Edited version of private ruling

Authorisation Number: 1011803203502

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Ruling

Subject: Foreign employment income

Question

Are the salary and overseas allowances you receive in Country X 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 2011

Year ending 30 June 2012

Year ending 30 June 2013

Year ending 30 June 2014

The scheme commenced on

1 July 2010

Relevant facts and circumstances

You are an Australian resident for taxation purposes.

You are an employee of an Australian aid organisation and have been posted to Country X on an Australian government aid program for a period of not less than 91 days.

As part of the overall remuneration package, you receive a salary and overseas allowances.

The overseas allowances are paid to cover various costs and hardship incurred while working in Country X.

You will only take leave that accrues during your posting to Country X.

If you return to Australia during your leave, you will not perform any work-related duties.

The laws of Country X 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 Country X.

Your salary and allowances are exempt from tax in Country X under the terms of the Memorandum of Understanding between the Government of Australia and the Government of Country X on Development Cooperation (MOU).

Relevant legislative provisions

Income Tax Assessment Act 1936 Subsection 23AG(1)

Income Tax Assessment Act 1936 Subsection 23AG(7)

Income Tax Assessment Act 1936 Subsection 23AG(6)

Income Tax Assessment Act 1936 Subsection 23AG(1AA)

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)

Reasons for decision

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).

Subsection 23AG(6) of the ITAA 1936 allows certain types of absences to be counted as foreign service, such as recreation or annual leave and sick leave wholly attributable to the period of foreign service.

Short trips to Australia or another country during a period of foreign service for reasons directly related to the foreign service to attend conferences, training sessions or briefing sessions are treated as part of the continuous period of foreign service, provided they are not excessive by comparison with the scheduled period of foreign service.

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 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 Australian official development assistance by the taxpayer's employer (generally provided by AusAID or 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 principally 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 posted to Country X by an Australian aid organisation to administer an Australian government aid program.

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

In addition to your salary, you receive overseas allowances.

As you receive a salary from your foreign employment, this salary is considered to be derived from your foreign service.

The overseas allowances are designed to cover various costs and hardship of the foreign service. As they are paid to compensate for costs arising from the foreign service and for the hardship attributable to the foreign service, they are considered to be derived from your foreign service.

Therefore, your salary and overseas allowances are foreign earnings from foreign service for the purposes of subsection 23AG(1) of the ITAA 1936.

However, 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 X. Therefore, paragraphs 23AG(2)(a) and 23AG(2)(b) of the ITAA 1936 do not apply.

As the laws of Country X 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 do not apply.

The exemption provided by the MOU does not fit within any of the other categories excluding exemption under subsection 23AG(2) of the ITAA 1936. 

Accordingly, subsection 23AG(2) of the ITAA 1936 will not apply because your salary and overseas allowances are not exempt in Country X solely because of any of the reasons listed in that subsection.

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 to your situation.

Consequently, the salary and overseas allowances you earn during your posting to Country X are 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.