Edited version of private ruling

Authorisation Number: 1011532930398

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Ruling

Subject: Foreign employment income

Question

Are your salary and overseas allowances paid to you on your deployment to Country X exempt from tax in Australia?

Answer

Yes

This ruling applies for the following period<s>:

Year ended 30 June 2010

Year ending 30 June 2011

Year ending 30 June 2012

The scheme commences on:

1 July 2009

Relevant facts and circumstances

You are an Australian resident for taxation purposes.

You are a member of a disciplined force of Australia.

You are deployed to work in the Country X for a continuous period of not less than 91 days.

During your deployment, you will return to Australia on leave that accrued during your foreign service.

Australia does not have a tax treaty with Country X.

You do not intend to take any breaks outside Country X other than returning to Australia for periods of recreation leave accrued as a result of your foreign service.

In addition to your salary, you receive overseas allowances. These allowances are paid to cover various costs and hardship incurred while working in Country X.

You do not envisage working in Australia when returning for leave. However, you are required to attend a short business trip to Australia to attend training and to meet with senior executive to brief them on work performance and outcomes in Country X.

The laws of Country X provide for the imposition of income tax and do not generally exempt employment income from income tax.

There is no tax treaty between Australia and Country X.

There is a signed Memorandum of Understanding (MOU) in place between the Government of Australia and the Government of Country X which covers your duties.

The MOU exempts Australian income taxes on salaries, wages and other similar remuneration derived from activities performed in Country X.

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(6)

Income Tax Assessment Act 1936 Subsection 23AG(2)

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

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

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

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

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).

The foreign earnings must be derived from the foreign service, though not necessarily derived during the period of foreign service.

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 or Australian Federal Police); or

- an activity of a kind specified in the regulations.

As you are a member of a disciplined force of Australia and deployed in Country X, you satisfy one of the conditions for exemption under subsection 23AG(1AA) of the ITAA 1936.

Under subsection 23AG(6) of the ITAA 1936 certain temporary absences form part of a period of foreign service, such as recreation leave which is accrued as a result of the foreign service, other than long service leave and leave without pay.

You do not intend to take any breaks outside Country X other than returning to Australia for a period of recreation leave accrued as a result of your foreign service. The recreation leave you accrue that is not utilised to travel will be taken in Country X. You do not envisage working in Australia when returning for leave. Therefore, the leave forms part of your foreign service and accordingly the leave will qualify as foreign earnings.

According to Taxation Ruling TR 96/15, short business trips to Australia or to another foreign country during the period of foreign service for reasons directly related to the taxpayers continuing foreign service for example to attend training courses are also considered to form part of the taxpayers period of continuous foreign service.

Therefore, the days that you are required to attend training and to meet with senior executives to brief them on work performance and outcomes in Country X will not constitute a break in foreign service.

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.

As you receive salary from your foreign employment, this salary is considered to be derived from your foreign service.

In addition to your salary, you receive overseas allowances. The overseas allowances are designed to cover various costs and hardship of the foreign service.

As they are paid to compensate for costs arising from the foreign service and for the hardship attributable to the foreign service, they are considered to be derived from your foreign service.

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

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 tax in the foreign country only because of any of the reasons listed therein.

One of the reasons listed is where the income is exempt in the foreign country because of a tax treaty (paragraph 23AG(2)(b) of the ITAA 1936).

Therefore in determining the liability to Australian tax on foreign sourced income received by a resident taxpayer it is necessary to consider not only the income tax laws but also any applicable tax treaty contained in the International Tax Agreements Act 1953 (Agreements Act).

There is no tax treaty between Australia and Country X. Therefore, paragraphs 23AG(2)(a) and 23AG(2)(b) of the ITAA 1936 do not apply.

As the laws of Country X provide for the imposition of income tax and do not generally exempt employment income from income tax, paragraphs 23AG(2)(c) and (d) of the ITAA 1936 also do not apply.

None of the other reasons in subsection 23AG(2) of the ITAA 1936 apply to your situation.

In your case, you are an Australian resident for taxation purposes, you are engaged in foreign service for a continuous period of not less than 91 days and Country X has a tax system that taxes employment income.

Accordingly, the salary and overseas allowances paid to you on your deployment to Country X are exempt from tax under subsection 23AG(1) of the ITAA 1936.

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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