Edited version of private ruling

Authorisation Number: 1011678392487

This edited version of your ruling will be published in the public Register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns.

Ruling

Subject: Foreign Income

Question

Is your foreign employment income derived in country X exempt from income tax in Australia?

Answer: No.

This ruling applies for the following periods:

Year ended 30 June 2011

Year ended 30 June 2012

The scheme commences on:

1 July 2010

Relevant facts and circumstances

You are an Australian resident for tax purposes.

You are employed by an Australian company.

You have been seconded to country X for a minimum of two years and you are currently based in that country.

Your salary is paid from Australia.

Your employer is a resident of country X for tax purposes.

Your employer has a permanent establishment in country X.

Your salary is deductible in determining the taxable profits of a permanent establishment which your employer has in country X.

There is a tax treaty between Australia and 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 1997 Subsection 30-80(1)

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

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

Income Tax Assessment Act 1997 Subsection 30-80(1)

Income Tax Assessment Act 1997 Paragraph 30-85(2)(a)

Income Tax Assessment Act 1997 Paragraph 30-85(2)(b)

Income Tax Assessment Act 1997 Section 50-5

Income Tax Assessment Regulations 1997 Regulation 50-50.01

Income Tax Assessment Regulations 1997 Regulation 50-50.02

International Tax Agreements Act 1953

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 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:

· the delivery of Australian official development assistance by the person's employer;

· 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);

· 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);

· the person's deployment outside Australia as a member of a disciplined force by:

· the Commonwealth, a State or a Territory; or

· an authority of the Commonwealth, a State or a Territory;

· an activity of a kind specified in the regulations.

Australian official development assistance

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 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, your employment in country X is not under a program overseen by DFAT or AusAID, or under contract to AusAID, and therefore does not qualify as Australian official development assistance.

Employer operating a public fund or a public disaster relief fund

According to the EM, this applies where the continuous foreign service period of a resident individual is directly attributable to the activities of the individual's employer in operating a public fund covered by item 9.1.1 or item 9.1.2 in the table in subsection 30-80(1) of the ITAA 1997.

Item 9.1.1 of subsection 30-80(1) of the ITAA 1997 applies to a public fund declared by the Treasurer to be a developing country relief fund.

A developing country relief fund is a fund established by an organisation solely for the purpose of providing relief to people of a developing country. The organisation must be an approved organisation as declared by the Minister for Foreign Affairs and the country must be a developing country as declared by the Minister for Foreign Affairs.

These conditions are contained in paragraphs 30-85(2)(a) and (b) of the ITAA 1997 respectively.

In your case, your foreign service is not directly attributable to the activities of your employer in operating a public fund covered by subsection 30-80(1) of the ITAA 1997.

Employer exempt from income tax under paragraphs 50-50(c) or (d)

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

Deployed as a member of a disciplined force

The EM states that the phrase is intended to mean a defence force (including a peacekeeping force) that is engaged in a non-warlike operation. It also covers a member of a police force, and applies to members of the Australian Federal Police deployed on an International Deployment Group mission who are subject to the Commanders Orders to achieve operational policing outcomes. In order for a person's deployment outside Australia as a member of a disciplined force to be by the Commonwealth, a State or Territory, it must be directly effected by an Australian government or an authority thereof.

In your case, you are not deployed as a member of the defence forces or Australian Federal Police.

Activity of a kind specified in the regulations

This is to allow the scope of section 23AG of the ITAA 1936 to be extended. There are currently no regulations gazetted.

Tax treaty between Australia and country X

In determining the liability to Australian 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 tax treaty contained in the International Tax Agreements Act 1953 (Agreements Act).

A Schedule to the Agreements Act contains the tax treaty between Australia and country X (Convention between Australia and country X). The country X Convention operates to avoid the double taxation of income received by Australian and country X residents.

An Article of the country X Convention provides that salary and wages 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 country X. If the employment is exercised in country X, the remuneration may be taxed in country X.

However, an Article of the country X Convention provides that salary and wages derived by an individual who is a resident of Australia in respect of employment exercised in country X shall be exempt from tax in Country X if:

· the recipient is present in Country X for a period or periods not exceeding in the aggregate 183 days in the year of income or the taxable year as the case may be in Country X;

· the remuneration is paid by or on behalf of an employer who is not a resident of Country X, and

· the remuneration is not borne by a permanent establishment which the employer has in Country X.

In the first Country X tax year you will work in Country X for a period of less than 183 days. However, as your remuneration is paid by your employer who is a resident of Country X Article 14(2)(b) of the Country X Convention is not satisfied and the income you derive is not exempt from tax in Country X.

In the following year you will be present in Country X for more than 183 days and therefore your salary and wages are not exempt from tax in Country X under Article 14(2)(a) of the Country X Convention.

Conclusion

In your case, the foreign employment income you derive from Country X is not exempt from Australian income tax as you do not satisfy paragraphs (a), (b), (c), or (d) of subsection 23AG(1AA) of the ITAA 1936 as your employment is not directly attributable to:

· an Australian overseas aid program by your employer;

· your employer operating a developing country relief fund or a public disaster relief fund as an international affairs deductible gift recipient;

· activities by your employer exempt from income tax as a prescribed institution because of paragraphs 50-50(c) or (d) of the ITAA 1997

· your deployment as a member of a disciplined force such as the Australian defence forces and the Australian Federal Police.