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Ruling

Subject:

Foreign income

Question:

Are the salary and wages you derive in relation to your deployment to Country A exempt from income tax in Australia under section 23AG of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer:

Yes.

This ruling applies for the following periods:

Year ended 30 June 2011.

Year ending 30 June 2012.

Year ending 30 June 2013.

Year ending 30 June 2014.

The scheme commenced on:

1 July 2010.

Relevant facts

You are an Australian resident for taxation purposes.

You are employed by Company A to work in Country A on an AusAID project from some time in the 2010-11 to some time in the 2013-14 income year.

The project is managed under contract by Company A.

You are paid salary and wages.

You intend on taking annual leave during your period of employment in the Country A. This leave would have accrued as a result of your foreign service.

If you do return to Australia on leave, you will not be undertaking any work-related duties.

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

Your income is exempt from tax Country A because of the existence of a Memorandum of Understanding (MOU) between Australia and Country A.

There is no tax treaty between Australia and Country A.

Relevant legislative provisions:

Income Tax Assessment Act 1936 subsection 23AG(1)

Income Tax Assessment Act 1936 subsection 23AG(7)

Income Tax Assessment Act 1936 section 23AG

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

Income Tax Assessment Act 1936 subsection 23AG(6)

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)

Income Tax Assessment Act 1936 paragraph 23AG(2)(e)

Income Tax Assessment Act 1936 paragraph 23AG(2)(f)

Income Tax Assessment Act 1936 paragraph 23AG(2)(g)

Reasons for decision

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 1 July 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.

As you are deployed overseas on an AusAID project in a specific role, you are delivering official development assistance through your employer therefore satisfy one of the conditions for exemption under subsection 23AG(1AA) of the ITAA 1936.

Under subsection 23AG(6) of the ITAA 1936 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 intend not to take any breaks in your employment other than leave which will accrue during your service in Country A. This leave will form part of your foreign service, and accordingly the payments for the leave will qualify as foreign earnings.

To qualify for the exemption under subsection 23AG(1) of the ITAA 1936, it is a requirement that the foreign earnings be derived by an Australia resident who was engaged in foreign service and whose earnings were derived from that foreign service.

As you receive salary and wages from your foreign employment, this is considered to be derived from your foreign service.

Subsection 23AG(2) of the ITAA 1936 provides that no exemption is available under subsection 23AG(1) of the ITAA 1936 in circumstances where an amount of foreign earnings derived from service in a foreign country is exempt from tax in the foreign country solely because of:

§ a tax treaty or a law of a country that gives effect to such an agreement (paragraphs 23AG(2)(a) and (b) of the ITAA 1936)

§ the law of a foreign country generally exempts from, or does not provide for the imposition of income tax on income derived in the capacity of an employee, income from personal services or any other similar income (paragraphs 23AG(2)(c) and (d) of the ITAA 1936), or

§ a law or international agreement dealing with privileges and immunities of diplomats or consuls or of persons connected with international organisations applies (paragraphs 23AG(2)(e), (f) and (g) of the ITAA 1936).

There is currently no tax treaty between Australia and Country A.

The salary and wages you derive in Country A are not exempt, under a general provision, from income tax in Country A.

The privileges and immunities of persons connected with an international organisation do not apply to the situation in Country A.  

Your salary and wages are exempt from tax in Country A because of the existence of a Memorandum of Understanding (MOU) between Australia and Country A.

Accordingly, your salary and wages will be exempt in Country A for a reason other than those listed in subsection 23AG(2) of the ITAA 1936.

Therefore, subsection 23AG(2) of the ITAA 1936 will not apply to deny the exemption under subsection 23AG(1) of the ITAA 1936.

In your case, you are an Australian resident for taxation purposes and are engaged in foreign service for a continuous period of not less than 91 days.

Accordingly, the salary and wages you receive during your deployment to Country A are exempt from income tax in Australia under subsection 23AG(1) of the ITAA 1936.