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Ruling

Subject: Foreign employment income

Classification:

Foreign salary and wages

This ruling applies for the following periods:

Year ended 30 June 2010

The scheme commenced on:

30 June 2010

Question 1:

Is your income consisting of your salary and overseas allowances derived from your deployment with a specific project in Country A commencing on a specific date during the financial year ending 30 June 2010 and ceasing on a specific date during the financial year ending 30 June 2010 exempt income in Australia under section 23AG of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer 1:

Yes.

Question 2:

Is your income consisting of your transfer allowance derived from your employment with a specific project in Country A commencing on a specific date during the financial year ending 30 June 2010 and ceasing on a specific date during the financial year ending 30 June 2010 exempt income in Australia under section 23AG of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer 2:

No.

Facts:

You are an Australian resident for taxation purposes.

Your place of abode is Australia.

You are a permanent Australian Public Service (APS) employee, employed with Employer A.

You were transferred to a position with a specific project in Country A for the period commencing on a specific date during the financial year ending 30 June 2010 and ceasing on a specific date during the financial year ending 30 June 2010, inclusive.

You salary and allowances were continued to be paid by Employer A during your posting with the specific project, and you remained a fulltime APS employee throughout your deployment in Country A.

At the end of your temporary transfer, you returned to your position with Employer A in Australia.

Your deployment with the specific project in Country A was under a specific Act (Country A) and you did not occupy a diplomatic posting.

You accrued recreation leave during your deployment in Country A which you utilised throughout your period of employment in this role.

You departed Country A during your periods of recreation leave and did not perform any work-related duties whilst on recreation leave in Australia.

In addition to your salary, you received the following allowances:

· Transfer Allowance

· Overseas Allowances.

The transfer allowance was paid to cover costs associated with preparing for departure and returning from deployment, and was paid to you in two instalments:

· a specific amount paid on a specific date during the financial year ending 30 June 2010 - prior to your deployment;

· a specific amount paid on a specific date during the financial year ending 30 June 2010 - prior to the completion of your deployment.

The overseas allowances were paid fortnightly through your salary. Overseas allowances paid to you include:

· Cost of Living Adjustment (COLA) - this allowance is paid to compensate employees for the increased cost of purchasing goods and services at a post. You received a total of a specific amount for COLA during your deployment.

· Cost of Posting Allowance (COPA) - this allowance is paid to compensate for the wider range of impacts a posting has on an employee's life, and includes an amount factored into the calculation for rent and utility expenses. You received a total of a specific amount for COPA during your deployment.

· Household Allowance - this allowance is paid to assist with the additional costs incurred when maintaining a second household in Australia for either a spouse who does not live at the post, or a dependant child under 23 years who is undertaking fulltime tertiary studies who is not working fulltime and not in a long-term relationship. You received a total of a specific amount for this allowance during your deployment.

· Hardship Allowance - this allowance is paid to compensate employees for the difficult environment and hardship at a post, and to enable employees to fund alternate means of relief from a difficult environment. You received a total of a specific amount for this allowance during your deployment.

A specific agreement has been signed by the governments of Australia and Country A.

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

Your salary and allowances are exempt from taxation in Country A under a specific Act (Country A).

ATO views used:

TR 96/15

Reasons for decision

Foreign Employment Income

Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources, whether in or out of Australia, during the income year.

Salary and wages are ordinary income for the purpose of subsection 6-5(2) of the ITAA 1997.

Subsection 6-15(2) of the ITAA 1997 provides that if an amount is exempt income then it is not included in assessable income.

Section 11-15 of the ITAA 1997 lists those provisions dealing with income that may be exempt. Included in this list is section 23AG of the Income Tax Assessment Act 1936 (ITAA 1936), which deals with overseas employment income.

Subsection 23AG(1) of the ITAA 1936 provides that where Australian resident individuals are engaged in foreign service for a continuous period of not less than 91 days, foreign earnings derived from that foreign service are exempt from tax in Australia.

From 01 July 2009, subsection 23AG(1AA) of the ITAA 1936 came into effect and provides that foreign earnings will not be exempt under section 23AG of the ITAA 1936 unless the continuous period of foreign service is directly attributable to the following:

· delivery of Australian official development assistance by your employer

· activities of your employer in operating a public fund declared by the Treasurer to be a developing country relief fund, or a public fund established and maintained to provide monetary relief to people in a developing foreign country that has experienced a disaster (a public disaster relief fund)

· activities of your employer as a prescribed charitable or religious institution exempt from Australian income tax because it is located outside Australia or the institution is pursuing objectives outside Australia

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

Delivery of Australian official development assistance by the person's employer

The term 'Australian official development assistance' is not defined for the purposes of section 23AG of the ITAA 1936. However, the Explanatory Memorandum (EM) which accompanied Tax Laws Amendment (2009 Budget Measures No. 1) Bill 2009) introducing paragraph 23AG(1AA)(a) of the ITAA 1936 provides guidance on the meaning of the phrase. The relevant paragraphs are below:

Australian official development assistance

1.19 Australian official development assistance (ODA) is assistance delivered through the Australian Government's overseas aid program, as administered by the Department of Foreign Affairs and Trade and/or the Australian Agency for International Development (AusAID). Australian ODA aims to reduce poverty and achieve sustainable development in developing countries, in line with Australia's national interest.

1.20 In addition to providing Australian ODA directly, AusAID also competitively contracts aid work to Australian and international entities. Thus, in practice, individuals involved in the delivery of Australian ODA can include both Australian Public Service (APS) employees and non-APS employees.

1.21 For the purposes of subsection 23AG(1AA) the delivery of Australian ODA must be undertaken by the person's employer, which includes AusAID and an entity contracted by AusAID to assist in the delivery of Australian ODA.

