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Edited version of your private ruling
Authorisation Number: 1012496487451
Ruling
Subject: Foreign income
Questions and answers
1. Are the salary and hardship allowance you earned while employed overseas exempt from income tax in Australia?
Yes.
2. Is the transfer allowance you received to assist you in preparing and returning from your foreign employment exempt from income tax in Australia?
No.
This ruling applies for the following periods:
Year ending 30 June 2014,
Year ending 30 June 2015,
Year ending 30 June 2016,
Year ending 30 June 2017.
The scheme commenced on:
1 July 2013.
Relevant facts and circumstances
You are an Australian resident for income tax purposes.
You are in receipt of foreign salary and allowances.
Your foreign service is directly attributable to the delivery of Australian official development assistance by your employer.
You are employed by an Australian Government Department.
You will be engaged in foreign employment for more than 91 continuous days.
There is an agreement between Australia and the overseas country that exempts the income from taxation in the overseas country.
There is a taxation treaty between the Australian Government and the overseas country.
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(1AA)
Income Tax Assessment Act 1936 Section 23AG(2)
Reasons for decision
Subsection 23AG(1) of the Income Tax Assessment Act 1936 (ITAA 1936) provides that foreign earnings are exempt from income tax where all of the following requirements are satisfied:
· you are a resident of Australia and a natural person,
· you are engaged in foreign service,
· the foreign service is for a continuous period of at least 91 days,
· you derive foreign earnings from that foreign service,
· the foreign service is directly attributable to an activity that is listed in subsection 23AG(1AA) of the ITAA 1936, and
· the foreign earnings are not exempt from income tax in the foreign country only because of one of the reasons listed in subsection 23AG(2) of the ITAA 1936.
Given a consideration of the whole arrangement, it is accepted that you meet the above criteria for your salary and X allowance as income referable to your foreign service. This income is exempt from income tax in Australia under section 23AG of the ITAA 1936.
Allowance
In order for the exemption to apply, foreign earnings need to be sourced from the foreign service. The allowance would need to be derived as a result of the undertaking of the foreign service, but not necessarily at the time of engaging in foreign service, CR 2006/15.
You are entitled to a allowance before and after the completion of your foreign service. The transfer allowance payable prior to the deployment period and after the end of the foreign service is not foreign earnings derived from that foreign service. It is paid as a compensation for non-reimbursed expenditure incurred by you prior to engaging in foreign service and after completion of foreign service and does not, therefore, qualify for exemption under section 23AG of the ITAA 1936.
For your information
If a taxpayer has income in a financial year which is only partially exempt, there is a requirement to apportion the income. Salary and wages which are not exempt foreign earnings should be declared as normal at Salary and wages when lodging.
Tax withheld should be declared in full. Any excess Pay As You Go Withholding (PAYGW) credits will be refunded automatically.
Foreign earnings exempt under section 23AG of the ITAA 1936 need to be included as exempt foreign salary and wage income in an individuals tax return.
These amounts 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.
It is advisable to include a note with lodgment, explaining the method of calculation and reference any applicable private rulings for the periods.