Edited version of your written advice

Authorisation Number: 1013023102797

Date of advice: 24 May 2016

Ruling

Subject: Foreign Income - 23AG

Question 1

Are the salary and allowances you receive, that are directly attributable to your foreign service, exempt from income tax in Australia during the 2015-16 income year?

Answer

Yes.

Question 2

Are the salary and allowances you receive, that are directly attributable to your foreign service, exempt from income tax in Australia during the 2016-17 income year?

Answer

No.

This ruling applies for the following periods:

Year ending 30 June 2016

Year ending 30 June 2017

The scheme commences on:

1 July 2015

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You are an Australian Public Service (APS) employee.

You were assigned to Country X during the relevant income period.

You will remain an Australian resident for tax purposes whilst overseas.

In addition to your salary, you receive allowances.

Whilst overseas you remain an APS employee.

Your engagement in service in Country X is for a continuous period in excess of 91 days. You have already completed a continuous period of service in Country X in excess of 91 days in the financial year ended 30 June 2016.

Under Country X law your income is tax free in Country X.

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

Tax and Superannuation Laws Amendment (2015 Measures No. 4) Act 2015

Reasons for decision

2015-16 Income Year

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 period.

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 have been engaged in Foreign Service for a continuous period of not less than 91 days. Therefore your 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.

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 the foreign country solely because of:  

• a law of the country giving effect to a double taxation agreement (paragraph 23AG(2)(a) of the ITAA 1936);

• a double taxation agreement (paragraph 23AG(2)(b) of the ITAA 1936);

• a law of the 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 the Country X law your salary is exempt from income tax in Country X. 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 the Country X for a reason other than those listed in subsection 23AG(2) of the ITAA 1936.

The salary that you receive that is directly attributable to your foreign service during the 2015-16 income period 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. What is required is that the foreign earnings, when derived, are as result of the undertaking of that Foreign Service.

In addition to your salary, you also receive allowances.

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 are directly attributable to your foreign service are therefore exempt from income tax in Australia.

2016-17 Income Year

With the introduction of the Tax and Superannuation Laws Amendment (2015 Measures No. 4) Act 2015 paragraph 23AG(1AA)(1) of ITAA 1936 will be amended from 1 July 2016 to read as follows (emphasis added).

However, those foreign earnings are not exempt from tax under this section unless the continuous period of Foreign Service is directly attributable to any of the following:

• delivery of Australian official development assistance by your employer (except if that employer is an Australian government agency (within the meaning of the Income Tax Assessment Act 1997));

As you are an employee of an Australian government agency your income and allowances will no longer be exempt from tax in Australia from 1 July 2016.