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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 Assessment Act 1936 (ITAA 1936)?

Answer

Yes.

Question 2

Are the equipment and transfer allowances you receive in relation to your employment in Country X exempt from income tax in Australia under section 23AG of the ITAA 1936?

Answer

No.

Question 3

Are the travel and overseas allowances 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 2009

Year ended 30 June 2010

The scheme commences on:

1 July 2008

Relevant facts and circumstances

You are an Australian resident for taxation purposes.

You are an employee of an Australian Government aid organisation

You have been appointed to undertake deployment to Country X under an aid program.

You were then appointed to undertake deployment to Country X under another aid program. The second deployment started a day after the first deployment finished.

Both positions were non-diplomatic.

You were deployed on the Australian aid projects to Country X for a period of not less than 91 days.

In addition to your salary, you received various allowances including an equipment allowance, a travel allowance, a transfer allowance and overseas allowances.

The equipment allowance was paid to assist with the cost of travel equipment and other items purchased and the extra wear and tear on an employee's possessions resulting from overseas travel. These costs are associated with preparing for departure and returning from your deployment.

The travel allowance was paid to provide for reasonable meal and incidental living costs incurred while away from headquarters on official duty.

The transfer allowance was paid as a one off payment to assist with the transfer from one program to another.

The overseas allowances were paid to compensate for costs arising from the foreign service and for the hardship attributable to the foreign service. They included:

· cost of living allowance

· cost of posting allowance

· hardship allowance

· household maintenance and assistance allowance

· special location supplement

No recreation leave was taken during the time period of your deployments.

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 Treaty on Development Cooperation.

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 Paragraph 23AG(2)(b)

Income Tax Assessment Act 1936 Subsection 23AG(7)

International Tax Agreements Act 1953 Section 4

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 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; or

· 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 deployment to Country X on two Australian Government aid organisation programs for a period of not less than 91 days.

As your deployment was directly attributable to the delivery of an Australian overseas aid program, you satisfy one of the conditions for exemption under subsection 23AG(1AA) of the ITAA 1936.

In addition to your salary, you receive various allowances and overseas allowances.

Equipment and transfer allowances

The equipment allowance was paid to you to cover costs associated with the cost of travel equipment and other items purchased and the extra wear and tear on your possessions resulting from overseas travel.

The transfer allowance was paid as a one off payment. This allowance was paid in relation to you transferring from one program to another in Country X.

These allowances were not paid to cover costs arising from the performance of your foreign service. They were paid to cover costs arising prior to and after the foreign service. Therefore, these allowances are not considered to be derived from your foreign service.

Accordingly, the equipment and transfer allowances are not exempt from income tax in Australia under subsection 23AG(1) of the ITAA 1936 as they are not derived from your foreign service.

Salary, travel and overseas allowances

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

The travel allowance is provided for reasonable meal and incidental living costs incurred while away from headquarters on official duty.

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, travel, transfer and overseas 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.

In determining your liability to pay tax in Australia it is necessary to consider not only the domestic income tax laws but also any applicable tax treaties.

Section 4 of the International Tax Agreements Act 1953 (Agreements Act) incorporates that Act with the ITAA 1936 and the Income Tax Assessment Act 1997 (ITAA 1997) so that all three Acts are read as one.

Australia has signed a double tax agreement (DTA) with Country X which is called the Country X agreement.

The Country X agreement 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 an 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 DTA, paragraph 23AG(2)(b) of the ITAA 1936 would normally apply and the income would therefore not be exempt from tax in Australia 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 the Treaty on Development Cooperation.

The exemption provided by the Treaty on Development Cooperation 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 salary, travel, transfer and overseas allowances you receive from employment in Country X are exempt from income tax in Australia under subsection 23AG(1) of the ITAA 1936.