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Ruling

Subject: Foreign employment income

Question 1

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

Answer

Yes

Question 2

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

Answer

No

Question 3

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

Answer

Yes

This ruling applies for the following periods:

Year ending 30 June 2013

Year ending 30 June 2014

Year ending 30 June 2015

Year ending 30 June 2016

The scheme commences on:

1 July 2012

Relevant facts and circumstances

You are an Australian resident for taxation purposes.

You are an employee of an Australian Government aid organisation.

You have been appointed to undertake deployment to Country X.

You will be deployed on an Australian aid project to Country X for a period of not less than 91 days.

In addition to your salary, you will receive various allowances including a transfer allowance and overseas allowances.

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

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

You will not take any breaks other than your recreation leave that accrues during your deployment to Country X.

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

Australia has a tax treaty with Country X.

Country X taxes employment income under its domestic law.

Your foreign employment income is exempt from income tax in Country X under the terms of the general agreement on development cooperation between Australia and 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(7)

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

Income Tax Assessment Act 1936 Subsection 23AG(2)

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

International Tax Agreements Act 1953 Section 3AAA

International Tax Agreements Act 1953 Section 4

International Tax Agreements Act 1953 Section 5

Reasons for decision

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.

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 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 have been appointed to undertake a deployment to Country X on an Australian aid project.

As your deployment is directly attributable to the delivery of an Australian overseas aid program 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 receive a transfer allowance and overseas allowances.

Transfer allowance

The transfer allowance is paid to you to cover costs associated with preparing for departure and returning from your deployment. This allowance is not paid to cover costs arising from the performance of your foreign service. It is 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 receive a salary from your employment in Country X, 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 are 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.

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 a tax treaty (paragraph 23AG(2)(b) of the ITAA 1936).

In determining liability to Australian tax on foreign source income, it is necessary to also consider any applicable double tax agreements (DTA) contained in the International Tax Agreements Act 1953 (the Agreements Act).

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

Australia has signed a DTA with Country X (Country X Agreement). The DTA operates to avoid the double taxation of income received by a resident of either Australia or Country X.

An article of the Country X Agreement provides that remuneration paid by Australia to any individual in respect of services rendered in the discharge of governmental functions shall be taxable only in Australia. However, such remuneration will be taxable only in Country X if the services are rendered in Country X and the individual is a citizen of Country X, or did not become a resident of Country X solely for the purpose of performing the services.

The employment income you receive in relation to your deployment to Country X is taxable only in Australia under this article of the Country X Agreement as you are an Australian resident and the income is paid by Australia in respect of services rendered in the discharge of governmental functions.

As the employment income you receive while posted to Country X is exempt from tax in Country X because of the operation of a tax treaty, paragraph 23AG(2)(b) of the ITAA 1936 would normally apply and the income would therefore not be exempt from tax under subsection 23AG(1) of the ITAA 1936.

However, the income you earn while on posting is also exempt from tax in Country X because of the terms of the general agreement on development cooperation between Australia and Country X.

The exemption provided by the agreement does not fall under any of the other exemption categories under subsection 23AG(2) of the ITAA 1936.

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

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

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.