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Edited version of your written advice
Authorisation Number: 1051430908230
Date of advice: 19 September 2018
Ruling
Subject: Foreign Income
Question
Is income received in Country A income tax exempt under Section 23AG of the Income Tax Assessment Act 1936?
Answer
Yes
This ruling applies for the following periods:
Year ended 30 June 2019
Year ended 30 June 2020
Year ended 30 June 2021
The scheme commences on:
1 July 2018
Relevant facts and circumstances
● You are employed as a Program Manager by a company.
● You are employed to work in Country A.
● The term of your employment is August 20XX to August 20XX.
● Your position involves implementation and reporting of activities in Country A.
● Your employment is directly related to an activity that is listed in subsection 23AG(1AA) of the Income Tax Assessment Act 1936.
● The Memorandum of Understanding between Country A and Australia states that you are exempt from tax.
Relevant legislative provisions
Income Tax Assessment Act 1936 section 23AG
Income Tax Assessment Act 1936 sub-section 23AG(1)
Income Tax Assessment Act 1936 sub-section 23AG(1AA)
Reasons for decision
As a general rule, and under the provisions of section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997), the assessable income of an Australian resident taxpayer includes all the ordinary income they earn from all sources, in or out of Australia in an income year.
Income in the form of salary, wages and allowances are all types of ordinary income.
Although a payment may be considered ordinary income and will generally be assessable under the provisions of section 6-5 of the ITAA 1997, there are some instances where ordinary income may be excluded from an individual’s assessable income in Australia. This will be the case for example if a specific provision of the tax law makes the income exempt from taxation in Australia.
Exemption from taxation under section 23AG of the Income Tax Assessment Act 1936 (ITAA 1936)
Subsection 23AG(1) of the ITAA 1936 provides that foreign earnings are exempt from income tax in Australia 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.
● From 1 July 2009 onwards, the foreign service is directly attributable to an activity that is listed in subsection 23AG(1AA) of the ITAA 1936.
Application of 23AG to your circumstances
Foreign service is defined in s 23AG(7) of the ITAA 1936 as: “service in a foreign country as the holder of an office or in the capacity of an employee”
The implication in this definition is that foreign service is carried out in one country only. However Justice Graham in Overseas Aircrew Basing Limited v Commissioner of Taxation [2009] FCA 7; (2009) 175 FCR 449 (Overseas Aircrew) appeared to suggest in his reasoning that this may not always be the case. The following paragraph is relevant:
93. Section 23AG exempts salaries from tax in Australia where they are derived by persons engaged in service in a particular foreign country and the particular foreign country is the base from which they derive those salaries.
In Graham J’s view, when a particular foreign country is considered the person’s “base country”, then service based in that country does not preclude parts of that service being carried out in other countries.
Therefore, you meet the conditions of 23AG(1) of the ITAA 1936 and 23AG(1AA) of the ITAA 1936.
In order for your employment income to be exempt from tax in Australia under section 23AG of the ITAA 1936, the income must not be exempt from tax in Country A only because of one of the reasons listed in subsection 23AG(2) of the ITAA 1936.
Since none of the circumstances listed in subsection 23AG(2) of the ITAA 1936 applies, it is not necessary to consider if your foreign earnings were exempt in Country A for a reason not included in subsection 23AG(2) of the ITAA 1936.
Your foreign earnings derived during your whole period of Foreign Service are exempt from income tax in Australia under section 23AG of the ITAA 1936.