Edited version of private ruling

Authorisation Number: 1011640425731

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Ruling

Subject: Foreign employment income - Country X

Will the salary and allowances you will receive in respect of your posting to Country X be exempt from income tax in Australia?

Yes.

This ruling applies for the following periods:

Year ending 30 June 2011

Year ending 30 June 2012

Year ending 30 June 2013

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 taxation purposes.

You are a member of a disciplined force in Australia.

You will be deployed to work in Country X for a continuous period of not less than 91 days.

You do not intend to remain in Country X beyond your current employment contract.

While in Country X, you will be receiving salary and allowances as a result of your employment. These allowances will be paid to compensate for costs arising from the foreign service and for the hardship attributable to the foreign service.

You will accrue 30 days of recreation leave per year as a result of your employment in Country X.

It is likely that you will expend this recreation leave in countries other than Country X, primarily in Australia.

You will not perform any work duties in Australia whilst on recreational leave.

You state that the liability for taxation in Country X is dealt with in the Memorandum of Understanding (MOU) between Australia and Country X.

Australia has a tax treaty with Country X.

Relevant legislative provisions

Income Tax Assessment Act 1936 Subsection 23AG(1)

Income Tax Assessment Act 1936 Subsection 23AG(7)

Income Tax Assessment Act 1936 Section 23AG

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

Income Tax Assessment Act 1936 Subsection 23AG(6)

Income Tax Assessment Act 1936 Subsection 23AG(2)

Income Tax Assessment Act 1936 Paragraph 23AG(2)(a)

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

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

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

Income Tax Assessment Act 1936 Paragraph 23AG(2)(e)

Income Tax Assessment Act 1936 Paragraph 23AG(2)(f)

Income Tax Assessment Act 1936 Paragraph 23AG(2)(g)

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.

Section 23AG(1) of the Income Tax Assessment Act 1936 (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 includes income consisting of 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 member of a disciplined force of Australia deployed in Country X, 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, you will not take any breaks in your employment other than leave which will be 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.

Foreign salary and allowances

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

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

Therefore, your salary and overseas 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 these reasons is a tax treaty contained in the International Tax Agreements Act 1953 (Agreements Act).

Australia has a tax treaty with Country X (Country X Agreement) which operates to avoid the double taxation of income received by Australian and Country X residents.

An 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 national or 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 will receive in relation to your deployment to Country X will be taxable only in Australia under Article 19(1) of the Country X Agreement as you are 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 you will receive while posted to 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 tax under subsection 23AG(1) of the ITAA 1936.

However, the income you will earn while on posting will be exempt from taxation in Country X in accordance with the provisions under the MOU between Australia and Country X.

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

You therefore will satisfy the conditions for exemption under section 23AG of the ITAA 1936.

Accordingly, the salary and allowances you will receive from employment in Country X will be exempt from Australian income tax 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.