Edited version of private ruling

Authorisation Number: 1011721672390

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Ruling

Subject: Foreign employment income

Question

Is the salary you receive from employment in Country B exempt from income tax in Australia under section 23AG of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

Yes.

This ruling applies for the following periods

Year ended 30 June 2009

Year ended 30 June 2010

Year ending 30 June 2011

The scheme commences on

1 July 2008

Relevant facts

You are an Australian resident for taxation purposes.

You have been appointed to undertake a deployment to Country B on an Australian Agency for International Development (AusAID) project as a Development Program Specialist for a period of about 21 months commencing in the 2009 income year.

You are an employee of AusAID.

Your foreign earnings are directly attributable to the delivery of Australian official development assistance by your employer.

You will not take any breaks other than your recreation leave that accrues during your deployment to Country B.

You will not perform any work-related duties if you undertake any breaks in Australia.

Australia has a tax treaty with Country B.

Country B taxes employment income under its domestic law.

Your foreign employment income is exempt from income tax in Country B under the terms of the Treaty on Development Co-operation between the Government of Australia and the Government of Country B.

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 1936 Subsection 23AG(6)

Income Tax Assessment Act 1936 Subsection 23AG(2)

International Tax Agreements Act 1953 SchX-Art19(1)

Income Tax Assessment Act 1936 Section 23AG(2)(b)

Reasons for decision

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 income consisting of salary, wages, bonuses or allowances (subsection 23AG(7) of the ITAA 1936).

To qualify for the exemption the foreign earnings must be derived from the foreign service. That does not mean that the foreign earnings need to be derived at the time of engaging in foreign service. The important test is that the foreign earnings, when derived, need to be derived as a result of the undertaking of that 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 29 June 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 Australia's overseas aid program by the individual's employer;

· the activities of the individual's employer in operating a developing country relief fund or a public disaster relief fund;

· the activities of the individual's employer being a prescribed institution that is exempt from Australian tax; or

· the individual's deployment outside Australia by an Australian government (or an authority thereof) as a member of a disciplined force.

In your case, you have been appointed to undertake a deployment to Country B on an AusAID project as a Development Program Specialist.

As your deployment is directly attributable to the delivery of an Australian overseas aid program by AusAID, you satisfy one of the conditions for exemption under subsection 23AG(1AA) 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 wage income in your Australian tax return.