Edited version of private ruling

Authorisation Number: 1011580007202

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Ruling

Subject: Foreign employment income - ADF

Are the salary and allowances you receive in respect to your posting in Country A by the Australian Defence Force (ADF) exempt from income tax in Australia?

Yes.

This ruling applies for the following period

Year ending 2011

Year ending 2012

Year ending 2013

The scheme commenced on

1 July 2010

Relevant facts

You are an Australian resident for income tax purposes.

You are a member of the ADF working in Country A on a period of not less than 91 days posting as part of the Australian Defence Staff, supporting the Defence Cooperation Program between Australia and Country A.

You do not intend to remain in Country A beyond your current employment contract.

While in Country A, you will be receiving the following allowances as a result of your employment:

· Attraction allowance - an incentive allowance to attract personnel to service in Country A

· Hardship allowance - paid in recognition of the hardship and limitations placed on personnel posted in that region

· Overseas living allowance - a compensatory allowance for the additional cost associated with living in Country A.

You intend to take annual leave that accrued during your posting.

You will accrue several days of recreation leave per year as a result of your employment in Country A.

It is likely that you will expend this recreation leave in countries other than Country A, primarily in Australia.

You will not perform any work duties in Australia whilst on recreational leave.

You state that the liability for taxation is dealt with in the treaty between Australia and Country A.

Australia has a tax treaty with Country A.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 23AG.

Income Tax Assessment Act 1936 Subsection 23AG(1).

Income Tax Assessment Act 1936 Subsection 23AG(1AA)

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

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

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

Income Tax Assessment Act 1936 Subsection 23AG(7).

International Tax Agreements Act 1953.

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).

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

You will also receive an attraction allowance; hardship allowance and an overseas living allowance. 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.

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.

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

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.

As you are a government employee deployed overseas as a member of a disciplined force, you satisfy the conditions for exemption under paragraph 23AG(1AA)(d) 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.

Australia has a tax treaty with Country A (the Country A Agreement) which operates to avoid the double taxation of income received by Australian and Country A residents.

An article of the Country A Agreement provides that remuneration paid by Australia to any individual in respect of services rendered in the discharge of governmental functions shall be taxable only in Australia. However, such remuneration will be taxable only in Country A if the services are rendered in Country A and the individual is a national or citizen of Country A, or did not become a resident of Country A solely for the purpose of performing the services.

The employment income you receive in relation to your employment in Country A is taxable only in Australia under an article of the Country A Agreement as you are an Australian resident and the income is paid by Australia in respect of services rendered in the discharge of governmental functions.

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

However, the income you earn while on posting is exempt from taxation in Country A in accordance with the provisions under the treaty between Australia and Country A.

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 A is exempt from Australian income 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 salary and wage income in your Australian tax return

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