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Ruling

Subject: Foreign employment income

Question 1

Is the salary you receive from employment 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

Is the hardship allowance, cost of posting allowance and travel allowance you receive in relation to your employment in Country X 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 2012

Year ended 30 June 2013

The scheme commences on:

1July 2011

Relevant facts and circumstances

You are an Australian resident for income tax purposes.

You have been appointed to undertake a deployment to Country X on an Australian aid agency project as a Development Program Specialist for a period of not less than 91 days.

You are an employee of the agency.

In addition to your salary, your employment contract states that you will receive a hardship allowance, cost of posting allowance and travel allowance.

These allowances are paid to compensate for costs arising from the foreign service and the hardship attributable to the foreign service.

You will accrue recreation leave during your deployment to Country X.

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

You are not expected or required to perform any work related duties if you undertake any breaks in Australia.

Australia has a tax treaty with Country X.

The laws of Country X provide for the imposition of income tax and do not provide for a general exemption from tax.

Your foreign employment income is exempt from tax in Country X under the terms of a general agreement on development co-operation 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).

The salary you receive from your foreign employment is considered to be derived from your foreign service.

The 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.

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 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 objectivities principally outside of 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 have been appointed to undertake a deployment to Country X on an Australian overseas aid agency project as a Development Program Specialist.

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.

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 because of any of the conditions listed in this section.

One of the reasons listed 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).

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

An article of 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 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 Country X Agreement 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 posted to Country X is also exempt from tax in Country X because of the general agreement on development co-operation between the Government of Australia and the Government of Country X.

As a result, your foreign earnings will not be exempt from tax in Country X solely because of any reasons listed in subsection 23AG(2) of the ITAA 1936. Therefore, subsection 23AG(2) of the ITAA 1936 will not operate to deny the foreign earnings exemption from income tax in Australia under subsection 23AG(1) of the ITAA 1936.

Accordingly, the salary and allowances you receive from employment in Country X are 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 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.