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Ruling

Subject: Foreign Income

Question:

Are the salary and allowances you derived from employment in Country A in the 2009-10 and 2010-11 income years exempt income in Australia?

Answer:

Yes.

This ruling applies for the following periods:

Year ended 30 June 2010.

Year ended 30 June 2011.

The scheme commenced on:

1 July 2009.

Relevant facts

You are a resident of Australia for tax purposes.

You were deployed to Country A from some time in the 2009-10 income year to some time in the 2010-11 income year as a full time employee by a specific Australian government department.

This specific Australian government department paid your salary and allowances and you remain a full time employee of the Australian Government.

You worked on a specific Development Program administered by this specific government department which was listed as Australian Official Development Assistance (ODA).

You took a few periods of recreation leave during your deployment. All this leave had accrued as a result of your foreign service.

You did not perform any work related duties whilst on recreation leave in Australia.

Apart from your salary income, you derived a few extra allowances as part of your foreign service in Country A.

There is no tax treaty between Australia and Country A.

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 Subsection 11-15

Income Tax Assessment Act 1936 subsection 23AG

Income Tax Assessment Act 1936 subsection 23AG(6)

Income Tax Assessment Act 1936 subsection 23AG(1)

Income Tax Assessment Act 1936 subsection 23AG(1AA)

Income Tax Assessment Act 1936 subsection 23AG(1AA)(a)

Reasons for decision

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.

In your case, in addition to your salary, you are also entitled to receive several allowances that relate to your overseas employment.

The overseas allowances you received are designed to cover various costs and hardship of the foreign service. As they will be paid to compensate you for costs arising from the foreign service and for the hardship attributable to the foreign service, they are considered to be derived from your foreign service as well.

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(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 took some recreation leave which was wholly attributable to the period of foreign service. This recreation leave forms part of your foreign service.

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. However, new subsection 23AG(1AA) of the ITAA 1936, which took effect from 1 July 2009, provides that those 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.

Paragraph 23AG(1AA)(a) of the ITAA 1936 is relevant to your employment. ODA is assistance delivered through the Australian Governments overseas aid program, as administered by the Department of Foreign Affairs and Trade and/or the Australian Agency for International Development (AusAid).

As you were employed by specific Australian government agency on a development program which was listed as Australian Official Developmental Assistance (ODA), your salary and allowances will fall under paragraph 23AG(1AA)(a) of the ITAA 1936.

Therefore, as you worked in Country A period of not less than 91 days, on a development program administered by a specific Australian government agency, your salary and allowances are exempt from tax in Australia 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 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 wages income in your Australian tax return.