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Ruling

Subject: Foreign Income

Question:

Is the employment income you derived that was directly attributable to your foreign service in Country A, exempt from income tax in Australia?

Answer:

Yes.

This ruling applies for the following period:

Year ended 30 June 2011

The scheme commenced on:

1 July 2010.

Relevant facts and circumstances

You are an Australian Public Service (APS) employee.

You were assigned to Country A in a particular role in a specific department. Your appointment began and finished some time in the 2010-11 income year.

Under a specific treaty, Australia has agreed to send APS employees to provide assistance to Country A consistent with the Government of Country A's Development Strategy.

While on assignment, you remain an officer of an Australian government agency.

You were engaged in service in Country A for a continuous period in excess of 91 days. You did not take any breaks during your service.

Besides your salary and wages, you didn't derive any other allowances as part of this foreign employment.

The department you work for is specifically responsible for the coordination of areas that are primarily funded by Australian Official Development Assistance (ODA).

The position which you occupied, worked intimately with all components of the project.

Under a specific Country A Agreement, the income you derived while in Country A is exempt from income tax in Country A.

Relevant legislative provisions:

Income Tax Assessment Act 1936 Section 23AG

Income Tax Assessment Act 1936 Section 23AG(1)

Income Tax Assessment Act 1936 Section 23AG(2)

Income Tax Assessment Act 1936 Section 23AG(3)

Income Tax Assessment Act 1936 Section 23AG(1AA)

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 6-15

Income Tax Assessment Act 1997 Section 11-15

Reasons for decision

Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources, whether in or out of Australia, during the income year.

Salary and wages are ordinary income for the purpose of subsection 6-5(2) of the ITAA 1997.

Subsection 6-15(2) of the ITAA 1997 provides that if an amount is exempt income then it is not included in assessable income.

Section 11-15 of the ITAA 1997 lists those provisions dealing with income that may be exempt. Included in this list is section 23AG of the Income Tax Assessment Act (ITAA 1936), which deals with overseas employment income.

Subsection 23AG(1) of the ITAA 1936 provides that where Australian resident individuals are engaged in foreign service for a continuous period of not less than 91 days, foreign earnings derived from that foreign service are exempt from tax in Australia.

You are an APS employee and were engaged in foreign service for a continuous period of not less than 91 days. Therefore your foreign earnings derived from that foreign service were exempt from tax in Australia, subject to other provisions listed under section 23AG of the ITAA 1936.

Subsection 23AG(1AA) of the ITAA 1936, which took effect from 1 July 2009, provides that those foreign earnings will not be exempt under section 23AG of the ITAA 1936 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; or

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

You were an APS employee assigned in a specific role which directly related to the delivery of Australian Official Development Assistance.

Therefore, 23AG(1AA) of the ITAA 1936 applies to exempt from tax any income earned as a result of your foreign service.

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).

Under a specific Country A Agreement, the income you derived while in Country A was exempt from income tax in Country A. This does not meet any of the reasons set out in subsection 23AG(2) of the ITAA 1936.

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 were exempt in the Country A for a reason other than those listed in subsection 23AG(2) of the ITAA 1936.

The employment income you derived that is directly attributable to your foreign service in Country A is therefore exempt from income tax in Australia.

Note:

It is important to note that even though your foreign employment income is exempt, it is used in calculating the amount of tax payable on your non-exempt income. Subsection 23AG(3) of the ITAA 1936 provides a formula for calculating the tax payable when a taxpayer has derived exempt income as well as non-exempt income.

The income which is exempt under section 23AG of the ITAA 1936 is added to the non-exempt income to determine a notional taxable income. This notional taxable income is used to work out an average tax rate which is then applied to the non-exempt income. This is called exemption with progression.