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Edited version of private ruling
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Ruling
Subject: Foreign income
Is the salary you receive during deployment overseas exempt in Australia under subsection 23AG(1) of the Income Tax Assessment Act 1936 (ITAA 1936)?
Answer
Yes
This ruling applies for the following periods
Year ended 30 June 2012
Year ended 30 June 2013
The scheme commenced on
29 July 2011
Relevant facts and circumstances
You are an Australian resident and employed by the Australian Defence Force (ADF).
You have been posted overseas for one year commencing XX July 20XX as a member of a disciplined force in a non-warlike operation.
The overseas location has a tax system that taxes employment income and has no tax treaty with Australia.
Reasons for decision
Subsection 23AG (1) of the ITAA 1936 provides that foreign earnings derived by an Australian resident individual engaged in continuous foreign service for not less than 91 days employment in a foreign country are exempt from tax in Australia.
Paragraph 23AG(1AA)(d) of the ITAA 1936 provides that such earnings are only exempt from income tax if the foreign service is directly attributable to that person's deployment outside Australia as a member of a disciplined force by an Australian government, or an authority thereof.
A disciplined force is intended to refer to a defence force, including a peacekeeping force, and a police force. In a defence force context, the exemption would apply to a person's deployment outside Australia as part of a non-warlike operation.
'Foreign service' includes service in a foreign country in the capacity as an employee and '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.
You are employed by the ADF and you are posted overseas. During this posting, you will continue to receive your normal salary from your employer. This salary will be considered to be derived from your foreign service for the purposes of paragraph 23AG(1AA)(d) of the ITAA 1936.
The exemption contained in subsection 23AG(1) of the ITAA 1936 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 (among other things) a tax treaty.
In your case, none of the reasons listed in subsection 23AG(2) of the ITAA 1936 apply to your circumstances. There is no tax treaty between Australia and the overseas location. Your employment income overseas will be subject to tax in that location under their domestic law.
As such, you will be engaged in foreign service for a continuous period of not less than 91 days and your income from that employment will not be exempt from tax in that location for any of the reasons listed in subsection 23AG(2) of the ITAA 1936.
Therefore, the salary you will receive during your deployment overseas will be exempt from income tax in Australia under subsection 23AG(1) of the ITAA 1936.