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Ruling

Subject: Foreign employment income

Question 1

Is the salary you earned in Country X exempt from income tax in Australia under section 23AG of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

Yes.

Question 2

Is the transfer allowance you earned in relation to your deployment to Country X exempt from income tax in Australia under section 23AG of the ITAA 1936?

Answer

No.

Question 3

Are overseas allowances you earned in relation to your deployment to Country X exempt from income tax in Australia under section 23AG of the ITAA 1936?

Answer

Yes.

This ruling applies for the following period

Year ended 30 June 2011

The scheme commenced on

1 July 2010

Relevant facts and circumstances

You are an Australian resident for taxation purposes.

You are an employee of an Australian government department. 

You were deployed to Country X for a period of not less than 91 days as part of a regional assistance mission.

As part of the overall remuneration package, you received a salary, transfer allowance and overseas allowances, including a cost of posting allowance, a cost of living allowance, and a hardship allowance.

The transfer allowance was paid for costs associated with preparing for departure and returning from your deployment.

The overseas allowances were paid to compensate for costs arising from the foreign service and for the hardship attributable to the foreign service.

You did not perform diplomatic or consular duties.

The laws of Country X provide for the imposition of income tax and do not generally exempt employment income from income tax.

Your deployment was governed by a legislation of Country X.

Australia does not have a tax treaty with Country X.

Relevant legislative provisions

Income Tax Assessment Act 1936 Subsection 23AG(1)

Income Tax Assessment Act 1936 Subsection 23AG(6)

Income Tax Assessment Act 1936 Paragraph 23AG(6)(b)

Income Tax Assessment Act 1936 Subsection 23AG(2)

Income Tax Assessment Act 1936 Paragraph 23AG(2)(a)

Income Tax Assessment Act 1936 Paragraph 23AG(2)(b)

Income Tax Assessment Act 1936 Paragraph 23AG(2)(c)

Income Tax Assessment Act 1936 Paragraph 23AG(2)(d)

Reasons for decision

Subsection 23AG(1) of the Income Tax Assessment Act 1936 (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 income tax in Australia.

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.

Section 23AG of the ITAA 1936 has been amended so that foreign employment income derived by Australian residents will only be exempt in certain circumstances. These amendments are effective from 29 June 2009.

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:

· the delivery of Australian official development assistance by the taxpayer's employer (generally provided by AusAID or the Department of Foreign Affairs and Trade);

· the activities of the taxpayer's employer in operating a public fund covered by the deductible gift recipient categories overseas aid fund and developed country disaster relief fund;

· the activities of the taxpayer's employer where they are a charitable institution or religious institution which is income tax exempt because they are a prescribed institution located outside Australia or pursuing objectives principally outside Australia;

· the taxpayer's deployment outside Australia as a member of a disciplined force of Australia (generally considered to be the Australian Defence Force or Australian Federal Police); or

· an activity of a kind specified in the regulations.

In your case, you were appointed to undertake a deployment to Country X as part of a regional assistance mission.

As your deployment was directly attributable to the delivery of Australian official development assistance by your employer, you satisfy one of the conditions for exemption under subsection 23AG(1AA) of the ITAA 1936.

In addition to your salary, you received a transfer allowance and overseas allowances.

Transfer allowance

The transfer allowance was paid to you to cover costs associated with preparing for departure and returning from your deployment. This allowance was not paid to cover costs arising from the performance of your foreign service. It was paid to cover costs arising before 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.

Salary and overseas allowances

As you received a salary from your foreign employment, 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 were paid to compensate 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.

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

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

One of the reasons listed is where the income is exempt in the foreign country because of a tax treaty (paragraphs 23AG(2)(a) and 23AG(2)(b) of the ITAA 1936).

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

As the laws of Country X 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 not apply.

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

In your case, you were engaged in employment overseas for a continuous period of not less than 91 days, and none of the reasons listed in subsection 23AG(2) of the ITAA 1936 apply to your situation.

Consequently, the salary and overseas allowances you earned during your deployment to Country X are exempt from income 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 employment income in your Australian tax return.