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Edited version of private ruling
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Ruling
Subject: Foreign Income - Research Fellowship
1. Are the research fellowship award payments and specific allowance you received from an Australian research institution while conducting research in Country A some time in the 2008-09 income year, assessable income in Australia?
No.
2. Are the research fellowship award payments and specific allowance you received from an Australian research institution while conducting research in Country A some time in the 2009-10 income year, assessable income in Australia?
Yes.
This ruling applies for the following period/s:
Year ended 30 June 2009.
Year ended 30 June 2010.
The scheme commenced on:
1 July 2009.
Relevant facts and circumstances
You are an Australian resident for income tax purposes.
You were awarded a research fellowship from an Australian research institution.
You commenced the fellowship some time in the 2008-09 income year.
The research will be conducted at a university in Country A for the first two years of the fellowship.
In addition to your research fellowship award payments, you also derived an overseas accommodation allowance.
During your foreign service, you will be taking some annual leave which would have accrued as a result of your foreign service.
You will continue your research for the last two years of the fellowship in an Australian institution.
You are not a full time student.
Australia has a tax treaty with Country A.
Relevant legislative provisions
Income Tax Assessment Act 1936 Section 23AG.
Income Tax Assessment Act 1936 Section 23AG(1).
Income Tax Assessment Act 1936 Section 23AG(2).
Income Tax Assessment Act 1936 Section 23AG(7).
Income Tax Assessment Act 1936 Section 23AG(2)(b).
Reasons for decision
Foreign income derived in the 2008-09 income year
Subsection 23AG(1) of the Income Tax Assessment Act 1936 (ITAA 1936) provides that, where a resident taxpayer is engaged in foreign service for a continuous period of not less than 91 days, any foreign earnings derived will be exempt from tax in Australia. 'Foreign service' includes service in a foreign country in the capacity as an employee and 'foreign earnings' includes income consisting of earnings, salary, wages and allowances (subsection 23AG(7) of the ITAA 1936).
In addition to your research fellowship award payments, you also derived a specific allowance. This allowance is paid to cover various costs incurred during your foreign service. Accordingly, the specific allowance is considered a foreign earning from foreign service for the purposes of subsection 23AG(1) 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. One of the reasons listed is where the income earned by an Australian resident in a foreign country is made exempt by the operation of a tax treaty (paragraph 23AG(2)(b) of the ITAA 1936).
Therefore, 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 (the Agreements Act).
Section 4 of the Agreements Act incorporates that Act with the ITAA 1936 and the Income Tax Assessment Act 1997 (ITAA 1997) so that those Acts are read as one.
A Schedule to the Agreements Act contains the tax treaty and notes between Australia and Country A (the Country A Convention). The Country A Convention operates to avoid the double taxation of income received by Australian and Country A residents.
An Article of the Country A Convention provides that salaries, wages and other similar remuneration derived by a resident of Australia in respect of an employment shall be taxable only in Australia unless the employment is exercised in Country A. If the employment is exercised in Country A, such remuneration as is derived from that exercise may be taxed in Country A.
In your case, paragraph 23AG(2)(b) of the ITAA 1936 will not apply as the research fellowship award payments and specific allowance received by you are not exempt from tax in Country A under an Article of the Country A Convention.
Therefore, the research fellowship award payments and specific allowance you derived from employment in Country A some time in the 2008-09 income year, will not be assessable income in Australia as you satisfy the conditions for exemption under subsection 23AG(1) of the ITAA 1936.
Foreign income derived in the 2009-10 income year
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 individual's employer in operating a developing country relief fund or a public disaster relief fund
· the activities of the individual's employer being a prescribed institution that is exempt from Australian tax
· the individual's 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.
In your case, you do not satisfy any of the conditions for exemption under subsection 23AG(1AA) of the ITAA 1936. Therefore, the research fellowship award payments and specific allowance you derived from employment in Country A during the 2009-10 income year, will be assessable income in Australia. You are liable to Australian income tax on your foreign earnings from 1 July 2009.
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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