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Ruling

Subject: foreign employment income

Question

Is the income you receive from employment in country X exempt from tax under section 23AG of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

Yes.

This ruling applies for the following periods

Year ending 30 June 2012

Year ending 30 June 2013

The scheme commences on

1 July 2011

Relevant facts and circumstances

You are an Australian resident for taxation purposes.

You are an employee of an Australian aid organisation.

You will be deployed on an Australian aid project to country X for a period of not less than 91 days.

You will not take any leave or breaks in service during your posting to country X.

Australia does not have a double tax agreement with the country X.

Country X taxes employment income under its domestic law.

Your income is exempt from taxation in country X under an agreement between the government of Australia and the government of country X.

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 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).

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 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 a public disaster relief fund

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

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

In your case, you have been appointed to undertake a short-term posting to country X for a period of no less than ninety one days.

As you 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 income from your foreign employment, this income is considered to be derived from your foreign service.

Therefore, your foreign employment income is foreign earnings from foreign service for the purposes of subsection 23AG(1) of the ITAA 1936.

Exemption of foreign income

Subsection 23AG(2) of the ITAA 1936 provides that no exemption is available under subsection 23AG(1) of the ITAA 1936 in circumstances where an amount of foreign earnings derived from service in a foreign country is exempt from tax in the foreign country solely because of:

· a double tax agreement or a law of a country that gives effect to such an agreement

· a law of that foreign country which generally exempts from, or does not provide for, the imposition of income tax on income derived in the capacity of an employee, income from personal services or any other similar income and

· a law or international agreement dealing with privileges and immunities of diplomats or consuls or of persons connected with international organisations.

None of the reasons listed in subsection 23AG(2) of the ITAA 1936 apply to your situation.

Therefore, subsection 23AG(2) of the ITAA 1936 does not apply and as a result, the income you earn from your posting to country X is exempt from income tax in Australia under subsection 23AG(1) of the ITAA 1936.

Further issues for you to consider

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.