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Ruling

Subject: Foreign employment income

Question and Answer

Is the salary you receive from your foreign employment exempt from tax in Australia?

No

This ruling applies for the following periods:

Year ended 30 June 2012

Year ended 30 June 2013

The scheme commences on:

1 July 2011

Relevant facts and circumstances

You are an Australian resident for tax purposes.

You are engaged in continuous foreign service for 91 days or more.

You are employed as a finance expert on a full time basis by an organisation (Organisation A) based in Country X.

Organisation A receives funds from Organisation B which is a large fund that conducts aid activities in the areas of diseases in developing countries. Organisation A plays the role of Local Fund Agency in Country Y for Organisation B.

You perform your employment duties in Country Y.

There is no tax treaty between Australia and Country Y.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 23AG

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

International Tax Agreements Act 1953

Reasons for decision

Subsection 23AG(1) of the Income Tax Assessment Act 1936 (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

§ an activity of a kind specified in the regulations.

We shall consider each of these tests

a) Delivery of official development assistance (ODA)

Official development assistance (ODA) is usually provided by AusAID or the Department of Foreign Affairs and Trade.

Your job description sets out the aim of your job, your tasks and responsibilities.

Given the functions of Organisation A and your tasks can be extended to other clients, this would add further weight to Organisation A providing a support service role in this context.

Furthermore you are based in Country Y and Organisation B provides its services more broadly across developing countries.

Thus your foreign service is not directly attributable to the delivery of Australian official development assistance by your employer.

b) Endorsed as an overseas aid fund or developing country disaster relief fund

For this test to be satisfied, the activities of your employer need to be 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)

This test is not satisfied as Organisation A is not endorsed as a deductible gift recipient in Australia being an overseas aid fund or developing disaster relief fund.

c) A prescribed institution that is exempt from Australian tax

This test requires the activities of the taxpayer's employer to be a prescribed institution located outside Australia (charitable or religious) that is exempt from tax in Australia. Organisation A does not satisfy this requirement.

d) Deployment outside Australia by an Australian government

This condition is not satisfied as you have not been deployed outside Australia as a member of a disciplined force of Australia (generally considered to be the Australian Defence Force or Australian Federal Police).

e) An activity of a kind specified in the regulations

This test is also not satisfied as your foreign service is not directly attributable to a kind specified in the regulations.

In summary whilst you are an Australian resident and you are engaged in foreign service of not less than 91 days, your foreign service is not directly attributable to any of the conditions specified in subsection 23AG(1AA) of the ITAA 1936

Consequently, your income will not be exempt from Australian income tax under section 23AG of the ITAA 1936.

Tax treaty with Country X

In determining liability to Australian tax of foreign-source income received by a resident, it is necessary to consider not only the income tax laws, but also any applicable tax treaty contained in the International Tax Agreements Act 1953 (the Agreements Act).

There is a tax treaty between Australia and Country X which operates to avoid the double taxation of income received by Australian and Country X residents.

Section 4 of the Agreements Act incorporates that Act with the Income Tax Assessment Act 1936 and Income Tax Assessment Act 1997 so that those Acts are read as one.

An article of Country X tax treaty provides that salaries, wages and other similar remuneration derived by a resident of Australia in respect of employment shall be taxable only in Australia, unless the employment is exercised in. Country X. If the employment is exercised in Country X, such remuneration as is derived from that exercise may be taxed in Country X.

In your case you are employed by a Country X organisation but your employment is exercised in Country Y. Thus the article does not apply.

There is no tax treaty between Australia and Country Y. Consequently the income is not exempt from tax in Australia.