Edited version of private advice

Authorisation Number: 1051653125840

Date of advice: 31 March 2020

Ruling

Subject: International - income - 23AG

Question 1

Will your foreign employment income (including allowances) whilst posted to Country A be exempt from taxation in Australia under section 23AG of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

Yes

Question 2

Will leave accumulated as a result of your foreign service in Country A, other than long service leave and leave without pay, form part of the period of foreign service under section 23AG of the ITAA 1936?

Answer

Yes

This ruling applies for the following periods:

Year ended 30 June XXXX

Year ended 30 June XXXX

The scheme commences on:

1 July XXXX

Relevant facts and circumstances

You are an Australian resident for tax purposes.

You are a full time member of a disciplined force.

You are to be posted to Country A on a fulltime assignment.

While posted you are not a member of a diplomatic mission, covered by the Vienna Convention or any other similar agreement Australia has entered into regarding diplomatic, consular or other protection.

In addition to your normal base salary you will receive allowances including:

·   service allowance

·   cost of posting allowance

·   separation allowance

·   language allowance

There is no double tax agreement between the Government of Australia and Country A nor is there any agreement between the countries that exempts your employment income from being assessable in that country.

Country A normally taxes income derived in the capacity of an employee however the local taxation authority elects not to tax the salaries of certain foreign personnel in your situation.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 23AG

Reasons for decision

Exemption from taxation under section 23AG of the Income Tax Assessment Act 1936

Section 23AG 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 (the listed activities include the person's deployment outside of Australia as a member of a disciplined force by the Commonwealth).

·   Subsection 23AG(2) of the ITAA 1936, must not apply to the taxpayer.

From the information that you have provided, during your posting you will satisfy all of the above criteria.

Subsection 23AG(2) of the ITAA 1936, prevents the exemption under subsection 23AG(1) of the ITAA 1936 where the income is exempt from income tax in the foreign country only because of one or more of the following conditions:

·   a double tax agreement or a law of a country that gives effect to such an agreement (paragraphs 23AG(2)(a) and (b));

·   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 (paragraphs 23AG(2)(c) and (d)); or

·   a law or international agreement dealing with diplomatic or consular privileges and immunities, or privileges and immunities of persons connected international organisations (paragraphs 23AG(2)(e), (f) and (g)).

In your case, your foreign earnings will not be exempt from tax in Country A only for a reason listed in subsection 23AG(2) of the ITAA 1936. Therefore, subsection 23AG(2) will not apply to deny an exemption under subsection 23AG(1) of the ITAA 1936.

Conclusion

As you satisfy all the exemption conditions provided for under section 23AG of the ITAA 1936, the income that you derive from your posting will be exempt from taxation in Australia.

Leave and Section 23AG

Foreign earnings do not need to be received at the time of engaging in a period of foreign service. The important test is that the foreign earnings need to be attributable to that period of service in a foreign country rather than to a period before or after the period of foreign service.

The period you will work overseas will constitute 'foreign service' for the purposes of subsection 23AG(7) of the ITAA 1936.

Accordingly, leave accumulated as a result of your foreign service in Country A will form part of the period of foreign service under subsection 23AG(6) of the ITAA 1936.