Edited version of private ruling

Authorisation Number: 1011506027300

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Ruling

Subject: Foreign employment income from Country X

1. Are the salary and overseas allowances you earn in Country X exempt from income tax in Australia under section 23AG of the Income Tax Assessment Act 1936 (ITAA 1936)?

Yes.

2. Is the transfer allowance you receive in relation to your deployment to Country X exempt from income tax in Australia under section 23AG of the ITAA 1936?

No.

This ruling applies for the following periods:

Year ending 30 June 2010

Year ending 30 June 2011

Year ending 30 June 2012

Year ending 30 June 2013

The scheme commences on:

1 June 2010

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You are an Australian resident for income tax purposes.

You are deployed on an aid project to Country X for a period of not less than 91 days.

You are an employee of an aid organisation.

Your deployment is directly attributable to the delivery of Australian official development assistance by the aid organisation.

In addition to your salary you receive a transfer allowance and overseas allowances.

The transfer allowance is paid prior to deployment. This allowance is paid to cover costs associated with preparing for departure.

The overseas allowances are paid to cover various costs and hardship incurred while working in Country X.

You will only take recreation leave that is accrued during your service in Country X.

You will not be performing any work-related duties during breaks taken in Australia.

You state that your income is not exempt from taxation in Country X for any of the reasons mentioned in subsection 23AG(2) of the ITAA 1936.

Country X taxes employment income under its domestic law.

There is no tax treaty between Australia and Country X.

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)

Income Tax Assessment Act 1936 Subsection 23AG(6)

Income Tax Assessment Act 1936 Subsection 23AG(7)

Reasons for decision

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.

Foreign earnings includes income consisting of salary, wages, bonuses or allowances (subsection 23AG(7) of the ITAA 1936).

To qualify for the 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. The important test is that the foreign earnings, when derived, need to be derived as result of the undertaking of that foreign service.

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 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, or

· an activity of a kind specified in the regulations.

In your case, you have been appointed to undertake a deployment to Country X on an aid project.

As your deployment is directly attributable to the delivery of Australian official development assistance by an aid organisation, you satisfy one of the conditions for exemption under subsection 23AG(1AA) of the ITAA 1936.

In addition to your salary, you receive a transfer allowance and overseas allowances.

Transfer allowance

The transfer allowance is paid to cover costs associated with preparing for departure. This allowance is not paid to cover costs arising from the performance of your foreign service. It is paid to cover costs arising prior to the foreign service. Therefore, this allowance is not considered to be derived from your foreign service.

Accordingly, the transfer allowance is not exempt from income tax in Australia under subsection 23AG(1) of the ITAA 1936 as it is not derived from your foreign service.

Salary and overseas allowances

As you receive a salary from your foreign employment, this salary is considered to be derived from your foreign service.

The overseas allowances are designed to cover various costs and hardship of the foreign service. As they are paid to compensate for costs arising from the foreign service and for the hardship attributable to the foreign service, they are considered to be derived from your foreign service.

Therefore, your salary and overseas allowances are foreign earnings from foreign service for the purposes of subsection 23AG(1) of the ITAA 1936.

Subsection 23AG(2) of the ITAA 1936 provides that the exemption in subsection 23AG(1) of the ITAA 1936 will not apply where the income is exempt from income tax in the foreign country only because of any of the reasons listed in that subsection.

One of the reasons listed is where the income is exempt in the foreign country because of a tax treaty (paragraphs 23AG(2)(a) and 23AG(2)(b) of the ITAA 1936).

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

As the laws of Country X provide for the imposition of income tax and do not generally exempt employment income from income tax, paragraphs 23AG(2)(c) and (d) of the ITAA 1936 will not apply.

None of the other reasons in subsection 23AG(2) of the ITAA 1936 apply to your situation.

In your case, you are engaged in employment overseas for a continuous period of not less than 91 days, and none of the reasons listed in subsection 23AG(2) of the ITAA 1936 apply in your situation.

Consequently, the salary and overseas allowances you earn during your deployment to Country X are exempt from income tax in Australia under subsection 23AG(1) of the ITAA 1936.

Note

Foreign earnings exempt under section 23AG of the ITAA 1936 are taken into account in calculating the tax payable on other income derived by a taxpayer. This method of calculation, referred to as exemption with progression, prevents the exempt income from reducing the Australian tax payable on the other income. This income needs to be included as exempt foreign employment income in your Australian tax return.