In your case:

· You are employed by Employer A and were deployed on transfer to a specific project in Country A

Your employer has been considered to be enabling the provision of Australian official development assistance (ODA) that is being managed by Employer A.

As a result, your foreign service is directly attributable to the delivery of Australian ODA by your employer.

Breaks in Foreign Service

Subsection 23AG(6) of the ITAA 1936 provides that the period of a person's foreign service will include recreation leave (which is accrued as a result of the foreign service), other than long service leave or leave without pay or reduced pay, and will not constitute a break in a period of foreign service.

In your case:

· You accrued recreation leave during your specific period of deployment with the specific project

· You left Country A on several occasions to undertake recreation leave that accrued during your deployment

· You did not undertake any work-related duties whilst on recreation leave

As your recreation leave accrued during, and as part of, your overseas posting, this will form part of your period of foreign service in Country A.

Foreign Income and Tax Treaties

Subsection 23AG(2) of the ITAA 1936 provides that the exemption under subsection 23AG(1) of the ITAA 1936 will not apply where a person's income is exempt from tax in the foreign country only because of any one of the reasons listed in that section.

One of the listed reasons, contained in paragraph (b) of subsection 23AG(2) of the ITAA 1936, is where the income earned by a person in the foreign country is made exempt by the operation of a tax treaty.

Therefore, it is necessary to consider not only the income tax laws but also any applicable tax treaty.

There is no tax treaty between Australia and Country A. As a result, paragraphs 23AG(2)(a) and 23AG(2)(b) of the ITAA 1936 will not apply.

As the laws of Country A provide for the imposition of income tax and do not generally exempt employment income from income tax, paragraphs 23AG(2)(c) and (d) of the ITAA 1936 will also not apply.

None of the other reasons in subsection 23AG(2) of the ITAA 1936 apply to your situation.

A specific article of a specific agreement provides that personnel deployed to Country A as part of a specific project shall be exempt from taxation by Country A's government on their pay and other emoluments. The specific Act (Country A) gives legal effect to the specific article of the specific agreement.

The exemption from income tax provided for under the specific agreement does not comprise one of the reasons listed in subsection 23AG(2) of the ITAA 1936.

In your case:

· Your salary and allowances are exempt from tax in Country A under the terms of a specific agreement

As a result, your employment income will be exempt from tax in Country A for a reason other than those listed in subsection 23AG(2) of the ITAA 1936.

Consequently, your foreign employment income will be exempt from Australian income tax under section 23AG of the ITAA 1936.

Foreign service and allowances

Subject to the additional conditions imposed under subsection 23AG(1AA) of the ITAA 1936, subsection 23AG(1) of the ITAA 1936 provides that where Australian resident individuals are engaged in foreign service for a continuous period of not less than 91 days, foreign earnings derived from that foreign service are exempt from tax in Australia.

Subsection 23AG(7) of the ITAA 1936 provides that a person's foreign earnings include income consisting of salary, wages, bonuses or allowances. 

To qualify for the exemption under subsection 23AG(1), the foreign earnings must be derived from the foreign service. This 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. 

In your case:

In addition to your salary, you received a transfer allowance and several overseas allowances including:

· living adjustment allowance

· posting allowance

· Australian household allowance

· hardship allowance.

As the overseas allowances were paid to cover costs incurred while you were performing the foreign service, they are considered to be derived from your foreign service.

Accordingly, the overseas allowances are exempt from income tax under subsection 23AG(1) of the ITAA 1936, and are not assessable under subsection 6-5(2) of the ITAA 1997.

The transfer allowance was paid to cover relocation costs arising at the commencement and completion of your deployment, and is not paid to cover costs arising from the performance of your foreign service. Therefore, it is not considered to be derived from your foreign service.

Accordingly, the transfer allowance is not considered to be exempt from income tax under subsection 23AG(1) of the ITAA 1936 and will therefore be classed as assessable income under subsection 6-5(2) of the ITAA 1997.

Conclusion:

You are an Australian resident for taxation purposes who is engaged in foreign service for a continuous period of not less than 91days, and your foreign service is directly attributable to the delivery of Australian ODA by your employer.

Accordingly, the salary and overseas allowances received by you from your deployment in Country A is exempt from tax under subsection 23AG(1) of the ITAA 1936, and is therefore considered to be exempt income under subsection 6-15(2) of the ITAA 1997.

However, the transfer allowance that you received to cover relocation costs to Country A and for your return to Australia is not considered to be derived from your foreign service, and therefore is not exempt from tax under subsection 23AG(1) of the ITAA 1936.

The transfer allowance is considered to be assessable income under subsection 6-15(2) of the ITAA 1997 and should therefore be included in your assessable income under subsection 6-5(2) of the ITAA 1997.

Note:

If you derive income from exempt foreign employment under section 23AG of the ITAA 1936, that income may be taken into account in calculating the tax payable on your other income.

You must declare foreign employment income you earn that is exempt from Australian tax as it is taken into account to work out the amount of tax you have to pay on your assessable income. In other words, whilst your exempt foreign employment income is not taxed in Australia, it will affect the tax you are liable to pay on any other income you earn.

Relevant legislative provisions

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

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)

Rulings and determinations

Taxation Ruling TR 96/15 (ATO View)

Taxation Ruling IT 2441 (ATO View)

Taxation Ruling IT 2015 (ATO View)

Keywords

Exempt income

Foreign income

Foreign salary and wages

International tax

Other references

Explanatory Memorandum (EM), which accompanied Tax Laws Amendment (2009 Budget Measures No.1) Bill 2009