Edited version of private ruling

Authorisation Number: 1011490620340

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Ruling

Subject: Foreign employment income

Question

Are the salary and wages you earned in Country X exempt from income tax in Australia under section 23AG of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

No

This ruling applies for the following period

Year ending 30 June 2008

Year ending 30 June 2009

Year ending 30 June 2010

The scheme commenced on

1 July 2007

Relevant facts and circumstances

You are an Australian resident for taxation purposes.

You are an employee of a government organisation.

You were deployed to Country X, and served for a period of not less than 91 days.

You were not attached to the Australian embassy or afforded any diplomatic status.

Australia has a tax treaty (double tax agreement) with Country X.

Country X taxes employment income under its domestic law.

Relevant legislative provisions

Income Tax Assessment Act 1936 Subsection 23AG(1)

Income Tax Assessment Act 1936 Subsection 23AG(7)

Income Tax Assessment Act 1936 Section 23AG

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

Income Tax Assessment Act 1936 Subsection 23AG(2)

International Tax Agreements Act 1953 Section 4.

Reasons for decision

Subsection 23AG(1) of the Income Tax Assessment Act 1936 (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 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 a result of the undertaking of that foreign service.

As you received salary and wages from your foreign employment, they are considered to be derived from your foreign service and are foreign earnings from foreign service for the purposes of subsection 23AG(1) of the ITAA 1936.

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 29 June 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 or Australian Federal Police); or

- an activity of a kind specified in the regulations.

In your case, you were appointed to undertake a deployment to Country X.

As your deployment was as a member of a government organisation covered by subsection 23AG(1AA) of the ITAA 1936, you satisfy one of the conditions for exemption under this subsection.

However, the exemption does not apply if the income is exempt from tax in the foreign country only because of any of the reasons listed in subsection 23AG(2) of the ITAA 1936.

One of these reasons is a tax treaty (double tax agreement) contained in the International Tax Agreements Act 1953 (Agreements Act) (paragraph 23AG(2)(b) of the ITAA 1936).

Australia has a tax treaty with Country X (Country X Agreement) which operates to avoid the double taxation of income received by residents of Australia and Country X.

An article of the Country X Agreement provides that remuneration paid by Australia to any individual in respect of services rendered in the discharge of governmental functions shall be taxable only in Australia.

However, such remuneration will be taxable only in Country X if the services are rendered in Country X and the individual is a citizen of Country X, or did not become a resident of Country X solely for the purpose of performing the services.

The employment income you received in relation to your deployment to Country X is taxable only in Australia, and exempt from tax in Country X, under this article of the Country X Agreement as you are an Australian resident and the income was paid by Australia in respect of services rendered in the discharge of governmental functions.

Consequently, as your income was exempt from tax in Country X solely because of the Country X Agreement, your salary and wages are not exempt from income tax in Australia under subsection 23AG(1) of the ITAA 1936.

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