Edited version of private ruling

Authorisation Number: 1011508723972

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Ruling

Subject: Foreign income - salary & wages

Are the salary and allowance you receive while deployed to country X exempt from income tax in Australia under section 23AG of the Income Tax Assessment Act 1936 (ITAA 1936)?

Yes.

This ruling applies for the following periods:

Year ending 30 June 2011

Year ending 30 June 2012

The scheme commences on:

1 July 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 an employee of the Australian government agency.

You were deployed to work in country X for periods of not less than 91 days.

In addition to your salary, you receive overseas allowance paid to cover various costs and hardship incurred while working country X.

You did not perform diplomatic or consular duties.

You intend to take annual leave that accrued during your posting.

The laws of country X provide for the imposition of income tax and do not generally exempt employment income from income tax.

There is no tax treaty between Australia and country X.

Your deployment to country X as a member of a disciplined force of Australia is under the authority of the Australian government agency.

Relevant legislative provisions

Income Tax Assessment Act 1936 Subsection 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(2)(a)

Income Tax Assessment Act 1936 Subsection 23AG(2)(b)

Income Tax Assessment Act 1936 Subsection 23AG(2)(c)

Income Tax Assessment Act 1936 Subsection 23AG(2)(d)

Income Tax Assessment Act 1936 Subsection 23AG(6)

Income Tax Assessment Act 1936 Subsection 23AG(6)(b)

Reasons for decision

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our 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 tax in Australia. Foreign earnings include salary, wages, bonuses or allowances (subsection 23AG(7) of the ITAA 1936).

The foreign earnings must be derived from the foreign service, though not necessarily derived during the period of 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 1 July 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 (generally provided by AusAID or the Department of Foreign Affairs and Trade)

· 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.

As you are a government employee deployed overseas as a member of a disciplined force, you satisfy one of the conditions for exemption under subsection 23AG(1AA) of the ITAA 1936.

Under subsection 23AG(6) of the ITAA 1936 certain temporary absences form part of a period of foreign service, such as recreation leave which is accrued as a result of the foreign service, other than long service leave and leave without pay.

In your case, your leave accrued during your service in country X. This leave will form part of your foreign service, and accordingly the payments for the leave will qualify as foreign earnings.

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

In addition to your salary, you will receive an overseas allowance. The overseas allowances are designed to cover various costs and hardship of the foreign service.

As they will be 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 allowance 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 no exemption is available under subsection 23AG(1) of the ITAA 1936 in circumstances where an amount of foreign earnings derived from service in a foreign country is exempt from tax in the foreign country solely because of:

· a tax treaty or a law of a country that gives effect to such an agreement (paragraphs 23AG(2)(a) and (b) of the ITAA 1936)

· the law of a foreign country 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) of the ITAA 1936), or

· a law or international agreement dealing with privileges and immunities of diplomats or consuls or of persons connected with international organisations applies (paragraphs 23AG(2)(e), (f) and (g) of the ITAA 1936).

There is no tax treaty between Australia and country X. Therefore, subsection 23AG(2) of the ITAA 1936 will not apply to deny the exemption under subsection 23AG(1) of the ITAA 1936.

In your case, you are an Australian resident for taxation purposes and are engaged in foreign service for a continuous period of not less than 91 days.

Accordingly, the salary and overseas allowance you receive during your service in country X are exempt from income tax in Australia under subsection 23AG(1) of the ITAA 1936.

Note

It is important to note that 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 salary and wage income in your Australian tax return.