Edited version of private ruling

Authorisation Number: 1011548563707

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Ruling

Subject: exempt foreign employment income - exemption with progression

Is your exempt foreign employment income taken into account to calculate the tax payable on your taxable income in Australia?

Yes.

This ruling applies for the following period

Year ended 30 June 2008

The scheme commenced on

1 July 2007

Relevant facts

You are an Australian resident for income tax purposes.

You were employed in Country A for a period of not less than 91 days on a cyclical basis.

Your working cycle was several week on and several weeks off work.

You were required to work in excess of 70 hours per week

You rarely returned to Australia for the period of your employment in Country A.

You paid taxes in Country A on your employment income.

You earned interest income from investments in bank in Australia.

You had your salary income in Australia prior to leaving for employment in Country A.

Australia has a tax treaty with Country A.

Relevant legislative provisions

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

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

Income Tax Assessment Act 1997 Section 11-15

Income Tax Assessment Act 1936 Section 23AG

Income Tax Assessment Act 1936 Subsection 23AG(3)

Reasons for decision

Foreign employment income

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 purposes 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 it is not included in assessable income. Section 11-15 of the ITAA 1997 lists those provisions dealing with income which may be exempt. Included in this list is section 23AG of the Income Tax assessment Act 1936 (ITAA 1936) which deals with foreign 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.

Exemption with progression

Subsection 23AG(3) of the ITAA 1936 provides that foreign earnings that are exempt from Australian tax under section 23AG of the ITAA 1936 are nonetheless taken into account in calculating Australian tax on other income derived by the taxpayer. This method of calculation is referred to as 'exemption with progression'. It prevents the exempt income from reducing the Australian tax payable on the non-exempt income.

Tax on the non-exempt income is calculated by applying a notional average rate of tax payable on the sum of exempt income and non-exempt income.

Subsection 23AG(3) sets out the following formula to be used in applying the average rate of tax to the other income:

Notional gross tax

_________________________ X Other taxable income

Notional gross taxable income

Where:

Notional gross tax is the tax (in whole dollars) that would be assessed (including the Medicare levy, but excluding rebates) on the amount that would be the total taxable income if the exempt amount was assessable income (including any exempt resident foreign termination payments).

Notional gross taxable income is taxable income plus exempt income and other taxable income. Taxable income is assessable income less allowable deductions that may include a proportion of certain deductions such as gifts.

Other taxable income is the amount remaining after deducting from assessable income any allowable deductions that relate exclusively or appropriately to that assessable income. These deductions include a proportion of deductions ('apportionable deductions') that are allowed without having any connection with the production of assessable income (for example gifts). Deduction for superannuation contributions and tax agents' fees are not apportionable and are to be applied solely against the taxpayer's other taxable income.

The formula for calculating the apportionment of the deductions is:

other taxable income calculated without

regard to apportionable deductions

apportionable deductions X ________________________________

apportionable deductions + notional

gross taxable income

Note

The exemption with progression rule does not apply where the foreign earnings are exempt under another provision. This means that if a taxpayer's foreign earnings satisfy the foreign earnings exemption but are also exempt under other specific provisions, such as those for pay and allowances of Defence Force members, for pay from international organisations, tax on a taxpayer's non-exempt income is not calculated on an exemption with progression basis.

Exemption foreign employment income and tax return

It is important to note that, although income subject to exemption under section 23AG of the ITAA 1936 is not taxable in Australia, the amount still needs to be declared as 'exempt foreign employment income' in your tax return. If you have not done so, please request for an amendment to your relevant tax returns.

Issues not addressed in ruling

We have limited our answer to the matters raised in your application. There may be other matters that you need to consider, including assessability of your income from your employment in country A.

Should you need a private ruling on these or any other matters, you will need to lodge another application.

Foreign employment income from 1 July 2009

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.

The amendments introduce subsection 23AG(1AA) of the ITAA 1936 and provide 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 Australia's overseas aid program by the individuals employer

· the activities of the individuals employer in operating a developing country relief fund or a public disaster relief fund

· the activities of the individuals employer being a prescribed institution that is exempt from Australian tax

· the individuals deployment outside Australia by an Australian government (or an authority thereof) as a member of a disciplined force, or

· an activity of a kind specified in the regulations.

If the foreign service is not directly attributable to the activities mentioned above, taxpayers do not qualify for the exemption.

If taxpayers do not qualify for the exemption, the foreign employment income will need to be included in the tax return as assessable income. In such cases, taxpayers will be eligible to claim a non-refundable foreign income tax offset (FITO) for foreign income tax paid on that income. This will relieve double taxation for those individuals.

For more detail you can access our website on www.ato.gov.au

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