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Edited version of your written advice
Authorisation Number: 1012737024869
Ruling
Subject: Foreign source income - 23AG
Question
Are the salary and allowances you earned while employed overseas exempt from income tax in Australia?
Answer
No
This ruling applies for the following period
Year ending 30 June 2014
The scheme commences on
1 July 2013
Relevant facts and circumstances
You are an Australian resident for income tax purposes.
You were deployed in an overseas country for a reason listed in section 23AG(1AA) of the Income Tax Assessment Act 1936 (ITAA 1936).
You were engaged in foreign employment for more than 91 continuous days.
There is an Agreement between Australia and the overseas country that exempts the income from taxation in the overseas country.
There is a tax treaty between Australia and country X.
There is an Agreement (Treaty) between the Government of Australia and the Government of country X concerning the Status of Forces.
There is an Agreement between the Government of Australia and the Government of country X concerning the Status of Forces.
Section 11 deals with personal taxation, and states:
1. Other than for taxes and duties for which provision is made under this Agreement, the liability for taxes or duties of members of a Visiting Force, the civilian component and dependants shall be governed by any agreement between the Parties in relation to such taxes or duties that has been implemented from time to time under the law of both countries.
2. Without prejudice to paragraph (1), the Parties acknowledge the applicability of the Agreement between the Government of Australia and the Government of country X for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income, done at Canberra on 20 August 1980.
Article 14(13) of Annex 2 of the Five Powers Defence Arrangements: Exchange of notes constituting an agreement between the Government of Australia and the Government of country X regarding External Defence states
The Government of country X shall exempt from tax the official emoluments paid from Australian Government funds to members of an Australian force or civilian component whilst in country X, in respect of their offices under the Government of Australia, if such emoluments are subject to an income tax in Australia, provided that nothing herein contained shall prejudice any claims for exemption or relief from taxation under arrangements between the two Governments for the avoidance of double taxation
Relevant legislative provisions
Income Tax Assessment Act 1936 section 23AG
International Tax Agreements Act 1953
Reasons for decision
Subsection 23AG(1) of the Income Tax Assessment Act 1936 (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 income tax in Australia.
Foreign earnings includes income consisting of salary, wages, bonuses or allowances (subsection 23AG(7) of the ITAA 1936).
Section 23AG of the ITAA 1936 has been amended so that foreign employment income derived by Australian residents will only be exempt in certain circumstances. These amendments are effective from 29 June 2009.
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.
The exemption from income tax in Australia does not apply 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.
In determining your liability to pay tax in Australia it is necessary to consider not only the domestic income tax laws but also any applicable double tax agreements.
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 X Agreement is listed in section 5 of the Agreements Act.
The country X Agreement is located on the Austlii website (www.austlii.edu.au) in the Australian Treaties Series database. The country X Agreement operates to avoid the double taxation of income received by residents of Australia and country X.
Article 18(1) of the country X Agreement provides that remuneration paid by Australia to an individual in respect of services rendered in the discharge of governmental functions shall be taxable only in Australia. However, such remuneration shall be taxable only in country X if the services are rendered in country X and the recipient is a resident of country X who:
(a) is a citizen or national of country X; or
(b) did not become a resident of country X solely for the purpose of performing the services.
You do not satisfy either of those conditions. Consequently, Australia retains the sole taxing right to your salary and allowances and the income is exempt from tax in country X.
Paragraph 23AG(2)(b) of the ITAA 1936 provides that where income is exempt in a foreign country solely as a result of the operation of a tax treaty, the income will not be exempt in Australia under subsection 23AG(1). Your salary and allowances are exempt in country X because of Article 18(1) of the country X Agreement.
Therefore, if the country X Agreement is the only reason that your income is exempt in country X, your salary and allowances will not be exempt from income tax in Australia under subsection 23AG(1) if the ITAA 1936.
There is an Agreement between the Government of Australia and the Government of country X concerning the Status of Forces (Australian Treaty Series 1999).
Section 11 deals with personal taxation, and states:
1. Other than for taxes and duties for which provision is made under this Agreement, the liability for taxes or duties of members of a Visiting Force, the civilian component and dependants shall be governed by any agreement between the Parties in relation to such taxes or duties that has been implemented from time to time under the law of both countries.
2. Without prejudice to paragraph (1), the Parties acknowledge the applicability of the Agreement between the Government of Australia and the Government of country X for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income, done at Canberra on 20 August 1980.
This section merely indicates that the Status of Forces Treaty will refer to the country X Agreement to determine which country has the taxing right on the income received by ADF personnel and does not provide for any exemptions.
Furthermore, Article 14(13) of Annex 2 of the Five Powers Defence Arrangements: Exchange of notes constituting an agreement between the Government of Australia and the Government of country X regarding External Defence states
The Government of country X shall exempt from tax the official emoluments paid from Australian Government funds to members of an Australian force or civilian component whilst in country X, in respect of their offices under the Government of Australia, if such emoluments are subject to an income tax in Australia, provided that nothing herein contained shall prejudice any claims for exemption or relief from taxation under arrangements between the two Governments for the avoidance of double taxation.
Consequently, as your income is exempt in country X solely because of the country X Agreement, your salary and allowances will not be exempt from income tax in Australia under subsection 23AG(1) of the ITAA 1936.
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