Edited version of your written advice

Authorisation Number: 1051378537048

Date of advice: 22 June 2018

Ruling

Subject: Exempt foreign income

Question 1

Is your salary and wage income exempt from Australian income tax under section 23AG of the Income Tax Assessment Act 1936 for the entire 520 days of your overseas employment?

Answer

No

Question 2

Is your salary and wage income exempt from Australian income tax under section 23AG of the Income Tax Assessment Act 1936 for the 76 days in Period A?

Answer

No

Question 3

Is your salary and wage income exempt from Australian income tax under section 23AG of the Income Tax Assessment Act 1936 for the 220 days in Period B?

Answer

Yes

Question 4

Is your salary and wage income exempt from Australian income tax under section 23AG of the Income Tax Assessment Act 1936 for the 58 days in Period C?

Answer

No

Question 5

Is your salary and wage income exempt from Australian income tax under section 23AG of the Income Tax Assessment Act 1936 for the 166 days in Period D?

Answer

Yes

This ruling applies for the following period:

Year ended 30 June 2015

Year ended 30 June 2016

The scheme commences on:

1 July 2014

Relevant facts and circumstances

You were employed by an Australian government agency.

You were posted to Country X for a total of 520 days.

You had a number of work-related trips to Australia during this time.

You had a number of periods of recreation leave during this time.

Your work related solely to official development assistance.

Your salary and wage income was exempt from tax in Country X by operation of the Vienna Convention on Diplomatic Relations [1968] ATS 3.

Your salary and wage income was exempt from tax in Country X by operation of a development cooperation treaty between Australia and Country X.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 23AG

Income Tax Assessment Act 1936 subsection 23AG(1)

Income Tax Assessment Act 1936 subsection 23AG(1AA)

Income Tax Assessment Act 1936 subsection 23AG(2)

Income Tax Assessment Act 1936 subsection 23AG(6)

Income Tax Assessment Act 1936 subsection 23AG(6A)

Vienna Convention on Diplomatic Relations [1968] ATS 3

Treaty between the Government of Australia and Country X

Reasons for decision

Summary

Your foreign sourced salary and wage income derived during Period B and Period D from your duties performing official development assistance (ODA) in Country X for an Australian government agency is exempt from Australian income tax under section 23AG of the Income Tax Assessment Act 1936 (ITAA 1936).

Detailed Reasoning

Subsection 23AG(1) of the ITAA 1936 states that where a resident has been engaged in foreign service for a period of at least 91 continuous days, any foreign earnings are exempt from tax.

Continuous period of foreign service

Subsection 23AG(6) of the ITAA 1936 treats certain temporary absences from foreign service as forming part of the period of foreign service. The Commissioner's view on temporary absences is discussed in 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?

If a person engaged in foreign service is required by their employer to spend a short time in Australia or in another foreign country during a period of foreign service for reasons directly related to that person's continuing foreign service engagement, that time will be treated as part of the person's continuous period of foreign service provided it is not excessive by comparison with the scheduled period of foreign service. For example, this will apply to time spent to attend conferences, training sessions or briefing sessions.

As per paragraphs 34 and 35 of TD 2012/8, your work-related absences from your foreign service are not considered excessive by comparison with the scheduled periods of foreign service and are therefore taken to form part of that foreign service.

Where an employee takes leave which does not constitute a temporary absence forming part of a period of foreign service, it needs to be determined whether the continuity of service can be maintained under the 1/6^th legislative rule.

Subsection 23AG(6A) of the ITAA 1936 outlines the 1/6^th legislative rule. This allows two or more periods of foreign service to be added together and treated as a continuous period of foreign service, unless, at any time, the total period of absence (in days) between the periods of foreign service exceeds 1/6^th the total number of days of foreign service. If the period of absence exceeds 1/6^th of the total period of foreign service at any time, continuity of foreign service is broken. An employee will begin a new period of foreign service when he or she next engages in foreign service again and must determine whether that period of foreign service lasts for at least 91 continuous days.

As no single period of your foreign service was 91 days or more in length, two or more periods must be added together as per the 1/6^th legislative rule in order to satisfy this requirement.

