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Ruling

Subject: Foreign employment income - country X

Question 1

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

Answer

Yes.

Question 2

Is the transfer allowance you receive in relation to your employment in country X exempt from income tax in Australia under section 23AG of the ITAA 1936?

Answer

No.

Question 3

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

Answer

Yes.

This ruling applies for the following periods

Year ended 30 June 2010

Year ended 30 June 2011

Year ending 30 June 2012

Year ending 30 June 2013

The scheme commences on

1 July 2009

Relevant facts and circumstances

You are an Australian resident for taxation purposes.

You were appointed to undertake a long term posting to country X for a period of more than 91 days.

You employer administers an Australian aid program.

You have participated in work-related meetings, workshops and briefing, in Australia and other countries.

In addition to your salary, you will receive various allowances including a transfer allowance and overseas allowances.

The transfer allowance is paid when you are proceeding on or returning from a long term posting. The allowance assists with expenditure incurred as a result of the household disruptions associated with a long term posting.

The overseas allowances are paid to compensate for costs arising from the foreign service and for the hardship attributable to the foreign service.

You will not take any leave other than your recreation leave that accrues during your posting to country X.

Australia does not have a double tax agreement with country X.

Under its domestic law, country X taxes employment income.

Your income is exempt from taxation in country X under an agreement between the government of Australia and the government of country X on development co-operation.

You are a member of the Commonwealth Superannuation Scheme.

Relevant legislative provisions

Income Tax Assessment Act 1936 Subsection 23AG(1)

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

Income Tax Assessment Act 1936 Subsection 23AG(2)

Income Tax Assessment Act 1936 Subsection 23AG(6)

Income Tax Assessment Act 1936 Subsection 23AG(7)

Reasons for decision

Subsection 23AG(1) of the 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 income consisting of salary, wages, bonuses or allowances (subsection 23AG(7) of the ITAA 1936).

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 29 June 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 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 a public disaster relief fund;

· the activities of the individual's employer being a prescribed institution that is exempt from Australian tax; or

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

In your case, you have been appointed to undertake a posting to country X for a period of more than 91 days.

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

In addition to your salary, you receive a transfer allowance and overseas allowances.

Transfer allowance

The transfer allowance is paid to you to cover costs associated with household disruptions associated with preparing for and returning from your long term posting. This allowance is not paid to cover costs arising from the performance of your foreign service. It is paid to cover costs arising before and after the foreign service. Therefore, this allowance is not considered to be derived from your foreign service.

Accordingly, the transfer allowance is not exempt from income tax in Australia under subsection 23AG(1) of the ITAA 1936 as it is not derived from your foreign service.

Salary and overseas allowances

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

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.

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

Temporary absences forming part of a period of foreign service

Subsection 23AG(6) of the ITAA 1936 treats certain temporary absences from foreign service as forming part of the period of foreign service. The Commissioner's view on the application of that subsection is reflected in paragraphs 9 to 11 of Taxation Ruling TR 96/15.

The legislation and ruling includes the following temporary absences:-

· recreation leave wholly attributable to the period of foreign service (other than, for example, long service leave, leave without pay, furlough and extended leave) and sick leave

· short business trips directly related to that person's continuing foreign service engagement

· weekends, public holidays, rostered days off, or other approved paid time off

· compassionate leave

In your situation you have taken recreation leave which included public holidays and the Christmas close down period, as well as short business trips directly associated with your duties. The periods you have been away from country X are not considered to be excessive compared to the overall length of your foreign service and you have only taken the recreation leave which you have accrued during the foreign service. Therefore, these temporary absences will form part of your foreign service and the payments you received will qualify as foreign earnings.

Exemption of foreign income

Subsection 23AG(2) of the ITAA 1936 provides that no exemption is available under subsection 23AG(1) of the ITAA 1936 in circumstances where an amount of foreign earnings derived from service in a foreign country is exempt from tax in the foreign country solely because of:

· a double tax agreement or a law of a country that gives effect to such an agreement

· a law of that foreign country which generally exempts from, or does not provide for, the imposition of income tax on income derived in the capacity of an employee, income from personal services or any other similar income and

· a law or international agreement dealing with privileges and immunities of diplomats or consuls or of persons connected with international organisations.

None of the reasons listed in subsection 23AG(2) of the ITAA 1936 apply to your situation.

Therefore, subsection 23AG(2) of the ITAA 1936 does not apply and as a result, the income you earn from your posting to country X is exempt from income tax in Australia under subsection 23AG(1) of the ITAA 1936.

Further issues for you to consider

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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