foreign earnings include income consisting of salary, wages, bonuses or allowances (subsection 23AG(7) of the ITAA 1936).

To qualify for the exemption under section 23AG(1) of the ITAA 1936 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 a result of that foreign service.

Foreign service is service in a country as the holder of an office or in the capacity of an employee. You were employed to work in Country A. The salary you received from this employment is derived from foreign service.

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 following reasons:

Paragraphs 23AG(2)(a) and 23AG(2)(b) of the ITAA 1936 applies as there is a tax treaty between Country A and Australia.

The law of Country A provides for the imposition of income tax on employment income and does not generally exempt such income from income tax. Therefore, paragraphs 23AG(2)(c) and 23AG(2)(d) of the ITAA 1936 do not apply.

The salary and wages received by you are not exempt in Country A because of a law (or regulations) of country A corresponding to the International Organisations (Privileges and Immunities) Act 1963 or under an international agreement to which Australia is a party that deals with privileges and immunities of persons connected with international organisations or relating to diplomatic or consular matters. As such paragraphs 23AG(2)(e), 23AG(2)(f) and 23AG(2)(g) of the ITAA 1936 apply.

The Country A Agreement provides that remuneration derived by an Australian resident in respect of services rendered in the discharge of governmental functions is taxed only in Australia.

However the Government Treaty provides that employees income tax liability deployed to Country A shall be borne by the Government of Country A, employees are not exempt from tax in Country A solely because of any of the reasons listed in subsection 23AG(2) of the ITAA 1936. Therefore, subsection 23AG(2) will not operate to deny the 'foreign earnings' exemption under subsection 23AG(1) of the ITAA 1936.

Subsection 23AG(6) of the ITAA 1936 allow certain types of absences to be counted as foreign service such as recreation or annual leaves and sick leave wholly attributable to the period of foreign service.

Subsection 23 AG(6A) of the ITAA 1936 allows two or more continuous periods of foreign service to be combined into a total foreign service period if the period of absence is not more than one sixth of the foreign service.

Your breaks are less than one sixth of your foreign service.

As you satisfy the conditions for exemption under section 23AG of the ITAA 1936, the salary derived by you from services performed in Country A are exempt from income tax in Australia.

Note

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 wages income in your Australian tax return.

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