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Ruling

Subject: Foreign employment income

Question

Is the employment income you earn in Country X exempt from income tax in Australia under section 23AG of the Income Assessment Act 1936 (ITAA 1936)?

Answer

Yes

This ruling applies for the following period

Year ending 30 June 2012

The scheme commences on

1 July 2011

Relevant facts and circumstances

You are an Australian resident for taxation purposes.

You have been appointed to undertake a posting in Country X to work for an Australian government aid agency on a development program.

Your deployment is for a period of not less than 91 days.

You are not working in Country X on a diplomatic posting.

You are an employee of the aid agency and your position is part of the Australian government's official development assistance to Country X.

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

You will not perform any work-related duties if you undertake any breaks in Australia.

Australia has a tax treaty with Country X.

Country X taxes employment income under its domestic law.

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

Relevant legislative provisions

Income Tax Assessment Act 1936 Subsection 23AG(1)

Income Tax Assessment Act 1936 Subsection 23AG(7)

Income Tax Assessment Act 1936 Section 23AG

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 3AAA

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.

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 1 July 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 an 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.

Foreign service directly attributable to the delivery of Australian official development assistance does not include diplomatic or consular duties carried out by Australian residents.

In your case, you have been appointed to undertake a position in Country X as an employee of a government aid organisation on a project for a period of not less than 91 days.

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.

As you receive a salary from your employment in Country X, this salary is considered to be derived from your foreign service and is considered 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 (paragraph 23AG(2)(b) of the ITAA 1936).

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

An article of the treaty 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 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 receive in relation to your deployment to Country X is taxable only in Australia under this article of the treaty 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 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 a general agreement on development cooperation between the government of Australia and the government of Country X.

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 employment income you receive in Country X is 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 tax payable on other income. This method of calculation referred to as exemption with progression prevents the exempt income from reducing the Australian tax payable on the other income.

The foreign earnings are not subject to income tax but need to be included as exempt foreign employment income in an Australian tax return.