Edited version of your written advice

Authorisation Number: 1013026710082

Date of advice: 2 June 2016

Ruling

Subject: Foreign income

Question 1

Are the living and accommodation allowances you will receive in relation to an overseas volunteer program exempt income?

Answer

Yes

This ruling applies for the following periods:

Year ended 30 June 2017

The scheme commences on:

1 July 2016

Relevant facts and circumstances

You are an Australian permanent resident.

You will travel to Country A to volunteer for a period of 12 months from a particular date.

Your volunteer program is fully funded by the Department as part of the Australian Volunteers program.

The program forms part of Australia's official development assistance.

Your volunteer program is administered by Australian Volunteers, a delivery partner of the program.

You will be paid a living allowance and an accommodation allowance.

Your allowances will be paid into your Australian bank account by X.

You will receive medical insurance and the cost of flights to and from your volunteer assignment.

You will receive no payment from the organisation you will be volunteering for in Country A.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 23AG, and

Income Tax Assessment Act 1997 sections 6-10, 10-5 and 15-2.

Reasons for decision

If you are a resident of Australia for taxation purposes, allowances paid to you in respect of employment or services rendered are generally included in your assessable income as amounts of statutory income under the provisions of sections 6-10, 10-5 and 15-2 of the Income Tax Assessment Act 1997 (ITAA 1997). However, if you have been employed overseas on foreign service, the provisions of section 23AG of the Income Tax Assessment Act 1936 (ITAA 1936) may provide an exemption from taxation in Australia on the income earned from that foreign service.

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(1AA) provides that foreign earnings are exempt if they are directly attributable to the delivery of Australian official development assistance by the person's employer .

Foreign service includes service in a foreign country in the capacity as an employee and 'foreign earnings' includes income consisting of salary, wages, bonuses and allowances (subsection 23AG(7) of the ITAA 1936.

The allowances you will earn while a volunteer under the program administered by X and funded by Y is Australian official development assistance.

In accordance with subsection 23AG(2) of the ITAA 1936, the exemption under subsection 23AG(1) of the ITAA 1936 will not apply if the income is exempt from income tax in the foreign country only because of one or more of the following conditions:

• a tax treaty with Australia or a law giving effect to a treaty agreement

• the foreign country exempts from income tax, or does not provide for the imposition of income tax on, income derived in the capacity of an employee, income from personal services or similar income, or

• a law or international agreement dealing with privileges and immunities of diplomats or consuls or of persons connected with international organisations applies.

Australia has a tax treaty with Country A, the Agreement between Australia and Country A for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income (the Country A Agreement) which operates to avoid the double taxation of income received by residents of Australia and Country A.

Article 21 of the Country A Agreement considers the tax treatment of income derived by a person participating in the Program to Country A. It provides that notwithstanding anything elsewhere in the Country A Agreement, income derived by any person from the participation in any capacity whatsoever of that person in the Program to Country A shall be exempt from Country A tax if:

(a) that person is not a resident of Country A for the purposes of Country A tax, or is a resident of Country A for the purposes of Country A tax solely for the purpose of such participation; and

(b) that income is derived from the aid fund and is, or upon the application of this Article will be, subject to tax in Australia.

However, the employment income you earned in Country A is exempt from taxation in Country A in accordance with the provisions of the Development Cooperation Memorandum of Understanding between Australia and Country A.

The exemption provided by the Development Cooperation Memorandum of Understanding does not fall under any of the other exemption categories under subsection 23AG(2) of the ITAA 1936.

You satisfy all the conditions for exemption under section 23AG of the ITAA 1936. 

Accordingly, the overseas allowances you received from the program in Country A are exempt from income tax in Australia under subsection 23AG(1) of the ITAA 1936.

Declaring exempt foreign income in your tax return

Although income subject to exemption under section 23AG of the ITAA 1936 is not taxable in Australia, the amount still needs to be declared as 'exempt foreign employment income' at the appropriate label in your tax return. This is because the amount of exempt foreign earnings is taken into account in calculating the tax payable on other income that you derive.

The living and accommodation allowances paid to you in relation to your volunteering with the program in Country A are excluded from your assessable income in Australia under the provisions of section 23AG of the ITAA 1936.