Edited version of private ruling

Authorisation Number: 1011721238009

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Ruling

Subject: Foreign Income

Question:

Are the salary and allowances you will derive from employment in Country A exempt income in Australia under section 23AG of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer: Yes.

This ruling applies for the following period:

Year ending 30 June 2011.

Year ending 30 June 2012.

The scheme commenced on:

1 July 2010.

Relevant facts

You are an Australian resident for income tax purposes.

You left Australia some time in the 2010-11 income year to work in Country A. You estimate that you will return some time in the 2011-12 income year.

In Country A, you serve the Australian Defence Force (ADF). You are employed and paid by the ADF.

You will return to Australia on paid annual leave for two stays of no longer than seven days each. You will not be undertaking any work related tasks while you're in Australia. The annual leave would have accrued as a result of your foreign service.

You will be engaged in continuous foreign service as an employee for 91 days or more.

Apart from your salary income, as part of your foreign service you will be paid some specific allowances which relate to your foreign service.

Australia does not have a tax treaty with Country A.

You are liable for tax in Country A on the income you derive from working there.

There is no Memorandum of Understanding (MOU) or an Agreement of Co-operation for Development in existence between the Australian Government and the Government of 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 subsection 23AG(1)

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

Reasons for decision

Salary and allowances are ordinary income for the purposes of subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997).

Subsection 6-15(2) of the ITAA 1997 provides that if an amount is exempt income then it is not included in assessable income.

Section 11-15 of the ITAA 1997 lists those provisions dealing with income that may be exempt. Included in this list is section 23AG of the Income Tax Assessment Act 1936 (ITAA 1936), which deals with overseas employment income.

In addition to your salary, you're receiving some specific allowances. As these allowances are paid to compensate for costs arising from your foreign service and for hardship attributable to your foreign service, they are considered to be derived from 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.

Subsection 23AG(1) of the ITAA 1936 provides that where Australian resident individuals are engaged in foreign service for a continuous period of not less than 91 days, foreign earnings derived from that foreign service are exempt from tax in Australia. However, new subsection 23AG(1AA) of the ITAA 1936, which took effect from 1 July 2009, provides that those foreign earnings will not be exempt under section 23AG of the ITAA 1936 unless the continuous period of foreign service is directly attributable to the following:

· delivery of Australian official development assistance by your employer.

· activities of your employer in operating a public fund declared by the Treasurer to be a developing country relief fund, or a public fund established and maintained to provide monetary relief to people in a developing foreign country that has experienced a disaster (a public disaster relief fund).

· activities of your employer as a prescribed charitable or religious institution exempt from Australian income tax because it is located outside Australia or the institution is pursuing objectives outside Australia.

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

In your case, you are employed by the ADF to work in Country A. Therefore, your foreign service is considered to be directly attributable to the last condition mentioned above in subsection 23AG(1AA) of the ITAA 1936. Accordingly, you are considered to be deployed outside Australia by an Australian government as a member of a disciplined force.

Australia does not have a Tax Treaty in place with Country A and your income is not exempt from tax in Country A. As you will work continuously overseas for a period greater than 91days, your foreign salary and allowances will be exempt income in Australia under section 23AG 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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