Edited version of your written advice

Authorisation Number: 1012909267245

Date of advice: 10 November 2015

Ruling

Subject: Long service leave attributable to foreign service

Question and answer:

Will the salary payments you receive when taking personal leave and long service leave attributable to prior periods of foreign service be exempt from income tax 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 2015

The scheme commenced on:

1 July 2014

Relevant facts:

You are employed with an Australian Government Department.

You were deployed to Country A as part of a program that exceeded 91 days.

During your periods of overseas deployment your income was exempt from Australian income tax under section 23AG of the ITAA 1936 as it was derived during continuous periods of foreign service of not less than 91 days.

During your period of foreign service you accrued long service leave which you have used some of on your return to Australia.

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(7)

Reasons for decision

Subsection 23AG(1) of the ITAA 1936 provides that the 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 income consisting of salary, wages, bonuses and allowances (subsection 23AG(7) of the ITAA 1936).

To qualify for the exemption the foreign earnings must be derived from the foreign service. That 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 a result of the undertaking of that foreign service.

Specifically, paragraph 81 of Taxation Determination TD 2012/8 Income tax: what types of temporary absences from foreign service form part of a continuous period of foreign service under section 23AG of the Income Tax Assessment Act 1936? states that where recreational leave accrues during a period of foreign service and is taken at a later time when the individual is employed in Australia, the earnings will be attributable to the period of foreign service and will be foreign earnings derived from that foreign service. Therefore, the salary or wages paid for the period of leave will be exempt from income tax.

In your case, you have completed a period of foreign service that met the criteria for your earnings to be exempt from tax in Australia under section 23AG of the ITAA 1936. You accrued long service leave during your period of foreign service. You have taken long service leave on your return to Australia.

You have taken long service leave attributable to your period of foreign service and therefore the salary you receive while taking this leave will be exempt from tax in Australia under section 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 the other income derived by you. This method of calculation referred to as exemption with progression prevents the exempt income from reducing the Australian tax payable on any other income. This income needs to be included as exempt foreign salary and wage income in your Australian tax return.