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Ruling

Subject: Assessability of foreign salary and allowances

Question and answer

Are the salary and allowances that you received, that are directly attributable to your foreign service in Country X, exempt from income tax in Australia?

Yes.

This ruling applies for the following period:

Year ended 30 June 2012

The scheme commenced on:

1 July 2011

Relevant facts and circumstances

You are a resident of Australia for tax purposes.

You are an Australian Public Service (APS) employee.

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

You were assigned to Country X as part of regional assistance mission to Country X.

In addition to your salary, you also receive the following allowances:

· Cost of posting allowance

· Cost of living allowance

· Hardship allowance

Under a specific act of law in Country X, the income you earn while in Country X is exempt from income tax in Country X as you are a member of Country X visiting contingent.

Relevant legislative provisions:

Income Tax Assessment Act 1936 Section 23AG.

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

Salary

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 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 assigned to foreign country. The functions and duties of your role 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 Country X 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 Country X law, the income you earn while in Country X is exempt from income tax in Country X as you are a member of Country X visiting contingent. 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 are exempt in Country X for a reason other than those listed in subsection 23AG(2) of the ITAA 1936.

The salary that you received that is directly attributable to your foreign service in Country X is therefore exempt from income tax in Australia.

Allowances

Subject to the additional conditions imposed under subsection 23AG(1AA) of the ITAA 1936, 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.

Subsection 23AG(7) of the ITAA 1936 provides that a person's foreign earnings include income consisting of salary, wages, bonuses or allowances.

To qualify for the exemption under subsection 23AG(1), the foreign earnings must be derived from the foreign service. This 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 result of the undertaking of that foreign service.

In addition to your salary, you also receive the following allowances:

· Cost of posting allowance

· Cost of living allowance

· Hardship allowance

As the overseas allowances were paid to cover costs incurred while you were performing the foreign service, they are considered to be derived from your foreign service.

The allowances that you receive that are directly attributable to your foreign service in Country X are therefore exempt from income tax in Australia.