Edited version of private ruling

Authorisation Number: 1011865850432

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Ruling

Subject: Foreign employment income

Question 1

Will the salary and overseas allowances you will earn in Country X exempt from income tax in Australia under section 23AG of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

Yes

Question 2

Will the transfer allowance you will receive in relation to your deployment to Country X exempt from income tax in Australia under section 23AG of the ITAA 1936?

Answer

No

This ruling applies for the following periods:

Year ending 30 June 2012

Year ending 30 June 2013

The scheme commences on:

1 July 2011

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You are an Australian resident for income tax purposes.

You are deployed on an aid project to Country X for a period of not less than 91 days.

You are an employee of an aid organisation.

Your deployment is directly attributable to the delivery of Australian official development assistance by the aid organisation.

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

The transfer allowance is paid prior to deployment. This allowance is paid to cover costs associated with preparing for departure.

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

You will only take recreation leave that is accrued during your service in Country X.

You will not be performing any work-related duties during breaks taken in Australia.

Country X has a taxation system that taxes employment income.

Your salary and allowances will be exempt from taxation in Country X under Clause 12 of the Annex to the Treaty on Development Co-operation between the Government of Australia and the Government of Country X.

There is a tax treaty between Australia and Country X.

Relevant legislative provisions

Income Tax Assessment Act 1936 Subsection 23AG(1)
Income Tax Assessment Act 1936 Subsection 23AG(7)
Income Tax Assessment Act 1936 Section 23AG
Income Tax Assessment Act 1936 Subsection 23AG(1AA)
Income Tax Assessment Act 1936 Subsection 23AG(6)
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)
Income Tax Assessment Act 1936 Paragraph 23AG(2)(e)
Income Tax Assessment Act 1936 Paragraph 23AG(2)(f)
Income Tax Assessment Act 1936 Paragraph 23AG(2)(g)
International Tax Agreements Act 1953 Schedule

Reasons for decision

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our 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 income tax in Australia.

Foreign earnings includes 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 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 employers like your organization or the relevant department in Australia);

· 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 have been appointed to undertake a deployment to Country X on an aid project.

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

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

Transfer allowance

The transfer allowance is paid to cover costs associated with preparing for departure and returning from deployment. This allowance is not paid to cover costs arising from the performance of your foreign service. It is paid to cover costs associated with preparing for departure and returning from deployment. Therefore, this allowance is not considered to be derived from your foreign service.

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

Salary and overseas allowances

As you will 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 will be paid to compensate for costs arising from the foreign service and for the hardship attributable to the foreign service, they will be considered to be derived from your foreign service.

Therefore, your salary and overseas allowances will be 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 this section. One of these reasons is a tax treaty contained in the International Tax Agreements Act 1953 (Agreements Act).

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

An Article of the Country X 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 X if the services are rendered in Country X and the individual is a national or citizen of Country X, or did not become a resident of Country X solely for the purpose of performing the services.

The employment income you will receive in relation to your deployment to Country X will be taxable only in Australia under the Article of the Country X Agreement as you are an Australian resident and the income will be paid by Australia in respect of services rendered in the discharge of governmental functions.

As the employment income you will receive while posted to Country X will be exempt from tax in Country X 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 will earn while on posting will be exempt from taxation in Country X in accordance with the provisions under the Treaty on Development Co-operation between the Government of Australia and the Government of Country X (Treaty).

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

You therefore will satisfy the conditions for exemption under section 23AG of the ITAA 1936.

Accordingly, the salary and allowances you will receive from employment in Country X will be exempt from Australian income tax 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 is referred to as exemption with progression prevents the exempt income from reducing the Australian tax payable on the other income. If you are required to lodge a tax return, this income needs to be included as exempt foreign salary and wages income in your Australian tax return.