Edited version of private ruling

Authorisation Number: 1011833785235

This edited version of your ruling will be published in the public Register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns.

Ruling

Subject: Foreign employment income

Question 1

Is the foreign employment income you earned in the 2007-08 and 2008-09 income years exempt from income tax in Australia?

Answer

Yes

Question 2

Is the foreign employment income you earned in the 2009-10 income year exempt from income tax in Australia?

Answer

No

This ruling applies for the following period

Year ending 30 June 2008

Year ending 30 June 2009

Year ending 30 June 2010

The scheme commences on

1 January 2007

Relevant facts and circumstances

You are an Australian resident for taxation purposes.

You lived in Country X, from the 2004-05 income year for several years.

You were on a posting until the 2008-09 income year.

Your family accompanied you on your posting.

You were a contributing member to a Commonwealth superannuation scheme while on the posting.

In the 2008-09 income year, you became a locally engaged employee at the Australian Embassy in Country X and your visa changed to provide an exemption from taxation in Country X.

You were no longer a contributing member to a Commonwealth superannuation scheme after you became a locally engaged employee.

You did not take any breaks in your employment, other than annual leave that accrued during your foreign service.

Your employment with the Embassy ceased in the 2009-10 income year, and you returned to Australia.

There is a tax treaty between Australia and the Country X.

Relevant legislative provisions

Subsection 23AG(1) of the Income Tax Assessment Act 1936

Subsection 23AG(2) of the Income Tax Assessment Act 1936

Section 4 of the International Tax Agreements Act 1953

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

Section 23AG of the Income Tax Assessment Act 1936

Reasons for decision

Foreign employment income: 2007-08 and 2008-09

Subsection 23AG(1) of the Income Tax Assessment Act 1936 (ITAA 1936) provides that the foreign earnings of an Australian resident for taxation purposes derived during a continuous period of foreign service of not less than 91 days employment are exempt from tax in Australia.

The exemption 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 of these reasons is a tax treaty contained in the International Tax Agreements Act 1953 (Agreements Act).

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

In Taxation Ruling TR 2005/8, the term 'service rendered in the discharge of government functions' with reference to the Country X Convention is considered to mean those services rendered by an employee in the completion of performance of any core functions undertaken by the government.

In your case, you were an Australian resident for taxation purposes employed by the Australian Government as a locally engaged employee at the Australian Embassy in Country X to perform administration duties. Your duties are considered to be non-core government functions. Therefore, the article relating to government service of the Country X Convention does not apply to your circumstances.

Another article of the Country X Convention provides that salaries, wages and other remuneration derived by an Australian resident in respect of employment shall be taxable only in Australia unless the employment is exercised or the services performed in the Country X. If the employment is exercised or the services performed in the Country X, then the Country X may tax the remuneration.

However, the income you earned while employed in the Country X was exempt from taxation in the Country X because of the your visa.

The exemption provided by the visa is not one of the reasons listed in subsection 23AG(2) of the ITAA 1936 which would exclude an exemption from income tax in Australia.

Consequently, you satisfy the conditions for exemption under section 23AG of the ITAA 1936, and therefore the salary and wages you earned while employed in the Country X in the 2007-08 and 2008-09 income years are exempt from income tax in Australia under subsection 23AG(1) of the ITAA 1936.

Foreign employment income: 2009-10

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.

In your case, you were employed to work as a locally engaged employee at the Australian Embassy in Country X to perform administration duties.

Your employment does not fall into one of the exemption categories listed above.

As you do not satisfy any of the conditions for exemption under subsection 23AG(1AA) of the ITAA 1936, the employment income you earned in the Country X in the 2009-10 income year is not exempt from income tax in Australia 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.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).