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Ruling

Subject: Foreign employment income

Question

Is the salary you receive from employment in Country X exempt from income tax in Australia?

Answer

Yes

This ruling applies for the following periods:

Year ending 30 June 2012

Year ending 30 June 2013

Year ending 30 June 2014

The scheme commences on:

1 July 2011

Relevant facts and circumstances

You are an Australian resident for taxation purposes.

You are engaged in foreign service with your employer, assisting with Australian official development assistance in Country X.

Your employment in Country X commenced during the 2011-12 income year and will cease during the 2013-14 income year.

There is no option to extend your contact past this date.

You will take annual recreational leave during your employment in Country X and this will be leave wholly attributable to the period of service there. You may return to Australia during this leave or spend the time overseas. You will not be required to undertake any duties during your leave.

You may return to Australia at other times during your employment in Country X; however this will be official business travel. You may be required to travel to your employer's office for meetings and training directly related to your work in Country X.

Your employer has been withholding income tax from your fortnightly salary.

You do not receive any allowances, as your spouse who is also working in Country X receives allowances at an accompanied rate.

There is currently a memorandum of understanding (MOU) between Australia and Country X.

The operation of the MOU exempts your income from income tax in Country X.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 23AG
Income Tax Assessment Act 1936 Subsection 23AG(1)
Income Tax Assessment Act 1936 Subsection 23AG(1AA)
Income Tax Assessment Act 1936 Subsection 23AG(2)
Income Tax Assessment Act 1936 Subsection 23AG(6)
Income Tax Assessment Act 1936 Subsection 23AG(7)
Income Tax Assessment Act 1997 Section 6-5

Reasons for decision

Summary

The salary you receive in relation to your deployment to Country X is exempt from income tax in Australia under section 23AG of the Income Tax Assessment Act 1936 (ITAA 1936).

Detailed reasoning

Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) states that the assessable income of an Australian resident includes income derived from all sources, whether in or out of Australia, during the income year.

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.

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 individuals' employer, generally provided by AusAID or the Department of Foreign Affairs and Trade

· 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 the Australian government (or an authority thereof) as a member of a disciplined force.

In your case, you have been appointed to undertake a deployment to Country X.

As your deployment is directly attributable to the delivery of an Australian overseas aid program, you satisfy one of the conditions for exemption under subsection 23AG(1AA) of the ITAA 1936.

Salary

As you receive a salary from your employment in Country X, this salary is considered to be derived from your foreign service.

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

Continuous period of foreign service

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 will take annual recreation leave during your foreign employment. You may spend this time in Australia or overseas. If you do return to Australia you will not be required to undertake any work related duties whilst on your break.

As the recreation leave relates to your foreign service and you will not be working in Australia whilst on leave, this recreation leave forms part of your foreign service.

You may also return to Australia on official business travel to attend meetings and undertake training relating to your work in Country X.

Taxation Ruling TR 96/15 states at paragraph 11 that:

Where an employee/office holder engaged in foreign service makes a short business trip to Australia or to another foreign country during a period of foreign service for reasons directly related to that person's continuing foreign service engagement, and made bona fide for that purpose, for example, to attend conferences, training sessions or briefing sessions, it is accepted that those trips should be treated as part of the person's continuous period of foreign service provided they are not excessive by comparison with the scheduled period of foreign service.

Therefore, any trips you may make during your foreign employment to Australia on official business will also form part of your foreign service.

Exemption of foreign income

The exemption does not apply if the income is exempt from tax in the foreign country because of any of the reasons listed in subsection 23AG(2) of the ITAA 1936:

· a tax treaty with Australia or a law giving effect to a treaty agreement

· the foreign country does not impose tax on employment or personal services income

· a law of the foreign country or an international agreement to which Australia is a party that deals with

· diplomatic or consular privileges and immunities, or

· privileges and immunities for people connected with international organisations such as the United Nations.

The employment income you receive in relation to your deployment is exempt from tax in Country X. It is exempt due to a provision contained within a treaty between Australia and Country X. This treaty is not a tax treaty, instead, it relates to the restoration of law and order and security in Country X.

Country X does not have a tax treaty with Australia but does impose tax on employment or personal services income.

Your employment income will not be exempt from tax in Country X due to one of the reasons contained within subsection 23AG(2) of the ITAA 1936.

You therefore satisfy the conditions for exemption under 23AG of the ITAA 1936.

Accordingly, the salary you receive from employment in Country X is exempt from income tax in Australia under subsection 23AG(1) of the ITAA 1936.

Further issues for you to consider

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.