Edited version of your written advice

Authorisation Number: 1012747205396

Ruling

Subject: International issues ~ Foreign income ~ Salary and wages ~ Section 23AG issues

Question and Answer

1. Is the salary you receive from employment in Country-X exempt from income tax in Australia under section 23AG of the Income Assessment Act 1936 (ITAA 1936)?

Yes

2. Are the overseas allowances you receive in relation to your employment in Country-X exempt from income tax in Australia under section 23AG of the ITAA 1936?

Yes.

This ruling applies for the following period

1 January 2015 to 31 December 2015

The scheme commences on

01 January 2015

Relevant facts and circumstances

You are an Australian resident for income tax purposes.

You were appointed to a position.

You are an Australian Public Service (APS) employee.

You will be based full time in Country-X where you will work on a program.

The program is part of Australia's official development assistance (ODA) to Country-X and is reportable as such to the Organisation for Economic Development and Co-Operation (OECD).

You will not take any leave other than your recreation leave that accrues during your employment in Indonesia.

In addition to your salary you will receive allowances because of your employment on the project:

Relevant legislative provisions

Section 6-5 of the Income Tax Assessment Act 1997

Section 6-15 of the Income Tax Assessment Act 1997

Section 11-5 of the Income Tax Assessment Act 1997

Section 23AG of the Income Tax Assessment Act 1936

Reasons for decision

Assessable income - general

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 ITAA 1936, which deals with exempt foreign employment income.

Exempt foreign employment income - section 23AG of the ITAA 1936

The basic tests that must be met for the exemption from taxation on foreign employment income under section 23AG of the ITAA 1936 to apply to an individual taxpayer are:

• the taxpayer must be a 'resident of Australia',

• the taxpayer must be 'engaged in foreign service',

• the foreign service must be for a 'continuous period of not less than 91 days',

• the taxpayer must derive 'foreign earnings' from that 'foreign service',

• the foreign service must be directly attributable to an activity that is listed in subsection 23AG(1AA), and

• the foreign earnings must not be covered by subsection 23AG(2).

Resident of Australia for taxation purposes

You have stated you are a resident of Australia for taxation purposes.

Engaged in foreign service

In subsection 23AG(7) of the ITAA 1936:

• 'Foreign service' is defined as 'service in a foreign country as the holder of an office or in the capacity of an employee', and

• 'Employee' is defined to include 'a person employed by a government or an authority of a government or by an international organisation'.

Considering the above and the facts of your case, we accept that you will be engaged in foreign service during the period you are employed on the program.

Continuous period of not less than 91 days (including certain temporary absences that form part of a period of foreign service)

Subsection 23AG(6) of the ITAA 1936 treats certain temporary absences from foreign service as forming part of the period of foreign service. The Commissioner's view on the application of that subsection is reflected in Taxation Determination TD 2012/8 Income tax: what types of temporary absences from foreign service form part of a continuous period of foreign service under section 23AG of the Income Tax Assessment Act 1936?

Absences which are accepted as continuing to form part of the period of foreign service include absences taken in accordance with the terms and conditions of employment because of either accident, illness, or recreation leave.

In the case of accident or illness, there is no limit to the amount of absence that can be treated as part of a period of foreign service under paragraph 23AG(6)(b) of the ITAA 1936, providing the leave is taken during the scheduled period of foreign service and is allowed under the terms and conditions of the foreign service.

In the case of recreation leave, any leave taken during a period of foreign service must be leave that accrued during the period of foreign service to be treated part of the period of foreign service under paragraph 23AG(6)(a) of the ITAA 1936.

Recreation leave does not include:

• leave that is not in the nature of paid holidays, such as weekends, public holidays, rostered days off, days off due to part time arrangements, flex-days, 'compulsory lay-off/over days', 'grounded days' and days off in lieu',

• purchased leave,

• maternity and parental leave,

• leave wholly or partly attributable to a period of service or employment other than the foreign service (that is, leave which is accrued prior to the period of foreign service),

• long service leave, furlough, extended leave or leave of a similar kind (however described), or

• leave without pay or on reduced pay.

You have stated you will only take recreation leave that is accrued during that time. Provided that is the case, you will be considered to have been engaged in a continuous period of foreign service of not less than 91 days for the purposes of section 23AG of the ITAA 1936.

Foreign earnings derived from foreign service

Foreign earnings are defined in subsection 23AG(7) of the ITAA 1936 to include salary and allowances. However, to qualify for the exemption under section 23AG of the ITAA 1936, the 'foreign earnings' must be derived 'from that foreign service'. That is, any salary and allowances you are paid must not relate to a period before or after the period of foreign service for the exemption under section 23AG of the ITAA 1936 to apply.

The salary cost of posting and hardship allowances you will receive are all considered to be foreign earnings derived from the foreign service your employment on the program relates to and will be exempt from taxation in Australia provided the other requirements of section 23AG of the ITAA 1936 are met.

Specific employment activities

Foreign earnings are not be exempt under section 23AG of the ITAA 1936 unless the continuous period of foreign service is directly attributable to at least one of several activities specified in subsection 23AG(1AA) of the ITAA 1936. One of the these is the delivery of Australian official development assistance (ODA) by your employer.

The exemption under section 23AG of the ITAA 1936 is available to APS employees who are providing assistance that is classified as Australian ODA and is delivered through the Australian Government's aid program.

You are an APS employee working in Country-X on a program that forms part of Australia's ODA. As such, the exemption under section 23AG of the ITAA 1936 can apply to your foreign earnings from that employment, provided the other requirements of section 23AG of the ITAA 1936 are met.

Certain foreign earnings not exempt - subsection 23AG(2) of the ITAA 1936

Even if the preceding requirements for the exemption under section 23AG to apply to your foreign earnings are met, the exemption will not apply if your foreign earnings are exempt from tax in Indonesia solely because of any of the following reasons:

• a double tax agreement or a law of a country that gives effect to such an agreement (paragraphs 23AG(2)(a) and (b)),

• a law of that foreign country which 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 (paragraphs 23AG(2)(c) and (d)), and

• a law or international agreement dealing with diplomatic or consular privileges and immunities, or privileges and immunities of persons connected with international organisations (paragraphs 23AG(2)(e), (f) and (g)).

Australia has a double tax agreement with Country-X (the double tax agreement) which operates to avoid the double taxation of income received by residents of Australia and Country-X.

Under the provisions of Article 19(1) of Australia's double tax agreement with Country-X, the foreign earnings you will receive because of your employment on the program in Country-X are only taxable in Australia because you are an Australian resident and the income is paid by Australia in respect of services rendered in the discharge of governmental functions. Accordingly, paragraph 23AG(2)(b) of the ITAA 1936 would normally apply to deny you an exemption from taxation on your foreign earnings. However, your foreign earnings are specifically exempted from taxation in Country-X under the terms a General Agreement.

Because of the operation of the General Agreement, your foreign earnings are not exempt from taxation in Country-X solely because of the operation of a double tax agreement

Furthermore, the exemption provided by the General Agreement does not fall under any of the remaining exemption categories listed under subsection 23AG(2) of the ITAA 1936.

Considering the above, subsection 23AG(2) of the ITAA 1936 will not apply to deny you the exemption from taxation that is available under section 23AG of the ITAA 1936.

Conclusion

Based on the facts you have provided, the salary, cost of living and hardship allowances you will receive because of your employment on the project in Country-X will be exempt from taxation in Australia under the provisions of section 23AG of the ITAA 1936.

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).