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Ruling

Subject: Foreign Income

Question 1:

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

Answer 1:

Yes.

Question 2:

Is the specific allowance you receive in relation to your employment in Country A exempt from income tax in Australia under section 23AG of the ITAA 1936?

Answer 2:

No.

Question 3:

Is the salary you receive from employment in Country B exempt from income tax in Australia under section 23AG of the ITAA 1936?

Answer 3:

Yes.

Question 4:

Is the specific allowance you receive in relation to your employment in Country B exempt from income tax in Australia under section 23AG of the ITAA 1936?

Answer 4:

No.

This ruling applies for the following periods:

Year ending 30 June 2012

Year ending 30 June 2013

Year ending 30 June 2014

The scheme commenced on:

1 July 2011.

Relevant facts

You are an Australian resident for taxation purposes.

You are employed by a specific Australian government agency, and in some time in the 2011-12 income year, you were posted to work on a two year secondment to work on an Australian official developmental assistance program administered by this specific government agency.

For the first number of months, you will be based in Country A. And for the remainder of the secondment you will be based in Country B.

Apart from your salary, you will also derive a specific allowance which doesn't relate to your foreign service.

You will not perform any work-related duties if you undertake any breaks in Australia.

Australia does not have a tax treaty with Country A.

Country A taxes employment income under their domestic law.

Australia has a tax treaty with the Country B.

The Country B taxes employment income under their domestic law.

Your foreign employment income is exempt from income tax in Country A and Country B as part of a Memorandum of Understanding between the specific Australian government agency and another foundation.

The annual leave you have taken and plan to take during your foreign service will be a mixture of leave that accrued in Australia, and, leave that accrued during your foreign service. However, the component of leave that you accrued in Australia, will not be more than one-sixth of the time of your foreign service accumulated up until the time your leave is taken.

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(6A)

Income Tax Assessment Act 1936 Subsection 23AG(2)

International Tax Agreements Act 1953 Section 3AAA

International Tax Agreements Act 1953 Section 5

Reasons for decision

Salary in Country A

Subsection 23AG(1) of the (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 tax in Australia.

Foreign earnings include 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 a result of the undertaking of that foreign service.

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.

Under subsection 23AG (6A) of the ITAA 1936, two or more periods in which a person has been engaged in foreign service are together taken to constitute a continuous period of foreign service until the end of the last of the two or more periods or a time since the start of the first of the two or more periods, when the persons total period of absence exceeds one-sixth of the persons total period of foreign service.

In your case, the annual leave you've taken and plan to take during your foreign service in Country A and Country B will be a mixture of leave that accrued in Australia and during your foreign service. However, the component of leave that you accrued in Australia, will not be more than one-sixth of the time of your foreign service accumulated up until the time your leave is taken.

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 were 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 Australia's overseas aid program by the individual's employer;

§ the activities of the individual's employer in operating a developing country relief fund or a public disaster relief fund;

§ the activities of the individual's employer being a prescribed institution that is exempt from Australian tax; or

§ the individual's deployment outside Australia by an Australian government (or an authority thereof) as a member of a disciplined force.

In your case, you were posted to work on a secondment to work on an Australian official developmental assistance program administered by a specific Australian government agency in Country A and Country B.

As your deployment is directly attributable to the delivery of an Australian overseas aid program by a specific Australian government agency, the foreign salary you derive from working in Country A and Country B satisfy one of the conditions for exemption under subsection 23AG(1AA) of the ITAA 1936.

However, the exemption does not apply if the income is exempt from tax in the foreign country only because of any of the reasons listed in subsection 23AG(2) of the ITAA 1936. One of these reasons is (among other things) that there is no income tax system in the foreign country.

Salary derived in Country A

In your case, you will be engaged in overseas employment for a continuous period of not less than 91 days in Country A during the 2011-12 income year, and, as Country A has a tax system in place that taxes employment income, none of the reasons listed in subsection 23AG(2) of the ITAA 1936 apply in your situation.

Therefore, the foreign salary income you derive from working in Country A will be exempt income in Australia under section 23AG of the ITAA 1936.

Salary derived in Country B

The Country B Agreement operates to avoid the double taxation of income received by Australian and Country B residents.

A specific paragraph of a certain section in the Country B Convention provides that the income will only be taxed in Australia if:

(a) the taxpayer is present in Country B for a period or periods not exceeding 183 days in the Country B income year;

(b) the remuneration is paid by, or on behalf of, an employer or company who is not a resident of Country B; and

(c) the remuneration is not deductible in determining taxable profits of a permanent establishment, a fixed base or a trade or business which the employer or company has in Country B.

The foreign salary you derive from working in Country A will be exempt from tax in Country A due to the MOU between a specific Australian government agency and a particular foundation. The exemption provided by the MOU does not fall under any of the other exemption categories under subsection 23AG(2) of the ITAA 1936.

Therefore, as you will be engaged in foreign service in Country B 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 in your situation - the salary you derive there will be exempt income in Australia under section 23AG of the ITAA 1936.

Specific Allowance in Country A and Country B

The specific allowance is paid to you to cover costs associated with preparing for departure and returning from your deployments. This allowance is not paid to cover costs arising from the performance of your foreign service. It is paid to cover costs arising prior to and after the foreign service. Therefore, this allowance is not considered to be derived from your foreign service.

Accordingly, the specific 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.

Note

It is important to note that 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 wage income in your Australian tax return.