Edited version of private advice

Authorisation Number: 1012671257220

Ruling

Subject: Foreign Source Income - 23AG

Question 1

Are the salary and allowances you earned while posted to Country A for full-time study exempt from income tax in Australia?

Answer

No

This ruling applies for the following periods:

30 June 2014

30 June 2015

The scheme commences on:

1 July 2013

Relevant facts and circumstances

You are a resident of Australia for tax purposes.

You are serving in the Australian Defence Forces.

You were posted to Country A.

The purpose of the posting was to undertake military training at Country as a full time student

For the duration of the posting you are not required to do any other duties other than as student.

You have returned to Australia during Christmas, for a short trip during the period of posting.

You are not a member of the Australian Embassy; you do not have a diplomatic passport or receive diplomatic privileges.

You will receive your Defence Force salary during the period you are posted to Country A.

The Australian Defence Force will also pay you an overseas living allowance, hardship allowance, uniform allowance and language proficiency allowance.

Your posting to Country A was not on a cyclical basis.

There is a tax treaty between Australia and Country A inter alia the 'Agreement between the Government of Country A and the Government of Australia for the avoidance of Double Taxation and The Prevention of Fiscal Evasion with Respect to Taxes on Income'.

There is a Development Cooperation Agreement between Australia and Country A, specifically the General Agreement on Development Cooperation between the Government of Australia and the Government of Country A.

There is also an Arrangement between the Department of Defence of Australia for the implementation of the agreement between Country A and Australia on the Framework for the security Cooperation and its plan of action on Defence Cooperation.

The posting to Country A falls under the auspices of the Defence Cooperation Program (DCP) which has inter alia with the broad aim of enhancing the defence related capabilities of regional partner nations as such is a development activity. Specifically, officers on exchange at respective military/security educational institutions meet the intent of the General Agreement definition of development cooperation implicitly per Article 1.

You stated that Article XX of the Agreement applies to you.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 23AG.

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 foreign earnings.

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.

New rules apply to foreign income earned from 1 July 2009. Subsection 23AG(1AA) of the ITAA 1936 provides that those foreign earnings will not be exempt under subsection 23AG(1) of the ITAA 1936 unless the continuous period of foreign service is directly attributable to any of the following:

(a) the delivery of Australian official development assistance by the taxpayer's employer (generally provided by AusAID or the Department of Foreign Affairs and Trade);

(b) the activities of the taxpayer's employer in operating a public fund covered by the deductible gift recipient categories overseas aid fund and developed country disaster relief fund;

(c) the activities of the taxpayer's employer where they are a charitable institution or religious institution which is income tax exempt because they are a prescribed institution located outside Australia or pursuing objectives principally outside Australia;

(d) the taxpayer's deployment outside Australia as a member of a disciplined force of Australia (generally considered to be the ADF or Australian Federal Police); or

(e) an activity of a kind specified in the regulations.

During the period you are in Country A, you will remain an Australian resident employed by the ADF. You are posted to Country A to undergo advanced military training as part of your employment with the ADF, and are therefore engaged in service in a foreign country as an employee. During this posting you will receive your normal salary and additional allowances for service overseas. The salary and allowances paid for the duration of your overseas posting are foreign earnings derived from your foreign service. Your foreign service is for a continuous period exceeding 91 days.

Your foreign service is of the kind specified in paragraph (d) of subsection 23AG (1AA) of the ITAA 1936, that is, your deployment as a member of a disciplined force (ADF) by an Australian government.

However, the existing conditions for exemption will continue to apply. Subsection 23AG(2) of the ITAA 1936 provides that the exemption in subsection 23AG(1) ITAA 1936 will not apply where the foreign earnings are exempt from income tax in the foreign country only because of any of the reasons listed in that subsection. One of the reasons listed in subsection 23AG (2) is where the foreign earnings are exempt from income tax in the foreign country because of a tax treaty.

Australia has a tax treaty with Country A, so it is necessary to consider whether your foreign earnings are exempt from income tax in Country A under this agreement.

