Edited version of private ruling

Authorisation Number: 1011808343863

This edited version of your ruling will be published in the public Register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns.

Ruling

Subject: foreign employment income

This ruling applies for the following periods:

Year ending 30 June 2011

The scheme commenced on:

29 January 2011

Question 1:

Is your income consisting of your salary and a specific allowance derived from your employment with Employer A in Country A during a specific period during the financial year ending 30 June 2011 exempt income in Australia under section 23AG of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer 1:

Yes.

Question 2:

Is your income consisting of a second specific allowance derived from your employment with Employer A in Country A during a specific period during the financial year ending 30 June 2011 exempt income in Australia under section 23AG of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer 2:

No.

Facts:

You are an Australian resident for taxation purposes.

Your place of abode is Australia.

Your employer is Employer A and your contract of employment from a specific date in the financial year ending 30 June 2011 to a specific date in the financial year ending 30 June 2011.

You intend to return to Australia permanently when your employment contract ends.

Employer A has a contract with the Australian Agency for International Development (AusAID) of the Department of Foreign Affairs & Trade (DFAT) to manage a specific program in Country A.

The contract between Employer A and AusAID is due to cease on a particular date in the financial year ending 30 June 2011.

You travelled from Australia to Country A on a specific date in the financial year ending 30 June 2011 to commence your position with Employer A.

Your employment is performed on a fulltime basis for a minimum of specific number of hours per day over a specific number of days per week.

You do not work on a cyclical basis (e.g. 8 weeks continuous employment, followed by 2 weeks leave).

You will accrue a specific number of days recreation leave during your contract with Employer A which you are required to utilise during your period of employment with them.

Your recreation leave accrues while you are employed in Country A.

You have taken a specific number of days recreation leave to date, and during this period of leave returned to Australia at your own expense.

You do not perform any work-related duties whilst on leave in Australia.

You reside with a specific person in rented accommodation in Country A.

Your employer pays you a salary and a specific allowance.

Your specific allowance is paid to cover the costs of obtaining and maintaining rental accommodation, utilities expenses, private telephone calls, insurances, etc.

You will receive a specific allowance in the form of a one-off lump sum payment at the completion of your contract of employment to cover the costs of relocation back to Australia.

Your salary and allowances are paid by Employer A in Australia and are deposited into your Australian bank account.

You state that your employment income is not taxable in Country A due to a memorandum of understanding between Australia and Country A.

Country A has a tax system in place that taxes employment income.

A specific agreement has been signed by the governments of Australia and Country A.

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.

From 01 July 2009, subsection 23AG(1AA) of the ITAA 1936 came into effect and 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:

Your employer, Employer A, is contracted by AusAID to manage a specific program in Country A.

Your employer is therefore considered to be enabling the provision of Australian official development assistance (ODA) that is being managed by AusAID. As a result, your foreign service is directly attributable to the delivery of Australian ODA by your employer.

Breaks in Foreign Service

Subsection 23AG(6) of the ITAA 1936 provides that the period of a person's 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 will accrue a specific number of days recreation leave during your contract with Employer A and have taken a specific number of days recreation leave to date, during which time you returned to Australia at your own expense.

You have stated that whilst on recreation leave you did not undertake any work-related duties.

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.

Foreign Income and Tax Treaties

Subsection 23AG(2) of the ITAA 1936 provides that the exemption under subsection 23AG(1) of the ITAA 1936 will not apply where a person's income is exempt from tax in the foreign country only because of any one of the reasons listed in that section.

One of the listed reasons, contained in paragraph (b) of subsection 23AG(2) of the ITAA 1936, is where the income earned by a person in the foreign country is made exempt by the operation of a tax treaty.

Therefore, it is necessary to consider not only the income tax laws but also any applicable tax treaty contained in the International Tax Agreements Act 1953 (Agreements Act).

There is no tax treaty between Australia and Country A. As a result, 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 also not apply.

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

A particular section of a specific agreement between Australia and Country A provides that personnel deployed to Country A as part of a specific agreement shall be exempt from taxation by Country A government on their pay and other emoluments. This exemption does not comprise one of the reasons listed in subsection 23AG(2) of the ITAA 1936.

In your case:

Your salary and wages are exempt from tax in Country A under the terms of a particular agreement signed by the governments of Australia and Country A.

Accordingly, your employment income will be exempt in Country A for a reason other than those listed in subsection 23AG(2). Therefore, subsection 23AG(2) will not apply to deny the exemption under subsection 23AG(1).

Consequently, your foreign employment income will be exempt from Australian income tax under section 23AG of the ITAA 1936.

Foreign service and allowances

Subject to the additional conditions imposed under subsection 23AG(1AA) of the ITAA 1936, 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.

Subsection 23AG(7) of the ITAA 1936 provides that a person's foreign earnings include income consisting of salary, wages, bonuses or allowances. 

To qualify for the exemption under subsection 23AG(1), the foreign earnings must be derived from the foreign service. This 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. 

In your case:

In addition to your salary, you receive allowances, including a specific allowance which is paid for you and a particular person to cover the costs of obtaining and maintaining rental accommodation, payment of utilities expenses, private telephone calls, insurances, etc.

As the specific allowance is paid to cover costs incurred while you are performing the foreign service, it is considered to be derived from your foreign service.

Accordingly, the specific allowance is exempt from income tax under subsection 23AG(1) of the ITAA 1936 and is not assessable subsection 6-5(2) of the ITAA 1997.

Your employer will also pay you a second specific allowance in the form of a one-off lump sum payment at the completion of your contract of employment to cover the costs of relocating back to Australia.

The second specific allowance is paid after the completion of foreign service, and is not paid to cover costs arising from the performance of your foreign service. As the specific allowance is paid to cover relocation costs arising at the completion of your employment contract, it is not considered to be derived from your foreign service.

Accordingly, your second specific allowance paid to cover relocation costs arising at the completion of your employment contract, is not considered to be exempt from income tax under subsection 23AG(1) of the ITAA 1936 and will therefore be classed as assessable income under subsection 6-5(2) of the ITAA 1997.

Conclusion:

You are an Australian resident for taxation purposes, and are engaged in foreign service for a continuous period of not less than 91days.

Your foreign service is directly attributable to the delivery of Australian ODA by your employer, Employer A.

Accordingly, the salary and the specific allowance received by you from services performed in country A is exempt from tax under subsection 23AG(1) of the ITAA 1936, and is therefore considered to be exempt income under subsection 6-15(2) of the ITAA 1997.

However, the second specific allowance that you will receive at the completion of your employment contract to cover relocation costs to Australia is not considered to be derived from your foreign service, and therefore is not exempt from tax under subsection 23AG(1) of the ITAA 1936.

The second specific allowance paid to cover relocation costs arising at the completion of your employment contract is considered to be assessable income under subsection 6-15(2) of the ITAA 1997 and should therefore be included in your assessable income under subsection 6-5(2) of the ITAA 1997.

Note:

If you derive income from exempt foreign employment under section 23AG of the ITAA 1936, 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.

Relevant legislative provisions

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

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) and

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