Edited version of private advice

Authorisation Number: 1051723452761

Date of advice: 27 July 2020

Ruling

Subject: International income - section 23AG

Question

Is your foreign employment income whilst posted overseas with Company A in Country A 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 2020

Year ended 30 June 2021

Year ended 30 June 2022

The scheme commenced on:

1 July 2019

Relevant facts and circumstances

You are an Australian resident for tax purposes.

You have been deployed to Country A to work on a redevelopment project.

You are employed by Company A as an employee.

Your period of foreign Service began in mid-2020, and this initial deployment will end in late-2020, after which you will return to Australia. You estimate that between 90% and 100% of your time in Australia will be devoted to this project.

Subject to project requirements there may be further occasions which require you to travel to and work in Country A.

As such you will be working in Country A for a period greater than 91 days.

You will not be remaining there following your period of Foreign Service.

You have supplied a copy of the employment contract which confirms that you will be entitled to 20 days recreational leave per year of service.

The employment contract also specifies that you are defined as an employee, and not as a contractor.

You have provided a letter from your employer which confirms that your foreign service is directly attributable to the delivery of Australian official overseas development assistance.

You are not liable for tax in Country A.

Australia has signed a double tax agreement (DTA) with Country A.

You have supplied a letter from your employer which confirms that your foreign service is covered under a section of this redevelopment agreement.

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

Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources, whether in or out of Australia, during the income year.

Salary and wages are ordinary income for the purposes of subsection 6-5(2) of the ITAA 1997.

Subsection 6-15(2) of the ITAA 1997 provides that if an amount is exempt income then it is not assessable income.

Section 11-15 of the ITAA 1997 lists those provisions dealing with income which may be exempt. Included in this list is section 23AG of the Income Tax Assessment Act 1936 (ITAA 1936) which deals with exempt foreign employment income.

Exempt income under section 23AG of the Income Tax Assessment Act 1936

Subsection 23AG(1) of the ITAA 1936 provides that foreign earnings of an Australian resident derived during a continuous period of foreign service of not less than 91 days employment in a foreign country are exempt from income tax in Australia.

Foreign earnings include income consisting of salary, wages, bonuses or allowances (subsection 23AG(7) 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:

·        the delivery of Australia's overseas aid program by the individual's employer (except if that employer is an Australian Government Agency);

·        the activities of the individual's employer in operating a developing country relief fund or a public disaster relief fund;

·        the activities of the individual's employer being a prescribed institution that is exempt from Australian tax; or

·        the individual's deployment outside Australia by an Australian government (or an authority thereof) as a member of a disciplined force.

In your case you meet the conditions of subsection 23AG (1AA) of the ITAA 1936 as you have supplied a letter from your employer which confirms that your foreign service is directly attributable to the delivery of Australian official overseas assistance by your employer.

However, 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, it is evident that your employment income is not exempt from tax in Country A for any of the above reasons that are listed in subsection 23AG(2) of the ITAA 1936.

Further, your foreign service is covered under a redevelopment agreement which exempts your employment income from tax in Country A.

Therefore, subsection 23AG(2) of the ITAA 1936 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 overseas deployment to Country A is not assessable in Australia under section 6-5(2) of the ITAA 1997 for the periods when you are resident in that country.

Other relevant comments

The income you earn from work you do while located in Australia will not be exempt income and will therefore be assessable to you in Australia. This is because:

·             the income you earn from work in Australia is not from service in a foreign country, and

·             your return to Australia does not satisfy the criteria for your absence from foreign service to count as foreign service.

This is the case even if you return to Australia and commence or continue to work in Australia on matters relating to your previous foreign service.

Foreign earnings exempt under section 23AG of the ITAA 1936 are considered in calculating the tax payable on other income derived by a taxpayer. This method of calculation referred to as exemption with progression prevents the exempt income from reducing the Australian tax payable on the other income. The exempt income needs to be included as exempt foreign salary and wages income in the Australian tax return (supplement income label 20).