Edited version of private ruling

Authorisation Number: 1011579974950

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Ruling

Subject: Foreign employment income

1. Is the salary earned by you while employed in Country A exempt from income tax under section 23AG of the Income Tax Assessment Act 1936 (ITAA 1936)?

Yes.

2. Are the overseas allowances paid to you in relation to your employment in Country A exempt from income tax under section 23AG of the ITAA 1936?

Yes.

3. Is the transfer allowance paid in relation to your employment in Country A exempt from income tax under section 23AG of the ITAA 1936?

No.

This ruling applies for the following period

Year ending 2011

Year ending 2012

The scheme commenced on

1 July 2010

Relevant facts

You are an Australian resident for taxation purposes.

You are a member of a government department in Australia (Australian government).

You are deployed to Country A, as part of Australia and Country A development program (development program).

You are undertaking an AusAID project which was for a period of several years.

The Australian government has signed an understanding with AusAID to deliver Australian official development assistance to the Government of Country A under the development program.

Your initial deployment has been extended for further years in future.

In addition to your salary, you will be entitled to the following allowances:

· Transfer allowance, and

· Overseas allowances.

The transfer allowance is payable in two instalments once prior to deployment and once on completion of deployment. This allowance is paid to cover costs associated with preparing for departure and returning from deployment. For example, any hotel accommodation after uplift of goods, taxi fares to and from airports, loss on sale of motor vehicle, and cost of obtaining a dental assessment.

The overseas allowances are paid as net allowances. Overseas allowances paid to you include:

· Cost of living allowance designed to compensate employees for different costs of purchasing goods and services at deployment locations. This amount will vary over the period of deployment.

· Cost of posting allowance designed to compensate employees for a wide range of impacts that posting has on their lives from loss of access to family and friends, the career impairment suffered by many posted employee spouses.

· Hardship allowance is paid in recognition of the difficulties faced by employees at hardship posts.

· Special location allowance is paid in addition to hardship allowance in recognition for loss of diplomatic safety nets.

· Child allowance is paid in recognition of the disruptions associated with relocating and living overseas with children or for additional communication costs associated with children remaining in Australia and additional costs associated with reunion visits. (Children must be under 18 and attending school.)

· Additional household allowance is paid where an official's family remains in Australia.

You do not intend to take any breaks in your employment other than your allocated annual leave accrued as a result of your foreign service.

If you return to Australia during that leave you will not be performing work related duties.

You stated your foreign employment income is derived in your capacity as an aid worker employed in the delivery of Australian official development assistance as administered by AusAID.

Your earnings and allowances are not liable to income tax in Country A because of a memorandum of understating between the Government of Australia and the Government of Country A.

There is a tax treaty between Australia and Country A.

Country A has a tax system that taxes employment income.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 23AG

Income Tax Assessment Act 1936 Subsection 23AG(1)

Income Tax Assessment Act 1936 Paragraph 23AG(1AA)(a)

Income Tax Assessment Act 1936 Subsection 23AG(6)

Income Tax Assessment Act 1936 Subsection 23AG(7)

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

Reasons for decision

Subsection 23AG(1) of the 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 salary, wages, bonuses or allowances (subsection 23AG(7) of the ITAA 1936).

Subsection 23AG(6) of the ITAA 1936 provides that 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, you do not intend to take any breaks other than annual leave accrued as a result of your foreign service. Thus, the leave will form part of your 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 a result of the undertaking of that foreign service.

In addition to your salary, you receive a transfer allowance and overseas allowances.

Salary and overseas allowances

You are employed to work on a project in Country A. As you will receive salary from this employment, this income is considered to be derived from your foreign service.

You will also receive overseas allowances that include cost of living allowance, cost of posting allowance, hardship allowance, special location allowance, child allowance and additional household allowance. These allowances are designed to compensate the cost of the following:

· various costs of purchasing goods and services at deployment locations

· wide range of impacts that posting has on the lives of the employees

· loss of access to family and friends; to compensate for having additional children at the post and for suitable household maintenance needs.