Section 4 of the International Tax Agreements Act 1953 (Agreements Act) incorporates that Act with the ITAA 1936 and the ITAA 1997 so that all three Acts are read as one. The Agreements Act overrides both the ITAA 1936 and ITAA 1997 where there are inconsistent provisions (except in some limited situations).

Section 5 of the Agreements Act states that, subject to the provisions of the Agreements Act, any provision in an Agreement listed in section 5 has the force of law. The Country A Agreement is listed in section 5 of the Agreements Act.

The Country A agreement is located on the Austlii website (www.austlii.edu.au) in the Australian Treaties Series database. The Country A agreement operates to avoid the double taxation of income received by residents of Australia and Country A.

The Country A Agreement

The Agreement operates to avoid the double taxation of income received by Australian and Country A residents.

You stated that Article XX of the Country A Agreement applies to you.

Article XX of the Country A Agreement provides that remuneration paid by Australia to any individual in respect of services rendered to it (government service) shall be taxable only in Australia. However, such remuneration will be taxable only in Country A if the services are rendered in that country and the individual is a resident and citizen of Country A, or did not become a resident of Country A solely for the purpose of performing the services.

The employment income you receive in relation to your posting to Country A is taxable only in Australia under Article XX of the Country A Agreement, as the income is paid by Australia in respect of your service in the ADF (government service). This income is not subject to tax in Country A by virtue of the operation of Article XX.

Consequently, one of the reasons listed in subsection 23AG(2) of the ITAA 1936 is satisfied, as your foreign earnings are exempt from income tax in Country A because of a tax treaty.

Development Co-operation Agreement

You stated that the employment income that you derive while you are in Country A is exempt from tax in Country A because of another reason not listed in subsection 23AG (2) of the ITAA 1936. That is, because your posting falls under the auspices of the Development Co-operation Agreement. You asserted that this Agreement applies because, your posting falls within one of the categories of a program of development co-operation, as defined in Article B of the Agreement.

However, it is not considered enough that a person's activity may be consistent with the aims of the Development Co-operation Agreement for the Agreement to apply to that person.

Generally, for an individual to qualify for the exemption from income tax they must be 'Australian personnel' under f the Development Co-operation Agreement, which states:

The income tax liability of Australian firms and Australian personnel shall be borne by the Government of Country A.

To be 'Australian personnel' an individual must be part of a 'Project'. This is because a person only gets the exemptions, rights and privileges of the Development

Co-operation Agreement if they are named by the Australian Government as per clause of Annex of the Agreement, which states:

The Government of Australia shall provide the Government of Country A in a timely manner with the names of the Australian firms and the Australian personnel and their Dependants entitled to the rights, exemptions and privileges set forth in this Agreement who are engaged in a Project.

A 'Project' is defined in the Article of the Development Co-operation Agreement as a self-contained 'Activity' based on a mutually approved design and involving the provision of Australian and Country A services and supplies. An 'Activity' is defined in the Article as any discrete unit of development cooperation, which may include any one or more of the forms of a program of development co-operation described in Article I.

Activities are chosen by the coordinating authorities for implementation under the program, under the Article of the Development Co-operation Agreement. Accordingly, a person can only be covered by the Agreement if they are 'Australian personnel' of a 'Project' which is part of the program. However, we have no evidence that is the case in your situation.

You have not provided official confirmation from the ADF that your posting to Country A is covered by the Development Co-operation Agreement.

In the absence of confirmation from the ADF or evidence that your posting to Country A falls under the Development Co-operation Agreement, the employment income that you derived while you are in Country A is not considered to be exempt from tax in Country A under that Agreement.

As your employment income derived while posted to Country A is exempt from tax in Country A due to the tax treaty (the Country A Agreement) only, subsection 23AG(2) of the ITAA 1936 applies to deny the exemption from tax on your overseas employment income.

Accordingly, your salary and allowances earned while posted to Country A are not exempt from tax in Australia under subsection 23AG(1) of the ITAA 1936 and are assessable income under subsection 6-5(2) of the ITAA 1997.

Note

We are not in a position to comment on previous successful private rulings for others who have identical circumstances as yours due to privacy considerations.

Private rulings are based on the facts detailed in the ruling. If those facts are materially incorrect (for example, development treaty does not apply) then the ruling cannot be relied upon.

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