Edited version of private ruling

Authorisation Number: 1011768366122

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Ruling

Subject: Foreign employment income

Question

Is the consideration you received from your foreign employer in relation to foreign employment carried outside of Australia assessable in Australia?

Answer

No.

This ruling applies for the following period

Year ended 30 June 2010

The scheme commenced on

1 July 2009

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You are an Australian resident.

You were employed by a Company in Country Y and performed services in Country X.

The foreign income was sourced from Country X where the work was performed.

Your foreign service in Country X was for a period of not less than 91 days.

The payment for your foreign service was received in the following income year. The delay of the payment was the employer's fault. The foreign employer's payroll officer resigned from his position and it was not until a new payroll officer was employed that you received the payment for your services.

You were issued with a Private Ruling with a decision that your foreign earnings in Country X were exempt from tax under subsection 23AG(1) of the ITAA 1936.

Country X has a tax system that taxes employment income.

Country X does not have a tax treaty with Australia.

Relevant legislative provisions

Subsection 6-5(2) of the Income Tax Assessment Act 1997
Subsection 6-15(2) of the Income Tax Assessment Act 1997
Section 11-15 of the Income Tax Assessment Act 1997
Subsection 23AG(1) of the Income Tax Assessment Act 1936
Subsection 23AG(2) of the Income Tax Assessment Act 1936
Subsection 23AG(7) of the Income Tax Assessment Act 1936

Reasons for decision

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

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

Salary and wages are ordinary income for the purpose of subsection 6-5(2) of the ITAA 1997.

Subsection 6-15(2) of the ITAA 1997 provides that if an amount is exempt income then it is not included in assessable income.

Section 11-15 of the ITAA 1997 lists those provisions dealing with income that may be exempt. Included in this list is section 23AG of the Income Tax Assessment Act 1936 (ITAA 1936), which deals with overseas employment income.

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 service includes service in a foreign country in the capacity as an employee and foreign earnings include income consisting of salary and wages (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.

For the purposes of section 23AG of the ITAA 1936, there must be a direct connection between the entitlement to the foreign earnings and the foreign service for the payment to be considered as derived from that foreign service.

In your case, you were engaged in employment in Country X for a continuous period of not less than 91 days and Country X has a tax system in place that taxes employment income. However, you only received the payment for that foreign service in the following income year. As the payment clearly relates to your foreign service in Country X, it is considered to be derived from that foreign service.

The exemption does not apply if the income is exempt from tax in the foreign country only because of any of the reasons listed in subsection 23AG(2) of the ITAA 1936. One of these reasons is (among other things) that there is no income tax system in the foreign country.

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

Consequently, the income you received for your foreign employment in Country X is exempt from Australian income tax under subsection 23AG(1) of the ITAA 1936 and thus not assessable under subsection 6-5(2) of the ITAA 1997.

Therefore, the payment received by you from employment in Country X is not assessable under subsection 6-5(2) of the ITAA 1997.

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.