Edited version of private ruling

Authorisation Number: 1011849368933

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Ruling

Subject: Foreign Income

Question 1:

Is the salary you derived from employment in Country A exempt income in Australia under section 23AG of the Income Tax Assessment Act 1936 (ITAA 1936) for the 2009-10 and 2010-11 income years?

Answer 1:

Yes.

Question 2:

Is Allowance A paid to you while employed in Country A exempt from income tax under section 23AG of the ITAA 1936 for the 2009-10 and 2010-11 income years?

Answer 2:

No.

Question 3:

Were the specific allowances paid to you while employed in Country A exempt from income tax under section 23AG of the ITAA 1936 for the 2009-10 and 2010-11 income years?

Answer 3:

Yes.

Question 4:

Will the income you derive from annual leave that accrued from your foreign service in Country A, and be taking in Australia in the 2010-11 and 2011-12 income years be exempt income under section 23AG of the ITAA 1936?

Answer 4:

Yes.

This ruling applies for the following period:

Year ended 30 June 2010.

Year ending 30 June 2011.

Year ending 30 June 2012.

The scheme commenced on:

1 July 2007.

Relevant facts

You are an Australian resident for taxation purposes.

You were deployed to Country A as an Australian government official to work in Country A as part of a particular project which commenced some time in the 2006-07 income year. You completed your posting some time in the 2010-11 income year.

The particular project you were working on was administered by AusAID.

You did not take any breaks in your employment.

As a result of this foreign employment you accrued annual leave which was not taken during this period. You intend on taking this annual leave in patches over the course of the 2010-11 and 2011-12 income years. You do not intend to perform any work related duties when you take this leave in Australia.

You received salary and wages in respect of this employment.

In addition to your salary, you were entitled to the following allowances:

· Allowance A, and

· a few other specific allowances.

Allowance A was payable in two instalments - once prior to deployment and once on completion of deployment. This allowance was paid to cover costs associated with preparing for departure and returning from deployment.

The other specific allowances were paid fortnightly through salary to cover various costs and hardship incurred while working in Country A.

There is a tax treaty between Australia and Country A.

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

Your salary and allowances were exempt from tax in Country A because of the existence of a specific Treaty between the Government of Australia and the Government of the Republic of Country A.

Relevant legislative provisions

Income Tax Assessment Act 1936 subsection 23AG(1)

Income Tax Assessment Act 1936 subsection 23AG(2)

Income Tax Assessment Act 1936 subsection 23AG(2)(b)

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

Income Tax Assessment Act 1936 subsection 23AG(6)

Income Tax Assessment Act 1936 subsection 23AG(7)

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

International Agreements Act 1953 section 5(1)

Reasons for decision

Subsection 23AG(1) of the (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 earnings include income consisting of salary, wages, bonuses or allowances (subsection 23AG(7) of the ITAA 1936).

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 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 1 July 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 Australia's overseas aid program by the individual's employer;

· the activities of the individual's employer in operating a developing country relief fund or a public disaster relief fund;

· the activities of the individual's employer being a prescribed institution that is exempt from Australian tax; or

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

In your case, you were appointed to undertake work for the Australian Government on a deployment which was funded for a specific project which was directly attributable to the delivery of Official Developmental Assistance (ODA).

As your deployment was directly attributable to the delivery of Official Developmental Assistance, you satisfy one of the conditions for exemption under subsection 23AG(1AA) of the ITAA 1936.

Annual leave accrued as a result of foreign service

Subsection 23AG(6) of the ITAA 1936 provides that for the purposes of section 23AG of the ITAA 1936, a period during which a person is engaged in foreign service includes any period during which the person is, in accordance with the terms and conditions of that service:

(a)  absent on recreation leave, other than:

(i)  leave wholly or partly attributable to a period of service or employment other than that foreign service;

(ii)  long service leave, furlough, extended leave or leave of a similar kind (however described); or

(iii)  leave without pay or on reduced pay; or

(b)  absent from work because of accident or illness.

This subsection accordingly extends the meaning of what constitutes continuous foreign service by deeming certain temporary absences from a period of foreign service to specifically form a part, and so preserve the continuity, of foreign service - absences that would otherwise constitute a break in a continuous period of foreign service.

Recreational leave that accrues while you are working overseas for an Australian employer but is not paid until you take the leave (even after you return to Australia) is still taken to be foreign earnings derived from that foreign service and is therefore exempt from Australian tax if the other earnings from that service are exempt. This is so even when you are paid after the foreign service was performed and the source of the annual leave payment was Australia.

In your case, the annual leave that accrued during your foreign service which you will be taking in Australia during the 2010-11and 2011-12 income years - will have been deemed to have formed part of that foreign service.

Allowance A

Allowance A was paid to you to cover costs associated with preparing for departure and returning from your deployment. This allowance was not paid to cover costs arising from the performance of your foreign service. It was paid to cover costs arising prior to and after the foreign service. Therefore, this allowance will not be considered to be derived from your foreign service.

Accordingly, Allowance A is not exempt from income tax in Australia under subsection 23AG(1) of the ITAA 1936 as it was not derived from your foreign service.

Salary, specific allowances and income derived from annual leave

As you received a salary from your employment in Country A, this salary is considered to be derived from your foreign service.

The specific allowances were 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, specific allowances and income derived from annual leave are foreign earnings from foreign service for the purposes of subsection 23AG(1) of the ITAA 1936.

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 a double tax agreement.

Section 5(1) of the International Agreements Act 1953 (Agreements Act) lists the current agreements.

Australia has a tax treaty with Country A (Country A Agreement) which operates to avoid the double taxation of income received by residents of Australia and Country A.

A specific Article of the Country A Agreement provides that remuneration paid by Australia to any individual in respect of services rendered in the discharge of governmental functions shall be taxable only in Australia. However, such remuneration will be taxable only in Country A if the services are rendered in Country A and the individual is a citizen of Country A, or did not become a resident of Country A solely for the purpose of performing the services.

The employment income you received in relation to your deployment to Country A is taxable only in Australia under a specific Article of the Country A Agreement as you are an Australian resident and the income is paid by Australia in respect of services rendered in the discharge of governmental functions.

As the employment income you received while posted to Country A is exempt from tax in Country A because of the operation of a tax treaty, paragraph 23AG(2)(b) of the ITAA 1936 would normally apply and the income would therefore not be exempt from tax under subsection 23AG(1) of the ITAA 1936.

However, the income you derived while on posting is also exempt from tax in Country A because of the terms of the General Agreement on Development Cooperation between the Government of Australia and the Government of Country A.

The exemption provided by the agreement does not fall under any of the other exemption categories under subsection 23AG(2) of the ITAA 1936.

Accordingly, you satisfy the conditions for exemption under section 23AG of the ITAA 1936.

Therefore the salary, specific allowances and income from annual leave you derived from employment in Country A are exempt from income tax in Australia under subsection 23AG(1) of the ITAA 1936.