Edited version of private ruling

Authorisation Number: 1011666259171

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Ruling

Subject: Foreign employment income - Country X

1. Is the employment income you earned in Country X considered foreign sourced income?

Yes.

2. Is the employment income you earned in Country X exempt from income tax in Australia because your employer is a charitable or religious institution exempt from income tax in Australia?

No.

3. Is the employment income you earned in Country X exempt from income tax in Australia under subsection 23AG(1) of the Income Tax Assessment Act 1936 (ITAA 1936) because your employment was directly attributable to the delivery of Australian official development assistance by your employer?

Yes.

This ruling applies for the following period

Year ending 30 June 2010

The scheme commences on

1 July 2009

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 were employed by a relief agency of Country X for a period of not less than 91 days.

You were employed on development projects contracted and funded by the Australian Agency for International Development (AusAID).

You were employed to manage community development programs.

You were paid by from Australian funds for an Australian official development assistance project contracted to and implemented by your employer.

This project was to increase the capacity for service delivery of community development projects in Country X.

Australian tax was withheld from your pay, and you were issued a payment summary from Australia.

Country X has a tax system that provides for the imposition of income tax on employment income and does not generally exempt such income from income tax.

Australia has a tax treaty with Country X.

Relevant legislative provisions

Section 6-5 of the Income Tax Assessment Act 1997

Subsection 23AG(1) of the Income Tax Assessment Act 1936

Subsection 23AG(2) of the Income Tax Assessment Act 1936

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

Section 4 of the International Tax Agreements Act 1953

Subsection 23AG(7) of the Income Tax Assessment Act 1936

Section 23AG of the Income Tax Assessment Act 1936

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

Paragraph 23AG(1AA)(a) of the Income Tax Assessment Act 1936

Paragraph 23AG(1AA)(c) of the Income Tax Assessment Act 1936

Paragraph 50-50(c) of the Income Tax Assessment Act 1997

Paragraph 50-50(d) of the Income Tax Assessment Act 1997

Section 50-5 of the Income Tax Assessment Act 1997

Regulation 50-50.01 of the Income Tax Assessment Regulations 1997

Regulation 50-50.02 of the Income Tax Assessment Regulations 1997

Reasons for decision

Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of an Australia resident for income tax purposes includes income gained from all sources, whether in or out of Australia. 

Australian courts have held that the source of employment income is where the employee performs their duties. Employment income earned while carrying out duties in Australia is considered to be sourced in Australia. Employment income earned while being carried out overseas is considered to be sourced in that overseas country, unless it is merely incidental to the performance of duties in Australia.

In your case, your employment income from Country X is considered foreign sourced 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 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:

(a) the delivery of Australian official development assistance by the person's employer;

(b) the activities of the person's employer in operating a public fund covered by item 9.1.1 or 9.1.2 of the table in subsection 30-80(1) of the Income Tax Assessment Act 1997 (ITAA 1997)(international affairs deductible gift recipients);

(c) the activities of the person's employer, if the employer is exempt from income tax because of paragraphs 50-50(c) or (d) of the ITAA 1997 (prescribed institutions located or pursuing objectives outside Australia);

(d) the person's deployment outside Australia as a member of a disciplined force by:

(i) the Commonwealth, a State or a Territory; or

(ii) an authority of the Commonwealth, a State or a Territory;

(e) an activity of a kind specified in the regulations.

Employer a prescribed charitable or religious institution exempt from income tax under paragraphs 50-50(c) or (d) of the ITAA 1997

The exemption applies where the continuous foreign service period of a resident individual is directly attributable to the activities of the individual's employer if the employer is exempt from income tax because of paragraphs 50-50(c) or (d) of the ITAA 1997.

This applies to a prescribed charitable or religious institution that is exempt from Australian income tax pursuant to item 1.1 or 1.2 of section 50-5 of the ITAA 1997.

A list of prescribed institutions for the purposes of paragraph 50-50(c) of the ITAA 1997 is contained in regulation 50-50.01 of the Income Tax Assessment Regulations 1997 (ITAR 1997).

A list of prescribed institutions for the purposes of paragraph 50-50(d) of the ITAA 1997 is contained in regulation 50-50.02 of ITAR 1997.

In your case, your employer is not on the list of charitable and religious institutions contained in regulations 50-50.01 or 50-50.02 of the ITAR 1997.

It is therefore not a prescribed institution exempt from income tax by virtue of paragraphs 50-50(c) or (d) of the ITAA 1997.

Foreign service directly attributable to Australian official development assistance by the employer

The Explanatory Memorandum (EM) which accompanied the Tax Laws Amendment (2009 Budget Measures No 1) Act 2009 (which implemented subsection 23AG(1AA) of the ITAA 1936) states that Australian official development assistance is Australian government assistance intended to reduce poverty and promote sustainable development in developing countries provided directly under programs overseen by the Australian Department of Foreign Affairs and Trade (DFAT) and/or the Australian Agency for International Development (AusAID).

AusAID also oversees the delivery of Australian official development assistance under contract with both Australian and international service providers.

Australian residents employed to carry out diplomatic and consular activities are performing services of benefit to the Australian government, and therefore their service is not directly attributable to the delivery of Australian official development assistance.

In your case, you were employed by a relief agency in Country X on community development projects. You were paid out of funds for an official AusAID-funded official development assistance project contracted to and implemented by your employer.

Consequently, your employment was directly attributable to the delivery of Australian official development assistance on an AusAID-funded project by your employer.

Exemption under subsection 23AG(1) of the ITAA 1936

The exemption under subsection 23AG(1) of the ITAA 1936 does not apply if the income is exempt from tax in the foreign country only because of any of the reasons listed in subsection 23AG(2) of the ITAA 1936.

One of the listed reasons is where the income earned 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 (the 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.

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

An article of the treaty provides that salary and wages derived by an Australian resident for employment exercised in Country X over a period of more than 90 days in the income year may be taxed in Country X.

Country X may tax the employment income you derived in that country as you were present in that country for more than 90 days in the year of income.

Accordingly, paragraph 23AG(2)(b) of the ITAA 1936 will not apply as the salary and wages received by you are not exempt from tax in Country X because of the tax treaty.

As you were engaged in foreign service for a continuous period of not less than 91 days and the salary and wages are not exempt from tax in Country X, you satisfy the conditions for exemption under section 23AG of the ITAA 1936.

Consequently, the foreign employment income you earned while employed in Country X is exempt from income tax in Australia under subsection 23AG(1) of the ITAA 1936.

Further issues for you to consider

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.