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Ruling

Subject: Foreign Income

Question:

Will the salary and allowances you receive from employment in Country A be exempt from income tax in Australia under section 23AG of the Income Assessment Act 1936 (ITAA 1936)?

Answer:

Yes.

This ruling applies for the following periods:

Year ending 30 June 2013.

The scheme will commence on:

1 July 2012.

Relevant facts

You are a member of the Australian Defence Force (ADF).

You will be serving with the Department of Defence in a posting to Country A in the 2012-13 income year.

You are an Australian resident for income tax purposes and you will remain an Australian resident during this posting.

You will not be taking any breaks during your foreign employment in Country A.

Apart from your salary, you will also receive a couple of extra allowances as part of your deployment to Country A. The allowances relate to your foreign service.

You will be subject to the ADF command structure and rules of conduct of the ADF whilst you are on this posting.

Australian does not have a tax treaty with Country A.

Your income will be subject to the Country A tax laws.

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 paragraph 23AG(2)(a)

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

Income Tax Assessment Act 1936 paragraph 23AG(2)(c)

Income Tax Assessment Act 1936 paragraph 23AG(2)(d)

Income Tax Assessment Act 1936 paragraph 23AG(2)(e)

Income Tax Assessment Act 1936 paragraph 23AG(2)(f)

Income Tax Assessment Act 1936 paragraph 23AG(2)(g)

Reasons for decision

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 this foreign service are exempt from Australian tax. 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, amongst other things, the individual's deployment outside Australia as a member of a disciplined force.

Foreign deployment as a member of a disciplined force

Specifically, subsection 23AG(1AA) of the ITAA 1936 relevantly states:

However, those foreign earnings are not exempt from tax under this section unless the continuous period of foreign service is directly attributable to any of the following:

(d)  the person's deployment outside Australia as a member of a disciplined force by:

(i) the Commonwealth, a State or a Territory; or

(ii) an authority of the Commonwealth, a State or a Territory.

The expression 'disciplined force' is not defined in the ITAA 1936 or in the ITAA 1997. However, the Explanatory Memorandum (EM) which accompanied Tax Laws Amendment (2009 Budget Measures No. 1) Bill 2009 introducing paragraph 23AG(1AA)(d) of the ITAA 1936 provides some guidance on this (see subparagraph 15AB(1)(b)(i) and paragraph 15AB(2)(e) of the Acts Interpretation Act 1901 ). It relevantly states:

Foreign deployment as a member of a disciplined force

As an employee of the Department of Defence subject to the command structure of the ADF during your posting, you are considered a members of a 'disciplined force' within paragraph 23AG(1AA)(d) of the ITAA 1936.

However, the foreign earnings of individuals engaged in foreign service that are directly attributable to one of the activities referred to in subsection 23AG(1AA) will not be exempt if one of the conditions for non-exemption contained in subsection 23AG(2) applies.

Subsection 23AG(2) applies, to deny an exemption, if the foreign earnings are exempt from tax in the foreign country only because of one or more of the following reasons:

a double tax agreement with Australia or a law giving effect to a double tax agreement (paragraphs 23AG(2)(a) and 23AG(2)(b) of the ITAA 1936);

a law of that foreign country which generally exempts from, or does not provide for, the imposition of tax on income derived in the capacity of an employee, income from personal services or any other similar income (paragraphs 23AG(2)(c) and 23AG(2)(d) of the ITAA 1936), or

a law or international agreement dealing with privileges and immunities of diplomats or consuls or of persons connected with international organisations (paragraphs 23AG(2)(e), 23AG(2)(f) and 23AG(2)(g) of the ITAA 1936).

Australia does not have a tax treaty with Country A therefore paragraphs 23AG(2)(a) and 23AG(2)(b) of the ITAA 1936 do not apply.

The law of Country A provides for the imposition of income tax on employment income and you will be subject to Country A tax laws, therefore paragraphs 23AG(2)(c) and 23AG(2)(d) of the ITAA 1936 do not apply.

Further, your earnings are not subject to any laws or agreements relating to privileges and immunities granted to persons connected with international organisations. Therefore, paragraphs 23AG(2)(e), 23AG(2)(f) and 23AG(2)(g) of the ITAA 1936 do not apply.

As none of the reasons listed in subsection 23AG(2) of the ITAA 1936 apply, the salary and wages received by you from your posting to Country A will be exempt from income tax under subsection 23AG(1) of the ITAA 1936.

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