Edited version of private ruling

Authorisation Number: 1011569360322

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Ruling

Subject:

Exempt foreign income

Question

Are the salary and allowances you received whilst you were deployed to Country X exempt from Income tax in Australia?

Answer: Yes

This ruling applies for the following period

Year ending 30 June 2010

Year ending 30 June 2011

The scheme commenced on

1 July 2009

Relevant facts and circumstances

You are an Australian resident for taxation purposes.

You are an employee of a government organisation.

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

During your deployment, you returned to Australia for few days on special leave to attend your family member's funeral.

You did not perform any work -related duties while on leave in Australia.

As per our telephone conversation, you stated that your contract has been extended for few weeks. You stated that you were deployed outside Australia by Australian government (or an authority thereof) as a member of a discipline force.

In addition to your salary, you received overseas allowances. All these allowances are taxed.

These allowances were paid to cover various costs and hardship incurred while working in Country X.

Your salary is not exempt in Country X.

You will accrue approximately few number of days recreation leave as a result of your employment in Country X.

The liability for taxation is dealt with in the a number of treaties between Australia and Country X. .

Relevant legislative provisions

Income Tax Assessment Act 1936 Subsection 23AG(1)

Income Tax Assessment Act 1936 Section 23AG

Income Tax Assessment Act 1936 Section 23AG(6)

Income Tax Assessment Act 1936 Subsection 23AG(2)

Income Tax Assessment Act 1936 Subsection 23AG(6)(b)

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)

Income Tax Assessment Act 1936 Subsection 23 AG(IAA)

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 government employee deployed to Country X as a member of a disciplined force, 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.

In your case, your leave accrued during your service in Country X. During your deployment, you returned to Australia for few days on special leave to attend a family member's funeral. You did not perform any duties whilst, you were in Australia. This leave will form part of your foreign service, and accordingly the payments for the leave will qualify as foreign earnings.

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

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

As they will be 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 allowance 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 no exemption is available under subsection 23AG(1) of the ITAA 1936 in circumstances where an amount of foreign earnings derived from service in a foreign country is exempt from tax in the foreign country solely because of:

· a tax treaty or a law of a country that gives effect to such an agreement (paragraphs 23AG(2)(a) and (b) of the ITAA 1936)

· the law of a foreign country generally exempts from, or does not provide for the imposition of income tax on income derived in the capacity of an employee, income from personal services or any other similar income (paragraphs 23AG(2)(c) and (d) of the ITAA 1936), or

· a law or international agreement dealing with privileges and immunities of diplomats or consuls or of persons connected with international organisations applies (paragraphs 23AG(2)(e), (f) and (g) of the ITAA 1936).

As the employment income you receive while posted to Country X is exempt from tax in Country X because of the operation of a tax treaty, paragraph 23 AG(2)(b) of the ITAA would normally apply and the income would be therefore not be exempt from tax under subsection 23AG(1) of the ITAA 1936.

However, the income you earn while posting is exempt from taxation in Country X in accordance with the provisions under number of treaties between Australia and Country X.

The exemption provided by the treaty would not fall under any of the other exemptions categories under subsection 23AG(2) of the ITAA 1936.

You therefore satisfy the conditions for exemption under section 23AG of the ITAA 1936.

Accordingly, the salary and allowances received by you from employment in Country X is exempt from Australian income tax under section 23AG of the ITAA 1936.

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