Edited version of private advice

Authorisation Number: 1051829958017

Date of advice: 21 April 2021

Ruling

Subject: Foreign income

Question

Are the foreign earnings from foreign service whilst working on a project in Country A exempt from income tax under section 23AG of the Income Tax Assessment Act 1936?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 20xx

Year ended 30 June 20xx

The scheme commences on:

1 July 20xx

Relevant facts and circumstances

You are a resident of Australia for income tax purposes.

You are employed by an Australian organisation (the organisation).

The organisation is a Public Benevolent Institution and a humanitarian aid agency funded by the Australian Government under a Department of Foreign Affairs and Trade (DFAT) Agreement to provide Australian official development assistance to assist countries in disaster risk management for the implementation of a specific program (the program).

You worked in Country A for a continuous period of approximately X months, being employed by the organisation under the DFAT agreement for the implementation of the program to provide expertise to a National Office in Country A as an expert in your vocation for development and public safety.

Two breaks were taken over the work assignment, both as approved recreation leave accrued as part of the foreign service contract as follows:

•         A couple of days in early 20xx (in Australia for family reasons); and

•         A couple of days in mid-20xx (in Australia for local elections).

No work duties were undertaken during these breaks and your accumulated recreation leave extended to just after mid-20xx.

You did not remain in Country A beyond your contracted service obligation.

There is no tax treaty between Australia and Country A.

In Country A, if you are an employee, your income is employment income and is therefore liable to tax.

The Memorandum of Understanding between the Government of Australia and the Government of Country A on Development Cooperation (the MOU) expresses the understandings of the Government of Australia and the Government of Country A ("the parties") concerning the respective responsibilities and contributions of the Parties in regard to development cooperation.

Specific clauses of the MOU permit subsidiary arrangements to be made in writing for the purpose of carrying out specific activities, and wherever possible the subsidiary arrangements will set out specific details in relation to each development activity.

A specific clause of the Subsidiary Arrangement between the Government of Australia and the Government of Country A relating to the Program (the Subsidiary Arrangement)provides that the terms of the abovementioned MOU apply to the Subsidiary Arrangement.

Your income was exempt from taxation in Country A under a specific clause of the MOU.

A specific clause of the Subsidiary Arrangement also provides that your income was exempt from taxation in Country A.

You have supplied written confirmation from the organisation that your overseas work assignment was facilitated by the Subsidiary Arrangement.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 6-5(2)

Income Tax Assessment Act 1997 Subsection 6-15(2)

Income Tax Assessment Act 1997 Section 11-15

Income Tax Assessment Act 1936 Section 23AG

Reasons for decision

Summary

The foreign earnings you earned from foreign service whilst working in Country A are exempt from income tax under section 23AG of the ITAA 1936.

Detailed reasoning

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 purposes 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 assessable income.

Section 11-15 of the ITAA 1997 lists those provisions dealing with income which may be exempt. Included in this list is section 23AG of the Income Tax Assessment Act 1936 (ITAA 1936) which deals with exempt foreign employment income.

Exempt income under section 23AG of the Income Tax Assessment Act 1936

Subsection 23AG(1) of the 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.

Subsection 23AG (7) of the ITAA 1936 determines foreign earnings as income consisting of salary, wages, bonuses or allowances.

To qualify for the tax exemption the foreign earnings must be derived from the Foreign Service. That does not mean that the foreign earnings need to be derived at the time of engaging in Foreign Service however, they must be derived as a result of undertaking Foreign Service.

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 Australian Official Development Assistance by the taxpayer's employer;

•         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;

•         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;

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

•         an activity of a kind specified in the regulations.

Your work assignment is directly attributable to the delivery of Australian ODA to Country A by the organisation. Therefore you satisfy one of the conditions for exemption under subsection 23AG (1AA) of the ITAA 1936.

Continuous foreign service

For the exemption from Australian tax to apply, your foreign service must be for a continuous period of 91 days or more.

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 temporary absences is discussed 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?

Some temporary absences during a period of foreign service still count as foreign service and will not affect the continuity of the service. For example, recreation leave that wholly relates to the current period of foreign service, leave for accident or illness and compassionate leave.

During the period of your deployment to Country A you took a approximately one week of recreational leave which was accrued as part of your foreign service.

As such you satisfy the 91 days continuous foreign service, and the salary you receive is derived from your foreign work assignment and is foreign earnings from foreign service for the purposes of subsection 23AG (1) of the ITAA 1936.

However, subsection 23AG(2) of the ITAA 1936, prevents the exemption under subsection 23AG(1) of the ITAA 1936 where the income is exempt from income tax in the foreign country only because of one or more of the following conditions:

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

•         the foreign country exempts from income tax, or does not provide for the imposition of income tax on, income derived in the capacity of an employee, income from personal services or similar income (paragraphs 23AG(2)(c) and (d)); or

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

There is no tax treaty between Australia and Country A. Therefore, paragraphs 23AG (2)(a) and 23AG(2)(b) of the ITAA 1936 will not apply.

In Country A, if you are an employee, your income is employment income and is therefore liable to tax.

The Memorandum of Understanding between the Government of Australia and the Government of Country A on Development Cooperation (the MOU) expresses the understandings of the Government of Australia and the Government of Country A ("the parties") concerning the respective responsibilities and contributions of the Parties in regard to development cooperation.

Specific clauses of the MOU permit subsidiary arrangements to be made in writing for the purpose of carrying out specific activities, and wherever possible the subsidiary arrangements will set out specific details in relation to each development activity.

A specific clause of the Subsidiary Arrangement between the Government of Australia and the Government of Tonga relating to the Australia Assists Program (the Subsidiary Arrangement)provides that the terms of the abovementioned MOU apply to the Subsidiary Arrangement.

Your income was exempt from taxation in Country A under a specific clause of the MOU.

A specific clause of the Subsidiary Arrangement also provides that the income was exempt from taxation in Country A.

Further, you have supplied written confirmation from the organisation that your overseas work assignment was facilitated by the Subsidiary Arrangement.

Therefore, as your foreign income exempt from income tax in Country A for a reason other than those listed in subsection 23AG(2) of the ITAA 1936, that subsection will not apply to deny an exemption under subsection 23AG(1) of the ITAA 1936.

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