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Ruling

Subject: Foreign income

Question 1

Is your income derived from your services in country A and country B during three periods from 1 July 2006 to 30 June 2009 exempt under section 23AG of the Income Tax Assessment Act 1997 (ITAA 1936) ?

Answers

Yes.

This ruling applies for the following period

Year ended 30 June 2007

Year ended 30 June 2008

Year ended 30 June 2009

The scheme commenced on

1 July 2006

Relevant facts

You are an Australian resident for income tax purposes.

You worked in the country A and country B for your employer from a particular date.

You stated when you worked in the country A and the country B you were engaged as an employee at all times while you were working for your employer.

You were asked to provide a copy of your contract that includes the terms and conditions of your engagement with your employer.

You provided copies of a certain number of Employment Agreements with your employer.

The Employment for these agreements was located in the country A.

You have advised that your engagement in the country B was under the same type of Employment Agreements or extensions of existing Employment Agreements in place for the country A.

You have advised that you were required to provide your Australian business number for your engagement in the country B to satisfy local legal requirements however you state this did not change the nature of the relationship being employee and employer.

You have advised that during the short breaks you mainly flew between places for work purposes.

Australia does not have a double tax agreement with country A.

The laws of country A provide for the imposition of income tax and do not generally exempt employment income from income tax.

The laws of the country B provide for the imposition of income tax and do not generally exempt employment income from income tax. 

There is no tax treaty between Australian and the country B.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 23AG

Income Tax Assessment Act 1936 subsection 23AG(1)

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

Income Tax Assessment Act 1936 subsection 23AG (7)

Income Tax Assessment Act 1936 subsection 23AG (6)

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 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(6) and 23AG(7) of the ITAA 1936).

Therefore, your salary and overseas allowances (other than the transfer allowances) are foreign earnings from foreign service for the purposes of subsection 23AG(1) of the ITAA 1936. 

Subsection 23AG(6) of the ITAA 1936 provides that the period of foreign service will include recreation leave (which is accrued as a result of the foreign service) other than long service leave or leave without pay or reduced pay and will not constitute a break in a period of foreign service.

According to Taxation Ruling TR 96/15, short business trips to Australia or to another foreign country during the period of foreign service for reasons directly related to the taxpayers continuing foreign service are also considered to form part of the taxpayers period of continuous foreign service.  

In your case during your deployment period you took short breaks which were mainly to fly between country A and country B for work purposes. These trips were an essential part of your ongoing employment. These short visits are therefore, considered to be business trips directly related to your foreign service as the purpose of these trips were purely business. Therefore, the business trips you made while in country A and country B form part of your foreign service. 

As your temporary absences from foreign service in country A and country B are not taken to constitute a break but are wholly attributable to the period of foreign service, you are considered to be employed in a foreign country for a continuous period of not less than 91 days.  

For the period May 2009 to 30 June 2009

Section 23AG(1AA) of the ITAA 1936 imposes a substantial restriction upon the scope of the section 23AG of the ITAA 1936 exemption by limiting the exemption to foreign service income of prescribed kinds. This limitation applies with respect to foreign earnings derived on or after 1 July 2009 from foreign service performed on or after that day.

This means that:

(a) amounts earned before 1 July 2009 but derived on or after 1 July 2009 will be considered under the broader section 23AG of the ITAA 1936 rules that applied prior to that time; and

(b) amounts derived before 1 July 2009 for service provided on or after that day only will be exempt if the more limited exemption rules applicable from 1 July 2009 are satisfied.

Calculation of the foreign service period will not be affected by the introduction of Section 23AG(1AA) of the ITAA 1936.

In your case thus, the amount derived before 1 July 2009 for service performed before that day (May 2009 to 30 June 2009) will fall within the broader sec23AG of the ITAA 1936 rules which operated prior to 1 July 2009. Further, amounts derived after 1 July 2009 with respect to service performed before that day (07 May 2009 to 30 June 2009) will also fall within the broader section 23AG of the ITAA 1936 rules.

Therefore under the transitional provision you are considered to be employed in a foreign country for a continuous period of not less than 91 days.

You satisfy the conditions for exemption for services performed for each period under section 23AG 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.

One of the reasons listed is where the income is exempt in the foreign country because of a double tax agreement (paragraphs 23AG(2)(a) and 23AG(2)(b) of the ITAA 1936).

Australia has no tax treaty with country A and country B. Therefore, paragraphs 23AG(2)(a) and 23AG(2)(b) of the ITAA 1936 will not apply. As the laws of country A and country B provide for the imposition of income tax and do not generally exempt employment income from income tax., paragraphs 23AG(2)(c) and (d) of the ITAA 1936 will not apply.

None of the other reasons in subsection 23AG(2) of the ITAA 1936 apply to the taxpayer's situation.

As you are engaged in foreign service during each period for a continuous period of not less than 91 days, the salary and allowance you derived while deployed to country A and country B is not assessable in Australia.  

Therefore, your income derived from your services in country A and country B during three periods from 1 July 2006 to 30 June 2009 exempt under section 23AG 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 wages income in your Australian tax return.