Edited version of private ruling

Authorisation Number: 1011738176794

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Ruling

Subject: exempt foreign income

Question 1

Is the foreign employment income you earn in another country assessable in Australia under subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No

This ruling applies for the following period

Year ending 30 June 2010

Year ending 30 June 2011

Year ending 30 June 2012

Year ending 30 June 2013

The scheme commenced on

01 July 2009

Relevant facts

You are an Australian resident for income tax purposes.

You are a civilian employee of an Australian Government Agency.

You are deployed as an advisor on a development cooperation program to the other country.

Your deployment is for not less than 91 days.

For the duration of your deployment in the other country, you are subject to the command and control of the Australian Government Agency.

The program is an official Australian Government overseas development assistance program conducted by the Agency.

You will only take recreation leave that is accrued during your service in the other country.

You do not intend to return to Australia during leave breaks during your deployment in the other country.

You will not be performing any work-related duties during breaks taken in Australia.

The other country taxes employment income under its domestic law.

There is no tax treaty between Australia and the other country.

Relevant legislative provisions

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

Income Tax Assessment Act 1936 section 23AD

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 Paragraph 23AG(1AA)(d)

Income Tax Assessment Act 1936 Subsection 23AG(2)

Income Tax Assessment Act 1936 Paragraph 23AG(2)(a)

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

Income Tax Assessment Act 1936 Paragraph 23AG(2)(c)

Income Tax Assessment Act 1936 Paragraph 23AG(2)(d)

Income Tax Assessment Act 1936 Subsection 23AG(6)

Income Tax Assessment Act 1936 Subsection 23AG(7)

Acts Interpretation Act 1901 Subparagraph 15AB(1)(b)(i)

Acts Interpretation Act 1901 Paragraph 15AB(2)(e)

Acts Interpretation Act 1901 Paragraph 15AB(2)(f)

Defence Act 1903 Section 30

Reasons for decision

Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of an Australian resident includes ordinary income derived directly or indirectly from all sources, whether in or out of Australia, during the income year.

Employment income is ordinary income for the purposes of subsection 6-5(2) of the ITAA 1997.

Foreign deployment as a member of a disciplined force

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 income tax in Australia. However, new subsection 23AG(1AA) of the ITAA 1936, which took effect from 01 July 2009, provides that those foreign earnings will not be exempt under section 23AG of the ITAA 1936 unless the continuous period of foreign service is directly attributable to, amongst other things, the individual's deployment outside Australia as a member of a disciplined force.

The expression' disciplined force' is not defined in the ITAA 1936 or the ITAA 1997. However, the explanatory memorandum (EM) which accompanied Tax Laws Amendment (2009 Budget Measures No. 1) Bill 2009 introducing paragraph 23AG(1AA)(d) of the ITAA 1936 provides that a person's foreign earnings will be eligible for exemption if the foreign service is directly attributable to that person's deployment outside Australia as a member of a disciplined force by an Australian government, or an authority thereof. A disciplined force is intended to refer to a defence force, including a peacekeeping force, and a police force.

The members of such a force will commonly, but not necessarily, be subjected to a common command structure and rules of conduct. Such a force will generally include persons who perform adjunctive roles relating to the overseas deployment. A 'disciplined force' will thus compromise persons specifically performing the defence, policing and peacekeeping functions of the deployment but will also include those accompanying and providing assistance and support to those so engaged. Persons providing such ancillary support will be considered part of the 'disciplined force' provided they are effectively integrated into the force performing the primary functions of defence, peacekeeping and policing.

As you are an employee of the Australian Government Agency providing auxiliary support to those performing the primary defence functions of the deployment and are integrated into that force and subject to Agency discipline as 'defence civilians', you will be a member of a 'disciplined force' within paragraph 23AG(1AA)(d) of the ITAA 1936.

Foreign earnings relating to the foreign service

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

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 a tax treaty (paragraphs 23AG(2)(a) and 23AG(2)(b) of the ITAA 1936).

There is no tax treaty between Australia and the other country and you are not exempt paying tax in the other country as the country has a tax system in place.

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

In your case, you are engaged in foreign service 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.

Consequently, the foreign employment income you derive from the other country is exempt from income tax in Australia under subsection 23AG(1) of the ITAA 1936, and is therefore not assessable income under subsection 6-5(2) of the ITAA 1997.

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 employment income in your Australian tax return.