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Edited version of your written advice
Authorisation Number: 1013097040293
Date of advice: 26 September 2016
Ruling
Subject: Exemption from income tax
Questions and answers
1. Is your foreign employment income you derived from working in Country X exempt income in Australia under section 23AG of the Income Tax Assessment Act 1936 (ITAA 1936) until 30 June 20YY?
Yes
2. Is your foreign employment income you derive from working in Country X exempt income in Australia under section 23AG of the ITAA 1936 from 1 July 20YY?
No
This ruling applies for the following periods:
Year ending 30 June 20YY
Year ending 30 June 20ZZ
The scheme commenced on:
1 July 20WW
Relevant facts and circumstances
You are an Australian resident for taxation purposes.
You are employed by an organisation in Country X as a manager. Your employer is an Australian government agency.
You commenced your employment in the 20XX-YY income year. The duration of your employment is at least two years.
You state that your foreign service is directly attributable to the delivery of Australian official development assistance by your employer.
There is a Memorandum of Understanding between Australia and Country X which exempts Australian personnel from income tax on salary and wages derived in Country X.
Relevant legislative provisions
Income Tax Assessment Act 1936 Section 23AG
Tax and Superannuation Laws Amendment (2015 Measures No. 4) Act 2015
Reasons for decision
If you are an Australian resident for tax purposes, you pay tax in Australia on your employment income, such as salary, wages, commissions, bonuses and allowances earned from foreign service - unless it is exempt from Australian tax.
From 1 July 2009, there is a limited exemption from income tax for foreign employment income from particular types of foreign service.
Year ended 30 June 20YY
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.
Subsection 23AG(1AA) of the ITAA 1936, which took effect from 1 July 2009, provides that those foreign earnings will not be exempt under section 23AG of the ITAA 1936 unless the continuous period of foreign service is directly attributable to any of the following:
• delivery of Australian official development assistance by your employer;
• activities of your employer in operating a public fund declared by the Treasurer to be a developing country relief fund, or a public fund established and maintained to provide monetary relief to people in a developing foreign country that has experienced a disaster (a public disaster relief fund);
• activities of your employer as a prescribed charitable or religious institution exempt from Australian income tax because it is located outside Australia or the institution is pursuing objectives outside Australia; or
• deployment outside Australia by an Australian government (or an authority thereof) as a member of a disciplined force.
You are employed by a government agency and work in Country X. You are engaged in delivering Australian official development assistance (ODA) by your employer. You thus satisfy one of the conditions for exemption under subsection 23AG(1AA) of the ITAA 1936.
Non-exemption conditions
Subsection 23AG(2) of the ITAA 1936 provides that no exemption is available in circumstances where an amount of foreign earnings derived in a foreign country is exempt from tax in the foreign country solely because of:
• 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)).
If your foreign employment income is exempt for a reason other than, or in addition to, the conditions listed above, then it will still be exempt from taxation in Australia.
For example, your foreign employment income may not be taxed in the foreign country you are working in because there is a Memorandum of Understanding (MOU) or similar agreement between Australia and the foreign country which provides for Australians to assist that country without the foreign country taxing the employment income.
There is a MOU between Australia and Country X which exempts Australian personnel from income tax on salary and wages derived in Country X. Therefore, subsection 23AG(2) of the ITAA 1936 will not apply to deny exemption under subsection 23AG(1) of the ITAA 1936.
Accordingly, the salary you received until 30 June 20YY from your employment in Country X is exempt from tax in Australia.
Year ended 30 June 20ZZ
Chapter 2 of the Explanatory Memorandum to the Tax and Superannuation Laws Amendment (2015 Measures No.4) Bill 2015 (the EM) provides that from the 20YY-ZZ income year and later income years, employees of an Australian government agency who are undertaking ODA in overseas employment for a period not less than 91 days are no longer exempt from income tax in Australia.
As such, from 1 July 2016, employees of an Australian government agency who earn foreign income while delivering Australian official development assistance will not be eligible for exemption from Australian income tax on their foreign employment income.
An 'Australian government agency' means:
(a) the Commonwealth, a State or a Territory; or
(b) an authority of the Commonwealth or of a State or a Territory.
Your employer is an Australian government agency. Therefore from 1 July 2016, your salary is not eligible to be exempt from Australian income tax.
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