Edited version of private ruling

Authorisation Number: 1011851476719

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Ruling

Subject: Exempt foreign employment income

Question 1

Is the salary you receive from employment in another country exempt from income tax in Australia under section 23AG of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

Yes

Question 2

Is the transfer allowance you receive in relation to your employment in another country exempt from income tax in Australia under section 23 AG of the ITAA 1936?

Answer

No

Question 3

Are the overseas allowances you receive in relation to your employment in another country exempt from income tax in Australia under section 23AG of the ITAA 1936?

Answer

Yes

This ruling applies for the following period

Year ending 30 June 2012

Year ending 30 June 2013

Year ending 30 June 2014

The scheme commenced on

1 July 2011

Relevant facts

You are an Australian resident for taxation purposes.

You have been selected for a posting to another country on an Australian government agency project for a period of not less than 91 days.

You are an employee of the Australian government agency.

Your foreign earnings are directly attributable to the delivery of Australian project by your employer.

In addition to your salary, you will receive a transfer allowance and overseas allowances.

The transfer allowance is paid for costs associated with preparing for departure and returning from your deployment.

The overseas allowances are paid to compensate for costs arising from the foreign service and for the hardship attributable to the foreign service. They include:

· cost of living allowance

· cost of posting allowance

· hardship allowance

· child allowances

You will accrue recreation leave during your posting to the other country. You do not intend to take any breaks other than your recreation leave that accrues during your deployment to the other country.

You are not required to perform any work-related duties if you undertake any breaks in Australia.

Australia has a tax treaty with the other country.

The other country taxes employment income under its domestic law.

Your foreign employment income is exempt from income tax in the other country under the terms of the General Agreement on Development Cooperation between the Government of Australia and the Government of the other country (General Agreement).

Relevant legislative provisions

Income Tax Assessment Act 1396 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 Paragraph 23AG(2)(b)

Income Tax Assessment Act 1936 Subsection 23AG(6)

Income Tax Assessment act 1936 Subsection 23AG(7)

International Tax Agreements Act 1953 Section 5

Reasons for decision

Subsection 23AG(1) of the ITAA 1936 provides that the 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 and allowances (subsection23AG(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 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 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 9or an authority thereof) as a member of a disciplined force.

In your case, you have been appointed to undertake a deployment to the other country on an Australian government agency project as a development program specialist.

As your deployment is directly attributable to the delivery of an Australian overseas aid program 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 a transfer allowance and overseas allowances.

Salary

Your salary from foreign employment in the other country has been derived from foreign service. It is therefore exempt from Australian tax under subsection 23AG(1) of the ITAA 1936.

Transfer allowance

You receive a transfer allowance payable in two instalments. This allowance is paid to cover costs associated with preparing for departure and returning from the deployment. A transfer allowance is not paid to cover costs arising from the performance of your foreign service.

Therefore, a transfer allowance is not derived from foreign service. Accordingly, a transfer allowance is not exempt from income tax in Australia under subsection 23AG(1) of the ITAA 1936.

Overseas allowances

Overseas allowances such as cost of living allowance, cost of posting allowance, hardship allowance and child allowances are paid to cover various costs and hardship of the foreign service. These allowances are paid to cover expenditure while the employee is in the foreign country and engaged in a period of foreign service, and is therefore derived from that foreign service. Accordingly, these overseas allowances are exempt from income tax in Australia under subsection 23AG(1) of the ITAA 1936.

Further consideration of exemption

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 tax treaty between Australia and the foreign country.

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

An Article of the treaty provides that salary and wages income derived by an individual who is a resident of Australia in respect of employment exercised in the other country may be taxable in both Australia and the other country.

Another Article of the treaty provides that salary and wages derived by an individual who is a resident of Australia shall be exempt from tax in the other country if they participated in certain Australian Government programs to the other country.

The exemption of income provided for in subsection 23AG(1) of the ITAA 1936 is subject to subsection 23AG(2) of the ITAA 1936 so that the exemption from tax in Australia in subsection 23AG(1) of the ITAA 1936 does not apply if the income is exempt from taxation in the foreign country only because of any of the reasons set out in subsection 23AG(2) of the ITAA 1936.

As the employment income you receive while posted to the other country is exempt from tax in the other country 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 earn while on posting is also exempt from tax in the other country because of the terms of the General Agreement.

Paragraph 23AG(2)(b) of the ITAA 1936 will not apply because the employment income earned in the other country is not exempt in the other country solely because of the tax treaty between Australia and the other country. The exemption provided by the General Agreement does not fit within any of the other categories excluding exemption under subsection 23AG(2) of the ITAA 1936.

As you are engaged in foreign service for a continuous period of not less than 91 days, your salary and overseas allowances will be exempt from tax under subsection 23AG(1) of the ITAA 1936.

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 the 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.

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