Edited version of private advice

Authorisation Number: 1051838437981

Date of advice: 18 May 2021

Ruling

Subject: Section 23AG

Question

Are the salary and allowances you earned from your employment in Country A exempt from income tax in Australia under section 23AG of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You are an Australian resident for tax purposes and a member of a disciplined force.

You were deployed to the Country A Academy as an instructor representing Australia.

You attended a school in late 20XX. Lessons at this school were conducted by local staff.

Immediately after completing this course you were posted to the academy.

You were working in Country A for a period greater than 91 days.

You did not remain in Country A following your period of Foreign Service.

Your employer has advised you that the service was not eligible for 23AG exemption.

In addition to your salary, you received various allowances as part of your posting.

You were directed to perform duties overseas in your capacity as a member of a disciplined force.

You were not providing official development assistance on behalf of Australia.

Your employer withheld tax from the salary and allowances you received while posted to Country A.

You did not travel on a diplomatic passport and are not eligible for diplomatic privileges.

Country A imposes income tax on income derived from employment under its domestic law. However, you did not pay income tax there.

Australia has a double tax agreement with Country A, Agreement between the Government of Australia and the Government of Country A for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income.

Australia has a treaty with Country A in respect of development cooperation, the Agreement.

Your employer has stated that activities in Country A are not within the scope of the Agreement.

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)

International Tax Agreements Act 1953

Reasons for decision

Assessable income - general

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(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 person's employer;

•         the activities of the person'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 person'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 person's deployment outside Australia as a member of a disciplined force by the Commonwealth, a State or a Territory (or an authority thereof); or

•         an activity of a kind specified in the regulations.

In your case, you satisfy one of the conditions for exemption under subsection 23AG (1AA) of the ITAA 1936 as you have been deployed as a member of a disciplined force.

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

•         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)).

You did not pay tax in Country A due to Article X of Australia's double tax agreement (DTA) which is given the force of law under the International Tax Agreements Act 1953.

In carrying out your employment duties, you are remunerated by the Australian government in respect of services rendered to it. Therefore, the income you derive is only subject to tax in Australia and the income is exempt from tax in Country A according to the operation of Article X. This is a reason listed in subsection 23AG(2) of the ITAA 1936.

As your income is exempt from tax in Country A because of a reason listed in subsection 23AG(2) of the ITAA 1936, your employment income will only be exempt from tax in Australia if the income is exempt from tax in Country A for a reason other than, or in addition to, that reason.

Your remuneration could be exempt from tax in Country A because of the Agreement. However, your force has stated that activities in Country A are not within the scope of the Agreement.

Therefore, the salary and allowances you receive are not exempt from tax in Australia under subsection 23AG(1) of the ITAA 1936 because the income is exempt from income tax in Country A onlybecause of one of the conditions listed in subsection 23AG(2) of the ITAA 1936.

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