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Ruling

Subject: Foreign Income

Question 1

Are your salary and allowances you earn from employment in Country X exempt from tax in Australia?

Answer

Yes

This ruling applies for the following period:

Year ended 30 June 2012

Year ended 30 June 2013

The scheme commenced on:

1 July 2011

Relevant facts and circumstances

You are a resident of Australia for taxation purposes and will remain so while overseas.

You are a member of the Australian Government organisation working in Country X.

You employment commenced in 2012 and expected to cease in 2014.

You do not intend to remain in Country X beyond your current employment contract.

While in Country X you are receiving the following allowances as a result of your employment: Attraction Allowance, Hardship Allowance and Overseas Living Allowance.

You will accrue 30 days per year recreation leave as a result of your employment in Country X and it is likely that you will expend this recreation leave in countries other than Country X; primarily in Australia. You will not perform any work duties in Australia whilst on recreation leave.

There is a tax treaty between Australia and Country X.

Country X has a tax system in place that taxes employment income.

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).

Income Tax Assessment Act 1936 subsection 6-5(2).

Income Tax Assessment Act 1936 subsection 6-15(2).

Income Tax Assessment Act 1936 section 11-15.

International Tax Agreements Act 1953 Sch29-Art19.

Reasons for decision

Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources during the income year.  

Salary and allowances are ordinary income for the purposes of subsection 6-5(2) of the ITAA 1997. 

Subsection 6-15(2) of the ITAA 1997 provides that if an amount is exempt income, it is not included in the assessable income of a taxpayer.  

Section 11-15 of the ITAA 1997 lists those provisions dealing with income which may be exempt. Included in this list is section 23AG of the Income Tax Assessment Act 1936 (ITAA 1936) which deals with overseas employment income. 

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 generally exempt from tax in Australia. 

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.

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 member of the Australian Government organisation.

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.

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

In addition to your salary, you receive an Attraction Allowance, Hardship Allowance and Overseas Living Allowance.  

As these allowances are paid to compensate for costs arising from the foreign service and for 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. 

However, 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 in this section.  

One of these reasons is a tax treaty contained in the International Tax Agreements Act 1953 (Agreements Act).

Australia has a tax treaty with Country X (Country X Agreement) which operates to avoid the double taxation of income received by Australian and Country X residents.

Article A of the 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 Country X if the services are rendered in Country X and the individual is a resident and 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 received in relation to your deployment to Country X is taxable only in Australia under Article A of the Country X Agreement as you are an Australian resident for income tax purposes and the income is paid by Australia in respect of services rendered in the discharge of governmental functions.

As the employment income you received 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 earned whilst on posting is also exempt from tax in Country X in accordance with the provisions of the Australian Treaty (Treaty) between Australia and Country X.

The exemption provided by the Treaty would 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.

As a result, your salary and allowances are exempt from Australian income tax under section 23AG of the ITAA 1936 and are not assessable under subsection 6-5(2) of the ITAA 1997.