Edited version of your private ruling

Authorisation number : 1012595930119

Ruling

Subject: Foreign source income

Question 1

Is the salary you receive from employment in the foreign country 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 the foreign country 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 the foreign country exempt from income tax in Australia under section 23AG of the ITAA 1936?

Answer

Yes.

This ruling applies for the following periods:

Year ending 30 June 2015

The scheme commences on:

1 July 2014

Relevant facts and circumstances

Your deployment in the foreign country was for a number of years. You have received an extension of this overseas posting. You have stated that the facts of your posting remain identical to those which were considered for your initial private ruling.

You are an Australian resident for tax purposes.

You are a civilian employee of the Department.

You are on deployment support in the foreign country.

For the duration of your deployment in the foreign country, you are subject to a disciplined force's command and control.

You do not hold an Australian diplomatic passport and do not have access to diplomatic privileges or immunities.

You will only take your recreation leave that is accrued during the period of your deployment in the foreign country. You will not return to Australia to work during your deployment in the foreign country.

You will not perform any work-related duties during leave breaks during your deployment.

The foreign country taxes employment income under its domestic law.

There is no tax treaty between Australia and the foreign country.

Relevant legislative provisions

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 Paragraph 23AG(1AA)(d)

Income Tax Assessment Act 1936 Subsection 23AG(2)

Income Tax Assessment Act 1936 Subsection 23AG(7)

Reasons for decision

Summary

Your salary and overseas allowances you receive from your employment in the foreign country are exempt from Australian tax. Your transfer allowance is not exempt from Australian tax.

Detailed reasoning

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 Australian tax.

'Foreign service' means 'service in a foreign country as the holder of an office or in the capacity of an employee' and 'foreign earnings' include income consisting of salary, wages, bonuses or allowances (subsection 23AG(7) of the ITAA 1936).

Your deployment to the foreign country constitutes 'foreign service' as you will undertake 'service in a foreign country as the holder of an office or in the capacity of an employee'.

To qualify for the exemption under subsection 23AG(1) of the ITAA 1936 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.

You are employed by the Department to serve in the foreign country as deployment support in the foreign country. 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 preparing for departure and returning from your deployment. 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, your 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 the foreign country, 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 you receive from this employment are foreign earnings derived from foreign service for the purposes of subsection 23AG(1) of the ITAA 1936.

As you are a resident of Australia for tax purposes and will be engaged in foreign service for a continuous period of not less than 91 days, you satisfy all the basic tests for the exemption of foreign employment income in subsection 23AG(1) of the ITAA 1936. Therefore, your foreign earnings will be exempt from tax in Australia, subject to the operation of subsections 23AG(1AA) and 23AG(2) of the ITAA 1936.

Subsection 23AG(1AA) of the ITAA 1936

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, amongst other things, the individual's deployment outside Australia as a member of a disciplined force.

A 'disciplined force' will comprise persons specifically performing the defence, policing and peacekeeping functions of the deployment but will also include those accompanying and providing assistance and support to those so engaged. Persons providing such ancillary support will be considered part of the 'disciplined force' provided they are effectively integrated into the force performing the primary functions of defence, peacekeeping and policing.

These people will be so integrated into the primary force where they are subject to the same or similar command structure and rules of conduct as those performing the primary functions of that 'disciplined force'.

As the employees of the Defence are providing auxiliary support to those performing the primary defence functions of the deployment and are integrated into this force, because they are subject to Defence Force discipline as 'defence civilians', they will be members of a 'disciplined force' within paragraph 23AG(1AA)(d) of the ITAA 1936.

In your case, you are an employee of the Department deployed by the Commonwealth outside Australia as part of multilateral military, policing or peacekeeping forces and have the status of a defence civilian. For the duration of your deployment in the foreign country, you are subject to the disciplined force's command and control. Therefore, you are deployed as a member of the disciplined force by an Australian government and you satisfy one of the conditions for exemption from Australian tax under subsection 23AG(1AA) of the ITAA 1936.

Subsection 23AG(2) of the ITAA 1936

The exemption from Australian tax does not apply if the foreign earnings are exempt from foreign tax 'only because of any of the following' reasons set out in subsection 23AG(2) of the ITAA 1936.

• a tax treaty or law of that foreign country that gives effect to a tax treaty

• the foreign country exempts employment income from tax or does not tax employment income generally

• a law of another country or an international agreement with which Australia is a party dealing with the privileges and immunities of diplomats or consuls , or of persons connected with international organisations.

Australia does not have a tax treaty with the foreign country.

The law of the foreign country provides for the imposition of income tax, and does not exempt employment income from income tax.

You do not receive diplomatic or consular privileges and immunities under an international agreement.

Therefore, subsection 23AG(2) of the ITAA 1936 does not apply.

As a defence civilian employee deployed in the foreign country, you are a member of a 'disciplined force' within paragraph 23AG(1AA)(d) of the ITAA 1936. You satisfy the other conditions for exemption in subsection 23AG(1) of the ITAA 1936.

Accordingly, the salary and overseas allowances (other than transfer allowance) you receive from your employment in the foreign country are exempt from Australian tax.

Note

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.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).