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Ruling

Subject: Foreign sourced income

Questions and answers:

Are the salary and wages from your overseas deployment exempt from Australian income tax under section 23AG of the Income Tax Assessment Act 1936?

Yes.

Are any allowances that you receive prior to your deployment assessable in Australia?

Yes.

Are any allowances that you receive post your deployment assessable in Australia?

Yes.

This ruling applies for the following period

Year ended 30 June 2011

Year ended 30 June 2012

Year ended 30 June 2013

The scheme commenced on

1 July 2010

Relevant facts

You are an Australian resident for income tax purposes.

You are an Australian Public Service Employee and work for the Australian aid agency.

You will be deployed to country A, on an extended period on an Australian aide project.

Your role is to provide support in various areas in country A under an Australian aide project.

You will be engaged in service in country A for a continuous period in excess of 91 days.

You will be operating under a Government Treaty to provide assistance to country A.

You are afforded diplomatic status, however your salary and allowances are not part of any diplomatic privilege or immunity.

You will receive salary and other remuneration entitlements, including allowances that will continue to be paid on a fortnightly basis by your employer in Australia during your deployment and will remain eligible for performance bonuses.

The overseas allowances are paid as net allowances and paid fortnightly through your salary. These will be paid as a direct result of your foreign service and designed to assist with costs and any hardship incurred while deployed to country A.

You will accrue recreation leave per annum and in addition receive recreation leave per annum or pro-rata for part year of deployment.

You will take only recreation leave accrued while on deployment to country A.

During your period of foreign deployment you will not be required to undertake any work related duties if you return to Australia.

Apart from your recreation leave you do not envisage taking any other breaks during your period of foreign deployment.

There is a tax treaty in operation between the governments of Australia and country A. Under this treaty, it states that for certain purposes, an exemption on income taxes may be granted. We have highlighted the relevant extract.

You intend returning back to Australia to reside on a permanent basis on the completion of your deployment.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 23AG.

Income Tax Assessment Act 1936 Subsection 23AG(7).

Income Tax Assessment Act 1936 Subsection 23AG(1AA).

Fringe Benefits Tax Assessment Act 1986 Section 136.

Income Tax Assessment Act 1936 Subsection 23AG(1).

Income Tax Assessment Act 1936 Subsection 23AG(2).

Income Tax Assessment Act 1936 Subsection 23AG(6).

International Tax Agreements Act 1953 Section Sch2-Art15.

International Tax Agreements Act 1953 Subsection Sch2-Art15(1).

International Tax Agreements Act 1953 Subsection Sch2-Art15(2).

International Tax Agreements Act 1953 Section Sch2-Art19

Reasons for decision

Salary and Overseas allowances

Subsection 23AG(1) of the Income Tax Assessment Act 1936 (ITAA 1936), provides that where a resident taxpayer is engaged in foreign service for a continuous period of not less than 91 days, any foreign earnings derived from foreign service will be exempt from tax in Australia. 'Foreign service' includes service in a foreign country in the capacity of an employee and 'foreign earnings' includes income consisting of salary, wages, bonuses and 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.

Prior and post allowance

Allowances are often paid to cover costs associated with preparing for departure and returning from the deployment. Theses allowances are not paid to cover costs arising from the performance of foreign service, they are paid to cover costs arising prior to and after the end of the period of foreign service.

Accordingly, any allowances that you are paid to cover costs associated with preparing for departure and returning from the deployment are not considered to be derived from foreign service, and therefore not exempt from income tax under subsection 23AG(1) of the ITAA 1936.

Foreign service

Subsection 23AG(6) of the ITAA 1936, and Taxation Ruling TR 96/15 Income tax: foreign tax credit system: issues relating to the practical application of section 23AG: treat certain temporary absences from foreign service as forming part of a period of foreign service. This includes absences on recreation leave which is accrued as a result of the foreign service, other than long service leave, leave without pay and leave attributable to non-foreign service.

You are employed by the Australian Public Service to serve in country A. Your deployment to country A constitutes 'foreign service' as you will undertake 'service in a foreign country as the holder of an office or in the capacity of an employee'. You will be deployed in country A for a continuous period in excess of 91 days and only take recreation leave that has been accrued during your period of deployment. Therefore you satisfy all the basic tests for the exemption of foreign employment income in subsection 23AG(1) of the ITAA 1936.

Subsection 23AG(1AA) of the ITAA 1936 applies to foreign earnings derived on or after 1 July 2009 from foreign service performed on or after 1 July 2009. It provides that foreign earnings are not eligible for exemption from tax under section 23AG of the ITAA 1936 unless the continuous period of foreign service is directly attributable to any of the categories listed therein. One of the categories listed is the period of foreign is directly attributable of the delivery of Australian official development assistance by the persons employer (paragraph 23AG(1AA)(a) of the ITAA 1936).

As you will be deployed to country A by the Australian government for the purposes of providing Australian official development, your deployment to country A falls within the category in paragraph 23AG(1AA)(a) of the ITAA 1936. Therefore, subsection 23AG(1AA) will not operate to deny the exemption available under subsection 23AG(1) of the ITAA 1936.

Conditions for non-exemption

Subsection 23AG(2)(a) of the ITAA 1936, provides that an amount of foreign earning derived in a foreign country is not exempt from tax under this section if the amount is exempt from income tax in the foreign country only because of any of the categories listed therein. One of the categories listed is 'a law in the foreign country giving effect to a double tax agreement (paragraph 23AG(2)(a)) of the ITAA 1936.

Australia has an International Tax Agreement with country A.

Section 4 of the International Tax Agreements Act 1953 (Agreements Act) incorporates that Act with the ITAA 1936 and the ITAA 1997 so that all three Acts are read as one. The Agreements Act overrides both the ITAA 1936 and ITAA 1997 where there are inconsistent provisions (except in some limited situations).

Section 5 of the Agreements Act states that, subject to the provisions of the Agreements Act, any provision in an Agreement listed in section 5 has the force of law.

The country A agreement operates to avoid the double taxation of income received by residents of Australia and country A.

An Article of the country A agreement advises that remuneration, other than a pension or annuity; paid by Australia or a political subdivision or local authority of Australia to any individual in respect of services rendered in discharge of government functions shall be taxable only in Australia.

Therefore under the terms of the of the International Tax Agreement any remuneration that you receive as a result of your foreign will be exempt from income tax in country A.

However, the double tax agreement between Australia and country A is not the only reason why your income is exempt from taxation in country A. Under a treaty between Australia and country A, it states that for certain purposes, an exemption on income taxes may be granted. We have highlighted the relevant extract.

Therefore, as you are also exempt from income tax under the Treaty, section, 23AG of the ITAA 1936 will not operate to apply Australia income tax to any income that you receive as a result of your foreign service in country A.

Conclusion

You will be deployed in country A for a continuous period of not less than 91 days and you will take only recreation leave accrued while on deployment and country A has a tax system in place that taxes employment income. However, your employment income will not be taxed under this system because your duties are directly attributed to the delivery of Australian official assistance. The Treaty in place between Australia and country A, also exempts your foreign sourced income from being taxed in country A, therefore section 23AG of the ITAA 1936 will operate to exempt your foreign sourced income from being taxed in Australia.

Accordingly, any income that you receive from your employment while working in country A will be exempt from Australian income tax under 23AG of the ITAA 1936.