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Subject: Foreign employment income

Question 1

Are your salary and overseas allowances from your employment in Country X exempt from Australian income tax under section 23AG of the Income Tax Assessment Act 1936 (ITAA 1936) for the 2008-09 income year?

Answer

Yes.

Question 2

Are your salary and overseas allowances from your employment in Country X exempt from Australian income tax under section 23AG of the ITAA 1936 for the 2009-10, 2010-11 and 2011-12 income years?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 2009

Year ended 30 June 2010

Year ended 30 June 2011

Year ending 30 June 2012

The scheme commences on:

1 July 2008

Relevant facts and circumstances

You are an Australian resident for taxation purposes.

You were appointed to undertake a deployment to Country X.

You were deployed to Country X for a period of not less than 91 days.

Your position is diplomatic. It was your job to ensure the delivery of aid.

You state you were employed as an aid worker and your duties and responsibilities all focused on foreign aid - the management, implementation and design of health and education aid programs.

You were posted to Country X under the Vienna Convention, however some of the programs you were involved in were under the Memorandum of Understanding.

Although you have a diplomatic passport and you performed some representative duties, you did not perform any consular services.

In addition to your salary you were entitled to overseas allowances.

The overseas allowances were included in your salary and paid to compensate for costs arising from the foreign service and for the hardship attributable to the foreign service.

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

You did not perform any work-related duties on breaks taken in Australia.

Australia has a tax treaty with Country X.

Country X taxes employment income under their domestic law.

Your foreign employment income is exempt from income tax in Country X under the terms of general agreement on development cooperation.

Relevant legislative provisions

Income Tax Assessment Act 1936 Subsection 23AG(1)

Income Tax Assessment Act 1936 Subsection 23AG(6)

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 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.

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

The overseas allowances paid are to compensate for the hardship attributed 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 23 AG(1) of the ITAA 1936.

Subsection 23AG(6) of the ITAA 1936 allow certain types of absences to be counted as foreign service such as recreation or annual leaves and sick leave wholly attributable to the period of foreign service.

In your case, during the period of your foreign service you took annual leave that accrued as a result of your services in Country X during the period. This break was authorised by the terms and conditions of your employment, it was not used to return to Australia and it was not more than one-sixth of the foreign service.

Accordingly you satisfied the 91 days continuous foreign service under subsection 23AG(1) of the ITAA 1936.

Exemption consideration from start date to 30 June 2009

Subsection 23AG(2) of the ITAA 1936 provides that the exemption in subsection 23AG(1) of the ITAA 1936 will not apply where the income is exempt from income tax in the foreign country only because of any of the reasons listed.

Two of these reasons are an international agreement to which Australia is a party and that deals with diplomatic or consular privileges and immunities, and a law of the foreign country giving effect to such an agreement.

One of the listed conditions is where the income earned by the resident in the foreign country is made exempt by the operation of 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).

An article in 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 shall be taxable only in Country X if the services are rendered in Country X and the individual is a resident of Country X who is a citizen or national of Country X, or did not become a resident of Country X solely for the purposes of performing the services.

As you are an Australian citizen and the salary or wages paid to you are for services rendered in the discharge of governmental functions, the article allocates to Australia the right to tax the salary or wages paid to you.

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.

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 for the period to 30 June 2009 are exempt from income tax in Australia under subsection 23AG(1) of the ITAA 1936.

Exemption consideration from 1 July 2009

As from 1 July 2009, subsection 23AG(1AA) of the ITAA 1936 provides that foreign earnings derived by an Australian resident from 91 days continuous foreign service will only be exempt if the foreign service is directly attributable to:

· 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 an overseas public disaster relief fund;

· the activities of the individual's employer, being a prescribed institution that is exempt from Australian income tax.

· the individual's deployment outside Australia by an Australian government (or an authority thereof) as a member of a disciplined force.

You worked as an aid agency employee on a project that was directly related to aid delivery under the general agreement on development cooperation between the government of Australia and the government of Country X. Although you held a Diplomatic passport you did not perform any diplomatic or consular duties during the period of your foreign service in Country X. You satisfied paragraph (a) of subsection 23AG(1AA) of the ITAA 1936, as it is an Australian overseas aid program operated by your employer.

Accordingly your salary and overseas allowances from your employment in Country X from 1 July 2009 are exempt from tax 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.