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Subject: Foreign Income

Question 1

Is the salary you received in relation to foreign employment based in Country X exempt from income tax in Australia under section 23AG of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

Yes

Question 2

Are the travel allowances you received in relation to your foreign employment exempt from income tax in Australia under section 23AG of the ITAA 1936?

Answer

Yes

Question 3

Are the overseas allowances (cost of posting allowance and hardship allowance) you received in relation to your foreign employment exempt from income tax in Australia under section 23AG of the ITAA 1936?

Answer

Yes

This ruling applies for the following periods:

Year ended 30 June 2011

Year ending 30 June 2012

The scheme commences on:

1 October 2010

Relevant facts and circumstances

You remained an Australian resident for income tax purposes while overseas.

You were employed by an Australian government aid agency and sent to Country X to work under an agreement with AusAID.

Your role meets the requirements of Australia official development assistance.

Your employment commenced in November 2010 and ceased in December 2011. During this period you were posted to Country X with some time also spent in Country Y.

Travel to Country Y was always work related and necessary to be able to file reports and gain access to full departmental communications unavailable in Country X. The final two weeks spent in Country Y involved filing, accounting, writing reports to finalise the posting. Travel, accommodation and a per diem were paid by your employer while in Country Y.

You took recreation leave during your overseas deployment and the leave was accrued as a result of your foreign service.

You received a cost of posting allowance, a hardship allowance and travel allowances. The travel allowances were for employment purposes when you went to Country Y.

Australia does not have a tax treaty with Country X.

Country X taxes employment income under its domestic law.

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(7)

Reasons for decision

Subsection 23AG(1) of the Income Tax Assessment Act 1936 (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 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.

Section 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 taxpayer's employer (generally provided by AusAID or the Department of Foreign Affairs and Trade);

· the activities of the taxpayer's employer in operating a public fund covered by the deductible gift recipient categories overseas aid fund and developed country disaster relief fund;

· the activities of the taxpayer's employer where they are a charitable institution or religious institution which is income tax exempt because they are a prescribed institution located outside Australia or pursuing objectives outside Australia;

· the taxpayer's deployment outside Australia 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 were appointed to undertake a deployment to Country X as a Specialist under an agreement between AusAID and your employer.

As your deployment was directly attributable to the delivery of Australian official development assistance, it satisfies one of the conditions for exemption under subsection 23AG(1AA) of the ITAA 1936.

In addition to your salary, you received travel allowances and overseas allowances including a cost of posting allowance and a hardship allowance.

Salary, travel allowances and overseas allowances

The travel allowance is designed to cover various costs incurred during your service, and not pre- or post-deployment expenses. As it was paid to compensate for costs arising during the foreign service, it 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 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 the reasons listed is where the income is exempt in the foreign country because of a tax treaty (paragraphs 23AG(2)(a) and 23AG(2)(b) of the ITAA 1936).

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

As the laws of Country X provide for the imposition of income tax from income source in its country and does not exempt employment income from income tax, paragraphs 23AG(2)(c) and 23AG(2)(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.

In your case, you were engaged in employment overseas for a continuous period of not less than 91 days, and none of the reasons listed in subsection 23AG(2) of the ITAA 1936 apply in your situation.

Consequently, the salary and allowances you earned during your deployment to Country X is exempt from income tax in Australia under subsection 23AG(1) of the ITAA 1936.