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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 Tax Assessment Act 1936 (ITAA 1936)?

Answer

Yes.

Question 2

Is the transfer allowance you receive in relation to your deployment to 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 overseas allowances you receive in relation to your deployment to 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 2012

Year ending 30 June 2013

Year ending 30 June 2014

The scheme commences in:

Year ending 30 June 2012

Relevant facts and circumstances

You are an Australian resident employed by the Australian government department.

You have been appointed to undertake deployment to the foreign country for a period of two years as part of a regional assistance mission.

As part of the overall remuneration package, you receive a salary, 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 including cost of living allowance, cost of posting allowance and hardship allowance are paid to compensate for costs arising from the foreign service and for the hardship attributable to the foreign service.

You do not perform diplomatic or consular duties.

You plan to use recreation leave accrued during your foreign service to take about few weeks of recreation leave in each of the two years of your posting. You expect to require routine personal and carer's leave as required by illness.

You plan to use leave accrued in Australia for one period of recreation leave only which, under the one-sixth rule, will not break the continuity of your foreign service.

You have served 91 continuous days before you will take one period of recreation leave using leave accrued in Australia. This period of recreation leave is less than one-sixth of the total days you will have served prior to taking the leave.

You do not expect to perform any official work duties in Australia during the course of your overseas service.

You have provided a letter from your employer confirming that your foreign service is directly attributable to the provision of Australia's official development assistance to the foreign country.

The laws of the foreign country provide for the imposition of income tax and do not generally exempt employment income from income tax.

Australia does not have a tax treaty with the foreign country.

Your deployment was governed by a legislation of the foreign country.

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)(a)

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

Income Tax Assessment Act 1936 paragraph 23AG(2)(c)

Income Tax Assessment Act 1936 paragraph 23AG(2)(d)

Income Tax Assessment Act 1936 subsection 23AG(7)

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 income tax in Australia.

Foreign earnings includes 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 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 Australian official development assistance by the individual's 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;

· the individual's deployment outside Australia by an Australian government (or an authority thereof) as a member of a disciplined force of Australia (generally considered to be the Australian Defence Force or Australian Federal Police); or

· an activity of a kind specified in the regulations.

In your case, you have been appointed to undertake a deployment to the foreign country as a part of the regional assistance mission.

As your deployment is directly attributable to the delivery of Australian official development assistance 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 received 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.

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 received a salary from your foreign employment, 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 where 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 the Australian Treaty Series (paragraphs 23AG(2)(a) and 23AG(2)(b) of the ITAA 1936).

There is no tax treaty between Australia and the foreign country. Therefore, paragraphs 23AG(2)(a) and 23AG(2)(b) of the ITAA 1936 will not apply.

As the laws of the foreign country provide for the imposition of income tax and do not generally exempt employment income from income tax, paragraphs 23AG(2)(c) and (d) of the ITAA 1936 will not apply.

None of the other reasons in subsection 23AG(2) of the ITAA 1936 apply to your situation.

Continuous foreign service

For the exemption from Australian tax to apply, your foreign service must be for a continuous period of 91 days or more.

Any period of absence from foreign service breaks the continuity of your foreign service, unless either of the following applies:

· the absences do not exceed one-sixth of your total period of foreign service

· they are absences that still count as foreign service and so do not break the continuity of foreign service.

Some temporary absences during a period of foreign service still count as foreign service and will not affect continuity of the service. For example, recreation leave that wholly relates to the current period of foreign service, leave for accident or illness and compassionate leave.

In your case, you are engaged in employment overseas for a continuous period of not less than 91 days.

You have served 91 continuous days before you take a period of recreation leave accrued in Australia. This period of recreation leave is less than one-sixth of the total days you will have served prior to taking the leave. Hence, you will not break the continuity of your foreign service.

Note

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 employment income in your Australian tax return.