Edited version of private ruling

Authorisation Number: 1011749046429

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Ruling

Subject: Exempt foreign salary

Question 1

Are the salary and allowances you earned in another country 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 period

Year ending 30 June 2010

The scheme commenced on

04 August 2009

Relevant facts

You are an Australian resident for taxation purposes.

You are an employee of an Australian government department.

You were deployed to the other country for a short term deployment as part of the assistance program to the other country provided by the Australian government.

Your position is a senior advisor.

Your duties are to provide high quality support to the co-ordinator of the assistance program, involving the setting of priorities, allocation of resources, records management and supervision of staff.

You did not perform diplomatic or consular duties.

Your remuneration included salary and allowances.

You have only taken leave that accrued during your deployment to the other country.

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

Australia does not have a tax treaty with the other country.

Relevant legislative provisions

Income Tax Assessment Act 1936 Subsection 23AG(1)

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)

Reasons for decision

Question 1

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.

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

To qualify for 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.

Section 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 taxpayer's employer (generally provided by AusAID of the Department of Foreign Affairs and Trade);

· the activities of the taxpayer's employer in operating a public fund covered by the deductible gift recipient categories overseas aid fund and developed country disaster relief fund;

· the activities of the taxpayer's employer where they are a charitable institution or religious institution which is income tax exempt because they are a prescribed institution located outside Australia or pursuing objectives outside Australia;

· the taxpayer's deployment outside Australia as a member of a disciplined force of Australia (generally considered to be the Australian Defence Force or Australian Federal Police); or

· an activity of a kind specified in the regulations.

In your case, you were appointed to undertake a deployment to the other country as part of the assistance program to the other country provided by the Australian government.

As your deployment was directly attributable to the delivery of Australian official development assistance by the Australian government department, you satisfy one of the conditions for exemption under subsection 23AG(1AA) of the ITAA 1936.

Your salary and allowances are foreign earnings from foreign service for the purposes of subsection 23AG(1) 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 any of the reasons listed in that subsection.

One of the reasons listed is where the income is exempt in the foreign country 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. Therefore, paragraphs 23AG(2)(a) and 23AG(2)(b) of the ITAA 1936 will not apply.

As the laws of the other country provide for the imposition of income tax and do not generally exempt employment income from income tax, paragraphs 23AG(2)(c) and 23AG(2)(d) of the ITAA 1936 will not apply.

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

In your case, you were engaged in employment overseas 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 salary you earned during your deployment to the other country is exempt from income tax in Australia under subsection 23AG(1) of the ITAA 1936.

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.