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Ruling

Subject: Assessability of foreign salary and allowances

Question and answer:

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

Yes.

This ruling applies for the following periods:

Year ended 30 June 2013

Year ended 30 June 2014

Year ended 30 June 2015

The scheme commences on:

1 July 2012

Relevant facts and circumstances

You are an Australian Public Service (APS) employee.

You have been selected to work with a government department in a foreign country for an initial period of two years.

You will not perform diplomatic or consular duties while you are working in the foreign country.

Your position will be funded by an aid organisation under a government partnership agreement.

You will be paid from Australia's overseas development assistance budget.

Your income will be derived as part of an Australian aid project.

In addition to your salary you will be paid allowances related to living in the foreign country.

Your income will not be taxable in the foreign country.

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(2)(b)

Income Tax Assessment Act 1936 - Subsection 23AG(7)

Reasons for decision

Subsection 23AG(1) of the ITAA 1936 provides that the 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 and allowances (subsection 23AG(7) of the ITAA 1936). Only allowances that are paid to cover expenditure while the employee is in the foreign country and engaged in a period of foreign service can be classed as foreign earnings.

To qualify for the exemption the foreign earnings must be derived from the foreign service. That does not mean that the foreign earnings need to be derived at the time of engaging in foreign service. The important test is that the foreign earnings, when derived, need to be derived as a result of the undertaking of that foreign service.

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 will work in a foreign country for a period of not less than 91 days and receive a salary along with allowances related to living in that country. Your employment position will be funded by an aid organisation and the salary and allowances you derive will be derived as part of an Australian overseas aid project.

As your period of foreign service will be directly attributable to the delivery of an Australian overseas aid program, you will satisfy one of the conditions for exemption under subsection 23AG(1AA) of the ITAA 1936.

However, the exemption is not available if the provisions of subsection 23AG(2) of the ITAA 1936 apply.

Subsection 23AG(2) of the ITAA 1936 specifies that that no exemption is available 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,

· the law of a foreign country 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, or

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

Australia has entered into a tax treaty with the foreign country which is contained in the International Tax Agreements Act 1953 (the Agreements Act).

 The agreement provides that remuneration paid by Australia to any Australian resident in respect of services rendered in the discharge of governmental functions shall be taxable only in Australia.

 However, that agreement is not the only reason why Australian governmental employees' income will not be subject to tax in the foreign country. A Government Treaty provides that the income tax liability of Australian personnel shall be borne by the Government of the foreign country. This exempts Australian government employees from paying income tax in that country on salaries and allowances derived while deployed in that country.

Therefore subsection 23AG(2) of the ITAA 1936 will not apply to you.

As you will be engaged in foreign service for a continuous period of not less than 91 days, your salary, and allowances related to living in the foreign country, will be exempt from tax 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 the 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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