You initially spent 58 days working in Country X during Period A. This would have been added to your second period of 86 days, but for the fact that the 1/6^th legislative rule is exceeded during your 18 days of recreation leave separating the two. As the continuity of service has been broken, these two periods of service cannot be added together to form a continuous period of at least 91 days. The income you received from Period A is therefore not exempt under section 23AG of the ITAA 1936.

Whilst your foreign service of 86 days during Period B was less than 91 days, this can be added to your next period of foreign service of 16 days because your recreation leave of 10 days between the two does not exceed the 1/6^th legislative rule. The entire period is taken to be continuous and is therefore greater than 91 days.

The three separate work-related absences of not more than four days each are not considered to be excessive and are taken to form part of your foreign service. Therefore Period B continues for 220 days until the 1/6^th legislative rule is exceeded by your 58 days of recreation leave.

The 58 days of recreation leave constitutes Period C and cannot be included in the foreign service of Period B as the continuity of service is broken. The income you received during Period C while on 58 days of recreation is therefore not exempt under section 23AG of the ITAA 1936.

Period D comprises two or more separate periods of foreign service that are taken to form a continuous period of more than 91 days because your work-related absences are not excessive and your recreation leave does not exceed the 1/6^th legislative rule. The income you received during the 166 days of Period A is therefore exempt under section 23AG of the ITAA 1936.

Other requirements of 23AG

Subsection 23AG(1AA) of the ITAA 1936 provides that foreign earnings are not exempt from tax unless the continuous period of foreign service is directly attributable to any of the following:

● the delivery of Australian official development assistance by the taxpayer's employer;

● the activities of the taxpayer's employer in operating a public fund covered by the deductible gift recipient categories overseas aid fund and developed country disaster relief fund;

● the activities of the taxpayer's employer where they are a charitable institution or religious institution which is income tax exempt because they are a prescribed institution located outside Australia or pursuing objectives principally outside Australia;

● the taxpayer's deployment outside Australia as a member of a disciplined force of Australia (generally considered to be the Australian Defence Force or Australian Federal Police); or

● an activity of a kind specified in the regulations.

As your foreign service was directly attributable to the delivery of Australian official development assistance by your Australian government employer you satisfy one of the conditions for exemption under subsection 23AG(1AA) of the ITAA 1936.

Paragraph 23AG(1AA)(a) was amended to exclude those employed by an Australian government agency, however these amendments did not take effect until 1 July 2016. As your foreign service took place prior to 1 July 2016 the amendment does not affect your entitlement to the exemption.

An amount of foreign earnings derived in a foreign country is not exempt from Australian income tax under section 23AG of the ITAA 1936 if it is exempt from tax in the foreign country only because of any of reasons listed in subsection 23AG(2) of the ITAA 1936:

(a) a law of the foreign country giving effect to a double tax agreement;

(b) a double tax agreement;

(c) provisions of a law of the foreign country under which income covered by any of the following categories is generally exempt from income tax:

(i) income derived in the capacity of an employee;

(ii) income from personal services;

(iii) similar income;

(d) the law of the foreign country does not provide for the imposition of income tax on one or more of the categories of income mentioned in paragraph (c);

(e) a law of the foreign country corresponding to the International Organisations (Privileges and Immunities) Act 1963 or to the regulations under that Act;

(f) an international agreement to which Australia is a party and that deals with:

(i) diplomatic or consular privileges and immunities; or

(ii) privileges and immunities in relation to persons connected with international organisations;

(g) a law of the foreign country giving effect to an agreement covered by paragraph (f).

Your salary and wages from your posting in Country X are exempt in Country X by operation of the Vienna Convention on Diplomatic Relations [1968] ATS 3. If this was the only reason the income was exempt then subsection 23AG(2) of the ITAA 1936 would operate to deny the exemption. However, as your salary and wage income is also exempt by operation of a development cooperation treaty between Australia and Country X, and this is not a reason listed in subsection 23AG(2) of the ITAA 1936, it remains exempt under subsection 23AG(1) of the ITAA 1936.

Period B and Period D, each being 91 days or more of continuous service providing ODA in Country X are therefore exempt from Australian income tax under section 23AG of the ITAA 1936.