Edited version of private ruling

Authorisation Number: 1011909577561

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Ruling

Subject: Foreign employment income

Question 1

Is the salary you receive from employment in Country A exempt from income tax in Australia?

Answer

Yes.

Question 2

Is the transfer allowance you receive from employment in Country A exempt from income tax in Australia?

Answer

No.

Question

Are the financial advice and the outlay advance allowances you receive from employment in Country A taxable in Australia?

Answer

No.

Question 4

Are the overseas allowances you receive from employment in Country A exempt from income tax in Australia?

Answer

Yes.

This ruling applies for the following periods

Year ended 30 June 2012

Year ended 30 June 2013

Year ended 30 June 2014

The scheme commenced on

1 July 2011

Relevant facts and circumstances

You are an Australian resident for taxation purposes.

You have been appointed to undertake a deployment in Country A on an Australian overseas aid project for a period of not less than 91 days.

In addition to your salary, you will receive the following allowances:

· transfer allowance

· financial advice allowance

· outlay advance, and

· overseas allowances.

The transfer allowance is paid for costs associated with preparing for the departure of and returning from the deployment. It is paid in two instalments, one prior to deployment and one on completion of deployment.

The financial advice allowance is a reimbursable amount for financial advice.

The outlay advance is repayable by salary deduction.

Your foreign earnings are directly attributable to the delivery of Australian official development assistance.

You will accrue recreation leave during your posting to Country A.

You will not take any breaks other than your recreation leave that accrued during your deployment.

You will not perform any work related duties if you undertake your break in Australia.

Australia does not have a tax treaty with Country A.

Country A taxes employment income under its domestic law.

Your foreign employment income is exempt from income tax in Country A under the terms of an Agreement between Australia and Country A.

Relevant legislative provisions

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)

Income Tax Assessment Act 1936 Subsection 23AG(6)

Income Tax Assessment Act 1936 Subsection 23AG(7)

Income Tax Assessment Act 1997 Section 6-5

Reasons for decision

Summary

The salary and overseas allowances you receive in relation to your deployment to Country A are exempt from income tax in Australia under section 23AG of the Income Tax Assessment Act 1936 (ITAA 1936).

The transfer allowance you receive is subject to income tax in Australia as it is not paid as a direct result of your foreign service.

The financial advice and outlay advance allowances are not considered to be income for taxation purposes. Therefore, these payments do not form part of your assessable income for tax purposes.

Detailed reasoning

Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) states that the assessable income of an Australian resident includes income derived from all sources, whether in or out of Australia, during the income year.

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.

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:

(a) the delivery of Australia's overseas aid program by the individuals' employer, generally provided by AusAID or the Department of Foreign Affairs and Trade

(b) the activities of the individual's employer in operating a developing country relief fund or a public disaster relief fund

(c) the activities of the individual's employer being a prescribed institution that is exempt from Australian tax, or

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

As your deployment is directly attributable to the delivery of an Australian overseas aid program, 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, a financial advice allowance, an outlay advance and overseas allowances.

Transfer allowance

The transfer allowance is paid to you to cover costs associated with preparing for departure. This allowance is not paid to cover costs arising from the performance of your foreign service. It is paid to cover costs arising prior to, and after, the foreign service. 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.

Financial advice allowance

The financial advice allowance is a reimbursement paid to employees who seek financial advice up to a set amount.

Taxation Ruling TR 92/15 explains the difference between an allowance and a reimbursement. A payment is an allowance when a person is paid a definite predetermined amount to cover an estimated expense. It is paid regardless of whether the recipient incurs the expected expense.

A payment is a reimbursement when the recipient is compensated exactly (meaning precisely as opposed to approximately), whether wholly or partly, for an expense already incurred although not necessarily disbursed. In general, the provider considers the expense to be their own and the recipient incurs the expenditure on behalf of the provider.

From the information provided the financial advice allowance is actually a reimbursement which will be paid to you for the cost of obtaining financial advice.

As such, the amount will not be assessable under section 6-5 of the ITAA 1997.

Outlay advance allowance

You are required to repay any outlay advance received by salary deduction over the first X pays at your post.

As the outlay advance is repayable it is considered to be a loan from your employer and not income.

Accordingly, the outlay advance is not assessable under section 6-5 of the ITAA 1997.

Salary and overseas allowances

As you receive a salary from your employment in Country A, 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 are paid to compensate for costs arising from the foreign service and the hardship attributable to the foreign service, they are considered to be derived from your foreign service.

Therefore, your salary and overseas allowances are foreign earnings from foreign service for the purposes of subsection 23AG(1) of the ITAA 1936.

Continuous period of foreign service

Subsection 23AG(6) of the ITAA 1936 provides that certain temporary absences form part of a period of foreign service such as recreation leave which is accrued as a result of the foreign service, other than long service leave and leave without pay.

In your case, you are unsure of whether you will take recreation leave in the Country A or Australia. If you do return to Australia you will not be required to undertake any work related duties whilst on your break.

As the recreation leave relates to your foreign service and you will not be working in Australia whilst on leave, this recreation leave forms part of your foreign service.

Exemption of foreign income

The exemption does not apply if the income is exempt from tax in the foreign country because of any of the reasons listed in subsection 23AG(2) of the ITAA 1936:

(a) a tax treaty with Australia or a law giving effect to a treaty agreement

(b) the foreign country does not impose tax on employment or personal services income

(c) a law of the foreign country or an international agreement to which Australia is a party that deals with

(d) diplomatic or consular privileges and immunities, or

(e) privileges and immunities for people connected with international organisations such as the United Nations.

The employment income you receive in relation to your deployment is exempt from tax in Country A. It is exempt due to a provision contained within a treaty between Australia and Country A. This treaty is not a tax treaty.

Country A does not have a tax treaty with Australia but does impose tax on employment or personal services income.

Your employment income will not be exempt from tax in Country A due to one of the reasons contained within subsection 23AG(2) of the ITAA 1936.

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

Accordingly, the salary and overseas allowances you receive from employment in Country A are exempt from income tax in Australia 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 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.