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Ruling

Subject: foreign employment income

Question 1

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

Answer

No, to the extent that is attributable to a period prior to the commencement or after the completion of the foreign service.

Question 3

Are the overseas allowances you receive in relation to your employment in the foreign country 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 employed by the agency.

You have been appointed to undertake deployment to the foreign country as an Australian aid agency project as a Development Program Specialist for a period of not less than 91 days.

Your foreign employment income is exempt from income tax in the foreign country under the terms of a general agreement on development cooperation between the Government of Australia and the Government of the foreign country.

In addition to your salary, you will receive 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 to take recreation leave that has accrued during the period of deployment.

You will not be expected or required to perform any work related duties should you undertake your break in Australia.

Australia has a tax treaty with the foreign country.

The laws of foreign country provide for the imposition of income tax and do not provide for a general exemption from tax.

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 paragraph 23AG(2)(b)

Income Tax Assessment Act 1936 subsection 23AG(6)

Income Tax Assessment Act 1936 subsection 23AG(6A)

Income Tax Assessment Act 1936 subsection 23AG(7)

International Tax Agreements Act 1953 subsection 4(1)

International Tax Agreements Act 1953 section 5

Reasons for decision

Summary

The salary and overseas allowances you receive from employment in the foreign country are exempt from income tax in Australia under section 23AG of the ITAA 1936. The transfer allowance is not exempt to the extent that is attributable to a period prior to the commencement or after the completion of the foreign service.

Detailed reasoning

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 the foreign country on an Australian aid agency project as a development program specialist.

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 prior to and after the foreign service.

The question of when a taxpayer begins or ceases to be engaged in foreign service is a question of fact to be determined according to the circumstances of each particular case. However, as subsection 23AG(7) of the ITAA 1936 defines the term 'foreign service' to mean service in a foreign country, a taxpayer's foreign service period generally cannot begin or end at a time when the taxpayer is not actually present in the foreign country where the service will be performed.

That part of the transfer allowance that is attributable to a period prior to the commencement or after the completion of the foreign service, such as accommodation in Australia after uplift of goods; taxi fares to and from airports in Australia; loss on sale of motor vehicle; cost of obtaining a dental assessment; and purchase of travel equipment for use prior to the commencement or after the completion of the foreign service, is not attributable to the period where the employee is engaged in service in a foreign country, and not exempt from tax under subsection 23AG(1) of the ITAA 1936.

The part of the allowance that is to meet the cost of taxis to and from airports in the foreign country will not necessarily be exempt even though the employee is in the foreign country at the time when those expenses arise. That part of the allowance will not be exempt if the expenses arise before the employee commences foreign service and after the employee completes the foreign service. However, if the foreign service encompasses the times when those expenses arise, that part of the allowance is exempt.

Therefore, your transfer allowance is not exempt from income tax in Australia under subsection 23AG(1) of the ITAA 1936 to the extent that is attributable to a period prior to the commencement or after the completion of the foreign service.

Salary and overseas allowances

As you receive a salary from your employment in the foreign country, 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 as set out in Australian Treaties Series.

Australia has a tax treaty with the foreign country which operates to avoid the double taxation of income received by residents of Australia and the foreign country.

An Article of the Foreign Country 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 the foreign country if the services are rendered in the foreign country and the individual is a citizen of the foreign country, or did not become a resident of the foreign country solely for the purpose of performing the services.

The employment income you receive in relation to your deployment to the foreign country is taxable only in Australia under this article of the Foreign Country 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 the foreign country is exempt from tax in the foreign country 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 the foreign country because of the terms of the general agreement on development cooperation between the Government of Australia and the Government of the foreign country.

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 the foreign country 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 Australian tax payable on other assessable 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 assessable income. This income needs to be included as exempt foreign salary and wage income in your Australian tax return.

The Financial Advice allowance is a reimbursement for expenses incurred in seeking financial advice. This is not an allowance and will not be included under the allowances for consideration.

The Outlay Allowance is not an allowance as such. Under the Conditions of Employment, even though it is listed under Allowances, it is termed Outlay Advance. It is a loan up to a certain amount which has to be repaid by salary deduction over the first 13 pays. Therefore the Outlay Allowance will not be included under the allowances for consideration.