Edited version of private ruling

Authorisation Number: 1011640343369

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Ruling

Subject: Foreign employment income

Question 1

Are the taxpayer's salary and allowances earned while working in Country X exempt from tax in Australia under section 23AG of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer:

Yes.

This ruling applies for the following periods:

Year ended 30 June 2011

Year ended 30 June 2012

Year ended 30 June 2013

Year ended 30 June 2014

The scheme commences on:

January 2011

Relevant facts and circumstances

The taxpayer is a resident of Australia for taxation purposes.

The taxpayer is a member of a disciplined force.

The taxpayer will be employed in Country X for more than 90 days.

The taxpayer will be paid allowances during the employment in Country X which relate to the foreign service.

The taxpayer will accrue annual leave while working in Country X and anticipates spending most of the annual leave time in Australia. The taxpayer will not perform any work related duties whilst on leave.

There is a tax treaty between Australia and Country X.

The taxpayer states that the foreign earnings will be exempt from taxation in Country X under the terms of the agreement between the governments of Australia and Country X (MOU).

Relevant legislative provisions

Income Tax Assessment Act 1936 section 23AG

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 6-15

Income Tax Assessment Act 1997 section 11-15

International Tax Agreements Act 1953 section 4

International Tax Agreements Act 1953 Schedule X

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 during the income year.

Salary and allowances 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, it is not included in the assessable income of a taxpayer.

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 ITAA 1936 which deals with overseas employment income.

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 generally exempt from tax in Australia.

Paragraph 23AG(1AA)(d) of the ITAA 1936 provides that foreign earnings will not be exempt under section 23AG of the ITAA 1936 unless the continuous period of foreign service is directly attributable to the taxpayer's 'deployment outside Australia as a member of a disciplined force of Australia'.

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.

The taxpayer intends to take recreation leave that accrues during the employment in Country X. This leave will form part of the taxpayer's foreign service.

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.

The taxpayer will be employed to work in Country X. Therefore, the salary received from this employment will be considered to be derived from foreign service.

The taxpayer will receive certain allowances during the employment in Country X which relate to the overseas employment.

As these allowances will be paid to compensate for costs arising from the foreign service, they are considered to be derived from the taxpayer's foreign service.

Therefore, the taxpayer's salary and allowances will be foreign earnings from foreign service for the purposes of subsection 23AG(1) 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 ITAA 1997 so that those Acts are read as one.

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

The relevant Article of the 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 Country X 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 the taxpayer will receive in relation to employment in Country X will be taxable only in Australia under the relevant Article of the Country X Agreement as the taxpayer is an Australian resident and the income will be paid by Australia in respect of services rendered in the discharge of governmental functions.

As the employment income the taxpayer will receive while employed in Country X will be exempt from tax in Country X because of the operation of a tax treaty, paragraph 23AG(2)(b) of the ITAA 1936 would normally apply and the income would therefore not be exempt from Australian tax under subsection 23AG(1) of the ITAA 1936 and would be assessable under subsection 6-5(2) of the ITAA 1997.

However Taxation Determination TD 2005/37 Income tax: does section 23AG of the Income Tax Assessment Act 1936 exempt foreign earnings derived by a member of the Australian Defence Force engaged in foreign service for a continuous period of at least 91 days as part of certain United Nations operations? (TD 2005/37), at paragraph 3 states:

If the foreign earnings are exempt because of one or more of the reasons in subsection 23AG(2), and also exempt because of a reason not listed in the subsection, the subsection does not apply. Consequently, subsection 23AG(1) would apply to make the relevant earnings exempt from tax in Australia.

In these circumstances, the income the taxpayer will earn while employed in Country X will also be exempt from taxation in Country X because of the terms of the MOU entered into between Australia and Country X.

The exemption provided by the MOU would not fall under any of the exemption categories under subsection 23AG(2) of the ITAA 1936.

Therefore, in accordance with TD 2005/37 above, the taxpayer will be 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 will apply.

Accordingly, the taxpayer's salary and allowances earned during employment in Country X will be exempt from Australian income tax under section 23AG of the ITAA 1936 and will not be assessable under subsection 6-5(2) of the ITAA 1997.