Edited version of private ruling

Authorisation Number: 1011677069830

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Ruling

Subject: Foreign employment income

Is your traineeship allowance assessable in Australia?

Yes.

This ruling applies for the following period:

Year ended 30 June 2010

The scheme commenced on:

1 July 2009

Relevant facts and circumstances

You undertook a traineeship in a foreign country.

The traineeship lasted less than six months.

You remained a resident of Australia for tax purposes during this time.

You were paid a monthly allowance.

You used this to pay for rent and food.

You did not pay tax on the allowance in the foreign country.

Relevant legislation provisions:

Income Tax Assessment Act 1936 Subsection 23AG(1)

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

Income Tax Assessment Act 1936 Subsection 23AG(2)

International Tax Agreements Act 1953

Income Tax Assessment Act 1997 Subsection 6-5(2)

Reasons for decision

Foreign earnings

Subsection 23AG(1) of the Income Tax Assessment Act 1936 (ITAA 1936) provides that foreign earnings of an Australian resident engaged in foreign service and derived during a continuous period of not less than 91 days are exempt from tax in Australia. Foreign earnings include salary, wages, bonuses or allowances. This includes your traineeship allowance. However, subsection 23AG(1AA) of the ITAA 1936 states that foreign earnings are not exempt from tax under subsection 23AG(1) 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 paragraph 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.

Your traineeship allowance is income derived from foreign service under subsection 23AG(1) of the ITAA 1936 as it was derived during a continuous period of more than 91 days in a foreign country while you remained a resident of Australia for tax purposes. However, your traineeship was not a period of foreign service directly attributable to any of the categories specified in subsection 23AG(1AA) of the ITAA 1936. Therefore, it is not exempt foreign income under subsection 23AG(1) of the ITAA 1936.

Double tax agreement

In determining liability to tax on foreign sourced income received by a resident taxpayer, it is necessary to consider not only the income tax laws but also any applicable double tax agreement contained in the International Tax Agreements Act 1953 (the Agreements Act).

A section of the Agreements Act incorporates that Act with the ITAA 1936 and the ITAA 1997 so that those Acts are read as one. In the event of inconsistent provisions, the Agreements Act effectively overrides the ITAA 1936 and the ITAA 1997 (except in some limited situations).

A schedule of the Agreements Act, amended by another schedule to the Agreements Act, contains the double tax agreement between Australia and the foreign country (the Agreement). The Agreement operates to avoid the double taxation of income received by Australian and residents of the foreign country.

An Article of the Agreement provides that salary and wages and other similar remuneration derived by an individual who is a resident of Australia in respect of an employment will be taxable only in Australia unless the employment is exercised in the foreign country. If the employment is exercised in the foreign country, the remuneration may be taxed in the foreign country.

Conclusion

Under subsection 6-5(2) of the ITAA 1997 the assessable income of an Australian of Australia for tax purposes includes the income you derived directly or indirectly from all sources whether in or out of Australia during the year of income. As you have remained an Australian resident for tax purposes while you were in the foreign country, the income derived there from a traineeship is assessable in Australia under subsection 6-5(2) of the ITAA 1997.