Edited version of private advice

Authorisation Number: 1051713804399

Date of advice: 13 July 2020

Ruling

Subject: Section 23AG

Question

Is your foreign employment income whilst posted overseas exempt from taxation in Australia under Section 23AG of the Income Tax Assessment Act 1936?

Answer

Yes

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You are an Australian resident for tax purposes.

You have been posted to Country A as part of a Cooperation Program with the Government of that nation. You departed Australia in early 20XX, and you anticipate departing after a deployment lasting X years.

Your income is not taxable in Country A.

You have been deployed as a member of a disciplined force.

There is a Memorandum of Understanding (MOU) between Australia and Country A which exempts your income from tax in that country during your deployment.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 23AG

Income Tax Assessment Act 1997 Subsection 6-15(2)

Income Tax Assessment Act 1997 Subsection 6-5(2)

Reasons for decision

Assessable income - general

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.

·         The foreign earnings must not be exempt in the foreign country only for one or more of the reasons covered by subsection 23AG(2) of the ITAA 1936.

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:

● 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)).

● 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.

● Deployment outside Australia by an Australian Government (or an authority thereof) as a member of a disciplined force.

You will be employed to work in a foreign country by the Australian Government as a member of a disciplined force.

You therefore satisfy one of the conditions for exemption under subsection 23AG(1AA) of the ITAA 1936.

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 tax treaty or a law of a country that gives effect to such an agreement (paragraphs 23AG(2)(a) and (b) of the ITAA 1936);

● the law of a 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).

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 a foreign country only because of one of the reasons listed in subsection 23AG(2) of the ITAA 1936.

You are on Australian Government service and your income is taxed according to the Memorandum of Understanding (MOU) between Australia and Country A. This is a reason not covered by 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.

Accordingly, the salary you receive during your employment in a foreign country is exempt from income tax in Australia under subsection 23AG(1) of the ITAA 1936.