As these allowances are paid to compensate for costs arising from the foreign service and for 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.

Transfer allowance

You receive a transfer allowance paid once prior to deployment and once on completion of deployment. This allowance is paid to cover cost associated with preparing for departure and returning from the deployment, such as hotel accommodation after uplift of goods, taxi fares to and from airports, loss on sale of motor vehicle, costs of obtaining a dental assessment.

This allowance is not paid to cover costs arising from the performance of your foreign service. It is paid to cover costs arising prior to and after the end of the foreign service. Therefore, this allowance is not considered to be derived from your foreign service.

Accordingly, the transfer allowance is not exempt from income tax under subsection 23AG(1) of the ITAA 1936 as it is not derived from your foreign service. As this allowance is not exempt under subsection 23AG(1) of the ITAA 1936, it is included in your assessable income under subsection 6-5(2) of the ITAA 1997.

Exemption consideration from 1 July 2009

As from 1 July 2009, subsection 23AG(1AA) of the ITAA 1936 provides that foreign earnings derived by an Australian resident from 91 days continuous foreign service will only be exempt if the foreign service is directly attributable to:

· the delivery of Australia's overseas aid program by the individual's employer

· the activities of the individual's employer in operating a developing country relief fund or an overseas public disaster relief fund

· the activities of the individual's employer, being a prescribed institution that is exempt from Australian income tax

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

· an activity of a kind specified in regulations.

Delivery of Australian official development assistance by the person's employer

The term 'Australian official development assistance' is not defined for the purposes of section 23AG of the ITAA 1936. However, the Explanatory Memorandum (EM) which accompanied Tax Laws Amendment (2009 Budget Measures No. 1) Bill 2009) introducing paragraph 23AG(1AA)(a) of the ITAA 1936 provides guidance on the meaning of the phrase. The relevant paragraphs are below:

Australian official development assistance

1.19 Australian official development assistance (ODA) is assistance delivered through the Australian Government's overseas aid program, as administered by the Department of Foreign Affairs and Trade and/or the Australian Agency for International Development (AusAID). Australian ODA aims to reduce poverty and achieve sustainable development in developing countries, in line with Australia's national interest.

1.20 In addition to providing Australian ODA directly, AusAID also competitively contracts aid work to Australian and international entities. Thus, in practice, individuals involved in the delivery of Australian ODA can include both Australian Public Service (APS) employees and non-APS employees.

1.21 For the purposes of subsection 23AG(1AA) the delivery of Australian ODA must be undertaken by the person's employer, which includes AusAID and an entity contracted by AusAID to assist in the delivery of Australian ODA.

The ordinary meaning of 'assistance' in the Macquarie Dictionary is 'the act of assisting; help; aid'. Therefore, adopting the ordinary meaning, 'assistance' for the purposes of section 23AG of the ITAA 1936 would encompass the provision of money, goods or services capable of affording help or aid.

In your case you are an employee of Australian government, who has signed an understanding with AusAID to deliver Australian official development assistance to the Government of Country A under a government program. You are undertaking employment on an AusAID project that is directly related to aid delivery.

Accordingly, your foreign service is directly attributable to the delivery of Australian overseas aid program by AusAID, you are entitled to claim an exemption for the foreign earnings derived from your foreign service under section 23AG of the ITAA 1936.

Exemption of income

The exemption in subsection 23AG(1) of the ITAA 1936 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 o the reasons listed is a treaty contained in the International Tax Agreements Act 1953.

Your earnings and allowance are not liable to income tax in Country A because of a Memorandum of understanding between the Government of Australia and the Government of Country A.

Accordingly paragraph 23AG(2)(b) of the ITAA 1936 will not apply as the employment income received by you is not exempt from tax due to the tax treaty with Country A. None of the other reasons in subsection 23AG(2) of the ITAA 1936 will apply.

Accordingly your income for the period 1 July 2010 to 30 June 2012, being a continuous period of not less than 91 days is exempt from tax under subsection 23AG(1) of the ITAA 1936.

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 income in your Australian tax return.

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