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Edited version of your written advice

Authorisation Number: 1012689600966

Ruling

Subject: Assessability of allowance derived during a period of foreign service.

Question

Is a specific allowance received by member of a disciplined force while serving in an overseas location assessable income under subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

This ruling applies for the following period

Year ended 30 June 2012

Year ended 30 June 2013

Year ended 30 June 2014

Year ended 30 June 2015

The scheme commenced on

1 July 2011

Relevant facts and circumstances

Your 2012, 2013 and 2014 PAYG payment summaries show your specific allowance as being assessable Australian income.

You are an Australian resident serving in an overseas location as a member of a disciplined force.

The foreign service is directly attributable to an activity that is listed in subsection 23AG(1AA) of the Income Tax Assessment Act 1936 (ITAA 1936).

For these three years you earning exempt foreign income under section 23AG of the Income Tax Assessment Act 1936 (ITAA 1936).

There is a memorandum of understanding between the Governments of Australia and country X that exempts Australian salary and allowances from any form of taxation or other fiscal charges in country X.

Your employer contends that whilst your salary is exempt under section 23AG of the ITAA 1936, the uniform maintenance allowance is still classed as assessable.

There is an agreement between Australia and the overseas country that exempts the income from taxation in the overseas 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 Subsection 23AG(2)

Income Tax Assessment Act 1936 Paragraph 23AG(2)(b)

Income Tax Assessment Act 1936 Subsection 23AG(7)

Agreement between Australia and the Country X for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income [1989 No. 37] Article 15; Article 19

Reasons for decision

Subsection 23AG of the Income Tax Assessment Act 1936 (ITAA 1936) provides that foreign earnings are exempt from income tax where all of the following requirements are satisfied:

In addition to your salary, you receive a specific allowance, which is designed to cover specific costs incurred during your foreign service. The allowance is being paid to you while serving in an overseas location and is therefore derived during foreign service.

However, subsection 23AG(2) of the ITAA 1936 provides that the exemption in subsection 23AG(1) of the ITAA 1936 will not apply where the income is exempt from income tax in the foreign country because of any of the conditions listed in this section. One of the reasons listed is where the income earned by the resident in the foreign country is made exempt by the operation of a tax treaty (paragraph 23AG(2)(b) of the ITAA 1936).

It is therefore necessary to consider not only the income tax laws but also any applicable double tax agreements. The agreement between Australia and Country X (the Agreement) is located on the Austlii website (www.austlii.edu.au) in the Australian Treaties Series database. The Agreement operates to avoid the double taxation of income received by residents of Australia and Country X.

An Article of the Agreement advises that salaries, wages and other similar remuneration derived by a resident of Australia shall be taxable only in Australia unless the employment is exercised in Country X. If the employment is exercised in Country X then the income may also be taxed in Country X.

Another 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, your specific allowance derived whilst serving in Country X is exempt from tax in Country X in accordance with the provisions of an Agreement and which grants exemption from income taxes or other taxes on salaries and allowances.

As a result, the allowance will not be exempt from tax in Country X solely because of any of the reasons listed in subsection 23AG(2) of the ITAA 1936. Therefore, subsection 23AG(2) of the ITAA 1936 will not operate to deny the foreign earnings exemption under subsection 23AG(1) of the ITAA 1936. 

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 wages income in your Australian tax return.

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