Edited version of private ruling

Authorisation Number: 1011834537424

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Ruling

Subject: Foreign employment income

Subject

Foreign employment income

Question 1

Is the salary/wages you receive from employment in Country A exempt from income tax in Australia under section 23AG of the Income Assessment Act 1936 (ITAA 1936)?

Answer 1

Yes.

Question 2

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

Answer 2

Yes.

This ruling applies for the following period

Year ended 30 June 2010

Year ending 30 June 2011

Year ending 30 June 2012

The scheme commenced on

30 June 2008

Relevant facts

You are an Australian resident for taxation purposes.

You are employed by Employer A and have been appointed to undertake a deployment to Country A on an Australian Agency for International Development (AusAID) project in a specific role.

The project you are deployed is a specific agreement between Australia and Country A.

The project is administered by AusAID with additional support provided by Employer A.

Your duties involve specific tasks.

You commenced your deployment in Country A on a specific date within the financial year ending 30 June 2008.

You intend to return to Australia permanently on a specific date within the financial year ending 30 June 2012 when your Country A visa expires.

In addition to your salary, you receive the following overseas allowances:

You have stated that all of the allowances you receive are paid to cover the cost of living expenses in Country A.

You have stated that none of the allowances you receive cover pre or post deployment expenses.

Your foreign earnings from your employment in Country A are directly attributable to the delivery of Australian official development assistance.

You accrue a specific number of days recreation leave per year whilst employed in Country A.

You will not take any breaks other than your recreation leave that accrued during your deployment in Country A.

Your recreation leave will be spent mainly in Country A, however you will also return to Australia on occasion.

You will not perform any work-related duties if you undertake your leave in Australia.

You are not employed on a cyclical basis.

Your foreign employment income is exempt from income tax in Country A under a specific article of a specific agreement between Australia and Country A.

Country A taxes employment income under its domestic law.

Australia has a tax treaty with Country A.

Reasons for Decision

Foreign Employment Income

Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources, whether in or out of Australia, during the income year.

Salary and wages are ordinary income for the purpose of subsection 6-5(2) of the 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.

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.

Period of service in Country A

Subsection 23AG(1AA) of the ITAA 1936, which took effect from 1 July 2009, provides that 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.

Australian official development assistance

The Explanatory Memorandum (EM) which accompanied the Tax Laws Amendment (2009 Budget Measures No 1) Act 2009 states that Australian official development assistance is Australian government assistance intended to reduce poverty and promote sustainable development in developing countries provided directly under programs overseen by the Australian Department of Foreign Affairs and Trade (DFAT) and/or the Australian Agency for International Development (AusAID).

AusAID also oversees the delivery of Australian official development assistance under contract with both Australian and international service providers.  

In your case, you have been appointed to undertake a deployment to Country A on an AusAID project in a specific role in a specific project.

As your deployment is directly attributable to the delivery of an Australian overseas aid program by AusAID, you satisfy one of the conditions for exemption under subsection 23AG(1AA) of the ITAA 1936.

Salary and overseas allowances

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

In addition to your salary, you receive several overseas allowances.

The overseas allowances are designed to cover various costs and hardship of the foreign service. As they are 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.

However, any part of such an allowance that is in respect of expenses that are attributable to a period prior to the commencement of, or after the completion of, foreign service is not exempt from tax.

In your case, you have stated that you do not receive any allowance that relates to pre or post deployment expenses.

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

Continuous period of 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 will take recreation leave that accrues during your employment in Country A. This recreation leave forms part of your foreign service.

Exemption of foreign income

Exemption of foreign income under section 23AG 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 of these reasons is a tax treaty contained in the International Tax Agreements Act 1953 (the Agreements Act).

A specific schedule of the Agreements Act contains the tax treaty between Australia and Country A (the Country A Agreement) which operates to avoid the double taxation of income received by Australian and Country A residents.

A specific 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 citizen or national 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 deployment to Country A is taxable only in Australia under a specific 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 tax in Country A because of the terms of a specific agreement entered into between Australia and Country A. A specific article of the agreement provides for an exemption from Country A income tax for designated persons.

A designated person is defined within the specific agreement as any person notified by the Government of Australia to a specific department within Country A pursuant to specific articles of the specific agreement.

In your case, you would be considered a designated person under a specific article which relates to all personnel deployed under the specific agreement.

The exemption from Country A income tax provided by the operation of the agreement would not fall under any of the other exemption categories under subsection 23AG of the ITAA 1936. Therefore, you will satisfy the conditions for exemption under section 23AG of the ITAA 1936.

Accordingly, the salary and overseas allowances you receive from employment in Country A are 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. Your income from employment in Country A needs to be included as exempt foreign salary and wage income in your Australian tax return.

Relevant legislative provisions

Income Tax Assessment Act 1936 Subsection 23AG(1)

Income Tax Assessment Act 1936 Subsection 23AG(7)

Income Tax Assessment Act 1936 Section 23AG

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

Income Tax Assessment Act 1936 Subsection 23AG(6)

Income Tax Assessment Act 1936 Subsection 23AG(2)

Income Tax Assessment Act 1936 Section 23AG(2)(b)

International Tax Agreements Act 1953

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