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Ruling

Subject: Assessability of foreign employment income

Question and answer

Is the foreign employment income you derive from working in an overseas country exempt income in Australia under section 23AG of the Income Tax Assessment Act 1936 (ITAA 1936)?

Yes.

This ruling applies for the following periods:

Year ended 30 June 2011

Year ending 30 June 2012

The scheme commenced on:

1 July 2010

Relevant facts and circumstances

You are an Australian resident for income tax purposes.

You were deployed to work overseas for a number of months.

You worked as an annalist.

You were engaged in foreign employment for more than 91 continuous days.

You are deployed under the Facilitation of International Assistance Act 2003

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 (2)

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 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 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:

· Delivery of Australian official development assistance by your employer.

· Activities of your employer in operating a public fund declared by the Treasurer to be a developing country relief fund, or a public fund established and maintained to provide monetary relief to people in a developing foreign country that has experienced a disaster (a public disaster relief fund).

· Activities of your employer as a prescribed charitable or religious institution exempt from Australian income tax because it is located outside Australia or the institution is pursuing objectives outside Australia.

· Deployment outside Australia by an Australian government (or an authority thereof) as a member of a disciplined force.

In your case, you were appointed to undertake a deployment to Country X by the department of Foreign Affairs and Trade.

As your deployment was in relation to the delivery of Australian official development assistance by your employer, you satisfy one of the conditions for exemption under subsection 23AG (1AA) of the ITAA 1936.

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 tax treaty or a law of a country that gives effect to such an agreement (paragraphs 23AG(2)(a) and (b) of the ITAA 1936);

· the law of a foreign country 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 (paragraphs 23AG(2)(c) and (d) of the ITAA 1936), or

· a law or international agreement dealing with privileges and immunities of diplomats or consuls or of persons connected with international organisations applies (paragraphs 23AG(2)(e), (f) and (g) of the ITAA 1936).

You are deployed under the Facilitation of International Assistance Act 2003 This Act operates to exempt your salary and any allowances from income tax in the overseas country.

Therefore, subsection 23AG(2) of the ITAA 1936 will not apply to deny the exemption under subsection 23AG(1) of the ITAA 1936, as your foreign earnings are exempt in the overseas country for a reason other than those listed in subsection 23AG(2) of the ITAA 1936.

Accordingly, the salary that you receive that is directly attributable to your foreign service in Country X is exempt from income tax in Australia under subsection 23AG 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.