Edited version of private ruling

Authorisation Number: 1011596824162

This edited version of your ruling will be published in the public Register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns.

Ruling

Subject: Foreign employment income

Are your salary and allowances earned while posted to Country X for full-time study exempt from tax in Australia?

No.

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 a commonwealth employee.

You have been posted to Country X for a continuous period of not less than 91 days.

Your posting is for you to attend educational institutions in Country X for the purpose of full-time study.

During your time in Country X, you have no other official duties other than attending educational institutions.

Leave taken during the posting will be limited to that accrued during the posting and will be taken within Country X.

You were not a member of the Australia Embassy in Country X and travelled on an official passport and not on a diplomatic passport.

You did not receive diplomatic privileges.

During your period in Country X, you continued to receive your normal salary and associated allowances, as well as additional allowances for service overseas.

A few allowances are paid to cover the costs for the duration of your posting in Country X.

Australia has a tax treaty with Country X.

Country X has a tax system that taxes employment income.

You stated that your earnings and allowances were exempt from income tax in Country X under the auspices of the Agreement between the Government of Australia and the Government of the Republic of Country X (the agreement).

You stated that your posting meet the stated aims of the projects under the agreement as one of the articles states that the encouragement and promotion of relations between firms, organisations and institutions and persons of the two countries.

Another article states that the income tax liability of Australian firms and Australian personnel shall be borne by the Government of Country X.

Other Articles and terms of the agreement form part of the arrangement of this ruling.

You were asked to provide a letter of confirmation from your employer that the agreement applies to your deployment.

In response to this request you provided a letter from your employer which did not make any reference to this Agreement or support it.

Relevant legislative provisions

Income Tax Assessment Act 1936 Subsection 23AG(1).

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

Income Tax Assessment Act 1936 Paragraph 23AG(1AA)(d)

Income Tax Assessment Act 1936 Paragraph 23AG(2)(b).

Income Tax Assessment Act 1936 Subsection 23AG(7).

International Tax Agreements Act 1953

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 Income Tax Assessment Act 1936 (ITAA 1936) provides that foreign earnings derived by an Australian resident individual engaged in continuous foreign service for not less than 91 days employment in a foreign country are exempt from tax in Australia.

Paragraph 23AG(1AA)(d) of the ITAA 1936 provides that such earnings are only exempt from income tax if the foreign service is directly attributable to that person's deployment outside Australia as a member of a disciplined force by an Australian government, or an authority thereof.

A disciplined force is intended to refer to a defence force, including a peacekeeping force, and a police force. In a defence force context, the exemption would apply to a person's deployment outside Australia as part of a non-warlike operation.

'Foreign service' includes service in a foreign country in the capacity as an employee and '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.

You are a commonwealth employee. Your posting is for you to attend educational institutions in Country X for the purpose of full-time study. During this posting, you continued to receive your normal salary from your employer. This salary is considered to be derived from your foreign service.

In addition to your salary, you received a few allowances whilst posted to Country X.

As these allowances were paid for the duration of your posting, for the purposes of subsection 23AG(7) of the ITAA 1936 they are considered to be derived from your foreign service.

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

However, 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 this section.

One of the listed conditions is where the income earned by the resident in the foreign country is made exempt by the operation of a tax treaty (paragraph 23AG(2)(b) of the ITAA 1936).

Therefore, it is necessary to consider not only the income tax laws but also any applicable tax treaty contained in the International Tax Agreements Act 1953 (Agreements Act).

Section 4 of the Agreements Act incorporates that Act with the ITAA 1936 and the Income Tax Assessment Act 1997 (ITAA 1997) so that those Acts are read as one.

The Agreements Act contains the tax treaty between Australia and Country X (Country X Agreement). Country X Agreement operates to avoid the double taxation of income received by a resident of either Australia or Country X.

Country X Agreement provides that remuneration derived by an Australian resident individual who visit any university, college, school or other recognised educational institution of Country X for a period not exceeding two years for the purpose of teaching or research or both at such educational institution, will be taxable in Australia and exempt from tax in Country X.

Country X Agreement further provides that where a student, who is an Australian resident and visits Country X solely for the purpose of the student's education and receives payments from, sources outside of Country X for educational purposes are exempt from tax in Country X.

In your case, you are an Australian resident and were neither a professor nor teacher nor is a student for the purposes of the Country X Agreement, the above-mentioned situation not applicable to you.

Country X Agreement provides that remuneration paid by Australia to any individual in respect of services rendered in the discharge of governmental functions shall be taxable only in Australia. However, such remuneration will be taxable only in Country X if the services are rendered in that country and the individual is a resident and citizen of Country X, or did not become a resident of Country X solely for the purpose of performing the services.

The employment income you received in relation to your posting to Country X is taxable only in Australia under the Country X Agreement as the income was paid by Australia in respect of services rendered in the discharge of governmental functions.

You stated that your employment income derived while you were in Country X is exempt from tax in Country X because it falls under the auspices of the agreement between the Government of Australia and the Government of Country X. You argued that the agreement applies because your posting satisfies one of the aims of the agreement.

However, it is not considered enough that a person's activity may be consistent with the aims of the agreement for the agreement to apply to that person.

Generally, for an individual to get the exemption under the agreement they must satisfy other conditions and they must also be part of a project.

Projects consist of activities which are discrete units of development cooperation - Projects are part of a 'mutually approved design …' as defined:

(l) "Project" means a self-contained Activity based on a mutually approved design and involving the provision of Australian and country X services and supplies.

(a) "Activity" means any discrete unit of development cooperation which may include any one or more of the forms of development cooperation described in the Article.

Activities are chosen by the Coordinating Committee. Accordingly, you can only be covered by the agreement if you are a person covered by a Project which is part of the Programme and we have no evidence that is the case in the present matter. 

You were asked to provide confirmation from your employer that your deployment is covered by the agreement. You provided a letter from your employer in response to our request. This letter from your employer made no reference to the agreement.

In the absence of confirmation from your employer or evidence that that your deployment to Country X falls under the agreement, your income derived while you were in Country X is not taken to be exempt from tax under this agreement.

As your employment income derived while posted to Country X is exempt from tax in Country X due to the tax treaty only, subsection 23AG(2) of the ITAA 1936 will apply to deny exemption from tax on your employment income.

Accordingly, your salary and allowances earned while posted to Country X are not exempt from tax in Australia under subsection 23AG(1) of the ITAA 1936.

Note

Foreign salary and allowances derived by an Australian resident not exempt from tax in Australia, are included in the assessable income under subsection 6-5(2) of the ITAA 1997 as ordinary income.