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Ruling

Subject: Assessability of foreign salary

Question and answer

Is the salary you derive in Country X exempt from income tax in Australia?

Yes.

This ruling applies for the following periods:

Year ended 30 June 2012

Year ending 30 June 2013

Year ending 30 June 2014

The scheme commenced on:

1 July 2011

Relevant facts and circumstances

You are an Australian Public Service (APS) employee.

You have been assigned to Country X.

The program you have been posted under is an official Australia Government overseas development assistance program.

Your contract is for two years.

You will be engaged in service in Country X for a continuous period in excess of 91 days.

Country X has a tax system that taxes employment income.

Australia does not have a tax treaty with Country X.

Relevant legislative provisions:

Income Tax Assessment Act 1997 subsection 6-5(2)

Income Tax Assessment Act 1997 subsection 6-15(2)

Income Tax Assessment Act 1997 section 11-15

Income Tax Assessment Act 1936 subsection 23AG

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 will be engaged in foreign service for a continuous period of not less than 91 days. Therefore your foreign earnings derived from that foreign service are 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 are an APS employee. The functions and duties of your role as directly relate 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).

Australia does not have a tax treaty in place with Country X and your income is not exempt from tax in Country X. As you will work continuously overseas for a period greater than 91days, your foreign salary and allowances will be exempt income in Australia under section 23AG of the ITAA 1936.

Therefore, all the conditions of section 23AG of the ITAA 1936 have been met and your salary will be exempt income.

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.