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Ruling

Subject: Assessability of foreign sourced income

Question 1:

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

Answer:

Yes

Question 2:

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

Answer:

Yes.

This ruling applies for the following period:

Year ended 30 June 2012

Year ended 30 June 2013

Year ended 30 June 2014

The scheme commenced on:

1 July 2011

Relevant facts

You are an Australian resident for income tax purposes.

You were contracted by the Government of Australia for employment purposes.

Under the terms of your appointment you are contracted as a non-going Australian Public Service (APS) employee.

For a period of not less than 91 days you will be based full time in country Y.

The program that you have been deployed on is a partner program between Australia and country Y and will run for a period of not less than 91 days.

The program is governed by a subsidiary arrangement between the Government of Australia and country Y.

The program is implemented by the Government of Australia and country Y, and forms Australia's official assistance to country Y.

You will receive leave annually which you intend to take in Australia.

You will not perform any work-related duties when you undertake any breaks in Australia.

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

In addition to your salary you receive a number of allowances which are paid to compensate for costs arising from the foreign service and the hardship attributable to the foreign service.

Your employment income is paid into your Australia bank accounts with your allowances being paid into your country Y bank accounts.

Australia has a double tax agreement with country Y.

 Country Y taxes employment income under its domestic law.

 Your foreign employment income is exempt from tax in country Y under the terms of a general agreement on development co-operation between the Government of Australia and the government of country Y.

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 Section 23AG.

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

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

Income Tax Assessment Act 1936 Subsection 23AG(2).

Reasons for decision

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 (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.

You are employed as a non-ongoing APS employee and are engaged in Foreign Service for a continuous period of not less than 91 days. Therefore your foreign earnings derived from that Foreign Service are exempt from tax in Australia, subject to other provisions listed under section 23AG of the ITAA 1936.

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 any of 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; or

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

You are contracted as APS employee who has been deployed to country Y by the Government of Australia as part of an Australia-country Y Program that forms Australia's official assistance to country Y. As your foreign service directly relates to the delivery of Australian official development assistance, 23AG(1AA) of the ITAA 1936 will apply to exempt from tax any income earned as a result of your foreign service.

Subsection 23AG(2) of the ITAA 1936 provides that no exemption is available 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).

Australia has a tax treaty with country Y (country Y Agreement) which operates to avoid the double taxation of income received by residents of Australia and country Y.

An article of the 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 Y if the services are rendered in country y and the individual is a citizen of country Y, or did not become a resident of country Y solely for the purpose of performing the services.

 The employment income you receive in relation to your deployment to country Y is taxable only in Australia under an Article of the 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 Y is exempt from tax in country Y 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 Y because of the MOU entered into between Australia and country Y.

The exemption provided by the MOU does not fall under any of the other exemption categories under subsection 23AG(2) of the ITAA 1936. Therefore, subsection 23AG(2) of the ITAA 1936 will not apply to deny the exemption under subsection 23AG(1) of the ITAA 1936, as your foreign earnings are exempt in country Y for a reason other than those listed in subsection 23AG(2) of the ITAA 1936.

Accordingly, the salary and allowances that you receive that is directly attributable to your foreign service in country Y is exempt from income tax in Australia under subsection 23AG of the ITAA 1936.

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