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Ruling

Subject: Foreign employment income

Question 1:

Is your employment income derived as an employee of Employer A working in Country A from a specific date in the 2010 financial year to a specific date in the 2010 financial year and during your period of recreation leave from a specific date in the 2010 financial year to a specific date in the 2010 financial year exempt income in Australia under section 23AG of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer 1:

Yes.

Question 2:

Is your employment income derived as an employee of Employer A working in Australia from a specific date in the 2010 financial year to a specific date in the 2010 financial year exempt income in Australia under section 23AG of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer 2:

No.

This ruling applies for the following periods:

Year ended 30 June 2010

The scheme commenced on:

01 July 2009

Facts:

You are an Australian resident for income tax purposes.

You are an employee of an organisation that delivers Australian official development assistance.

You were on Leave Without Pay (LWOP) from Employer A from a specific date in the 2009 financial year to a specific date in the 2010 financial year following a posting in Country C.

You were recalled to duty on a specific date in the 2010 financial year and commenced deployment with Employer A in Country A from a specific date in the 2010 financial year to a specific date in the 2010 financial year.

Your period of deployment in Country A included several short visits to other countries for work-related purposes associated with your foreign service assignment.

You returned to Australia on a specific date in the 2010 financial year after completing your deployment in Country A.

You commenced working from your employer's Australian office from a specific date in the 2010 financial year to a specific date in the 2010 financial year in preparation for your next overseas posting to Country B.

You undertook recreation leave of a specific number of weeks from a specific date in the 2010 financial year to a specific date in the 2010 financial year.

You commenced deployment on a project delivering Australian official development assistance in Country B on a specific date in the 2011 financial year and you continue to work in this capacity.

You obtained a Private Binding Ruling on a specific date in the 2011 financial year concerning your foreign service in Country B that commenced from a specific date in the 2011 financial year.

You state that your income is not exempt from taxation in Country A for any of the reasons mentioned in subsection 23AG(2) of the ITAA 1936.

Country A taxes employment income under its domestic law.

There is no Memorandum of Understanding between Australia and Country A.

There is no Tax Treaty between Australia and Country A.

Relevant legislative provisions:

Income Tax Assessment Act 1997 subsection 6-5(1)

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

Income Tax Assessment Act 1997 subsection 6-5(3)

Income Tax Assessment Act 1997 subsection 6-15(2)

Income Tax Assessment Act 1997 section 11-15

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 subsection 23AG(2)

Income Tax Assessment Act 1936 subsection 23AG(6)

Income Tax Assessment Act 1936 subsection 23AG(6A)

Reasons for decision

Foreign Employment Income

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 ITAA 1936 provides that where Australian resident individuals are engaged in foreign service for a continuous period of not less than 91 days, foreign earnings derived from that foreign service are exempt from tax in Australia.

Period of service in country A

Subsection 23AG(1AA) of the ITAA 1936, which took effect from 1 July 2009, provides that foreign earnings will not be exempt under section 23AG of the ITAA 1936 unless the continuous period of foreign service is directly attributable to the following:

· delivery of Australian official development assistance by your employer

· activities of your employer in operating a public fund declared by the Treasurer to be a developing country relief fund, or a public fund established and maintained to provide monetary relief to people in a developing foreign country that has experienced a disaster (a public disaster relief fund)

· activities of your employer as a prescribed charitable or religious institution exempt from Australian income tax because it is located outside Australia or the institution is pursuing objectives outside Australia

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

In your case:

You are employed with an organisation responsible for delivering Australian overseas development assistance. You were recalled to duty in Country A and commenced foreign service from a specific date in the 2010 financial year to a specific date in the 2010 financial year performing specific duties.

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

Extended meaning of engaged in foreign service - subsection 23AG(6)

Subsection 23AG(6) of the ITAA 1936 provides that the period of foreign service will include recreation leave (which is accrued as a result of the foreign service) other than long service leave or leave without pay or reduced pay and will not constitute a break in a period of foreign service.

In your case:

You completed your period of foreign service in Country A from a specific date in the 2010 financial year to a specific date in the 2010 financial year and returned to Australia on a specific date in the 2010 financial year. Immediately prior to the commencement of your next overseas posting to Country C, you took a specific number of days recreation leave from a specific date in the 2010 financial year to a specific date in the 2010 financial year.

As your recreation leave accrued during, and as part of, your overseas posting, this will form part of your period of foreign service in Country A as indicated under Subsection 23AG(6) of the ITAA 1936. As a result, your period of recreation leave will therefore be exempt income in Australia under section 23AG of the Income Tax Assessment Act 1936 (ITAA 1936) and is not assessable under subsection 6-5(2) of the ITAA 1997.

Foreign income tax

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 Country A. Therefore, paragraphs 23AG(2)(a) and 23AG(2)(b) of the ITAA 1936 will not apply.

As the laws of Country A provide for the imposition of income tax and do not generally exempt employment income from income tax, paragraphs 23AG(2)(c) and (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 are 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, your foreign employment income from your period of service in Country A consisting of salary and overseas allowances will be exempt from Australian income tax under section 23AG of the ITAA 1936 and is not assessable under subsection 6-5(2) of the ITAA 1997.

Period of service in Australia

You ceased your period of foreign service in Country A on a specific date in the 2010 financial year and returned to Australia on a specific date in the 2010 financial year. You commenced working from your employer's office in Australia from a specific date in the 2010 financial year to a specific date in the 2010 financial year.

In the case of French v. FC of T (1957) 98 CLR 398 it was determined that the source of a taxpayer's income is the place where the services are performed.

In your case, the income you received from Employer A during a specific period had an Australian source and was for work performed by you within Australia. This work did not form part of your period of foreign service in Country A nor part of your next period of foreign service in Country B.

Given this, you do not satisfy any of the conditions for exemption under subsection 23AG(1AA) of the ITAA 1936, and therefore the income you received from Employer A during a specific period falling within the 2010 financial year will be assessable under subsection 6-5(2) of the ITAA 1997.

Note:

If you derive income from exempt foreign employment under section 23AG of the ITAA1936, that income may be taken into account in calculating the tax payable on your other income.

You must declare foreign employment income you earn that is exempt from Australian tax as it is taken into account to work out the amount of tax you have to pay on your assessable income. In other words, whilst your exempt foreign employment income is not taxed in Australia, it will affect the tax you are liable to pay on any other income you earn.