Edited version of private ruling

Authorisation Number: 1011666410461

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Ruling

Subject: Foreign income - salary - defence forces

Are the salary and allowances you earn in Country X exempt from income tax in Australia?

Yes.

This ruling applies for the following period

Year ended 30 June 2012

The scheme commenced on

1 July 2011

Relevant facts

You are an Australian resident for tax purposes.

You are a member of an Australian government organisation.

You have been posted to Country X for three years.

Your posting has been extended for a further year.

In addition to your salary, you will receive allowances.

Any leave you take will accrue as a result of your service in Country X.

You intend to return to Australia while on leave, but will not perform any work-related duties.

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.

There is a tax treaty between Australia and Country X.

Your income in Country X is exempt from tax in that country as a result of the Treaty on Development Co-operation between Australia and Country X (MOU). 

Relevant legislative provisions

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

Subsection 23AG(1AA) 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

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

Reasons for decision

Subsection 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 generally exempt from tax in Australia.

'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).

In addition to your salary, you will receive allowances during your posting to cover various costs and hardship of the foreign service. As the allowances 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 for the purposes of subsection 23AG(7) of the ITAA 1936.

Section 23AG(1AA) states that From 1 July 2009, your foreign employment income may be exempt from tax in Australia if it is directly attributable to deployment outside Australia by an Australian Government (or an Australian Government authority) as a member of a disciplined force.

You satisfy this condition as you have been deployed by the Australian Government as a member of a disciplined force.

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).

A Schedule to the International Tax Agreements Act 1953 (Agreements Act) contains the tax treaty between Australia and Country X (Country X Agreement). The tax treaty operates to avoid the double taxation of income received by a resident of either Australia or Country X.

An Article of the tax treaty 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.

The employment income you receive in relation to your posting to Country X is taxable only in Australia under an Article of the tax treaty as the income is paid by Australia in respect of services rendered in the discharge of governmental functions.

As the employment income you receive from Country X is exempt from tax in that country 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 in Australia under subsection 23AG(1) of the ITAA 1936.

However, the income you earn while on posting is 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 does not fall under any of the other exemption categories under subsection 23AG(2) of the ITAA 1936.

In your case, you are 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 apply in your situation.

As a result, the salary and allowances you earn in Country X are exempt from Australian income tax under section 23AG of the ITAA 1936.

Note

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 wages income in your Australian tax return.