Edited version of private advice

Authorisation Number: 1051897470242

Date of advice: 14 September 2021

Ruling

Subject: Foreign employment income

Question

Will your foreign employment income (including allowances) derived whilst posted to Country A as a police advisor to assist and support a body to combat crime for the period XX 20XX to XX 20XX be exempt from taxation in Australia under section 23AG of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

No.

This ruling applies for the following period:

Year ended 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You are an Australian resident for tax purposes.

You are a member of an Australian disciplined force

You were posted to Country A on a fulltime assignment.

This posting was for a period that exceeded 91 days of continuous foreign service.

While posted you were 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.

The posting delivered pursuant to two Memorandums of Understanding (MOUs) between the Australian disciplined force and overseas disciplined forces that do not cover taxation.

Australia has entered into a Co-operative Development Agreement or Treaty (CDA) with Country A (the Treaty).

A clause of the Treaty provides for Australian personnel to be exempt from tax in Country A.

To date no evidence that shows the work conducted by you in Country A to be exempt from taxation in Country A under the Treaty has been located.

Reasons for decision

Section 23AG Income Exemption

Where an Australian tax resident derives foreign earnings from a continuous period of at least 91 days of foreign service, those earnings will be exempt from tax if certain conditions are met.

Continuous period of at least 91 days

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?', it sets out at paragraph 1 that absences may be counted as foreign service where they are permitted by your employer and in accordance with the terms and conditions of that foreign service, and are for any of the following reasons:

•         recreation leave on full pay that accrues during the period of foreign service (this does not include long service leave or leave without pay);

•         leave due to accident or illness suffered by you, or due to the death of another person;

•         work-related trips in the course of carrying out either duties or training as required by the employer under a continuing foreign service engagement; and

•         weekends, public holidays, rostered days off, days off due to part-time arrangements, flex-days, and days off in lieu as a part of normal working conditions for foreign service.

Continuous foreign service directly attributable conditions in Section 23AG(1AA)

Even if the 91-day requirement is met, you may be denied the Australian tax exemption unless the continuous period of foreign service is directly attributable to any of the following:

•         the delivery of Australian official development assistance (ODA) by the taxpayer's employer (generally provided by the Australian Agency for International Development (AusAID) or the Department of Foreign Affairs and Trade (DFAT);

•         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.

Non-exemption provisions in Section 23AG(2)

Even if the 91-day requirement is met, you may also be denied the Australian tax exemption if your foreign earnings are exempt in the foreign country only because of any of the following reasons:

•         a double tax agreement or a law of a country giving effect to such an agreement;

•         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; or

•         a law or international agreement dealing with privileges and immunities of diplomats or consuls or of persons connected with international organisations applies.

This denial will not apply where your foreign earnings are exempt from tax in the foreign country for a reason listed in the subsection as well as a reason not listed. (See Taxation Determination TD 2005/15 Income tax: does subsection 23AG(2) of the Income Tax Assessment Act 1936 apply where foreign earnings are exempt from tax in the foreign country for a reason listed in that subsection as well as a reason not listed?)

Application to your circumstances

You were deployed to Country A for more than 91 days.

We are satisfied that you meet the requirements in subsections 23AG(1) and 23AG(1AA) of the ITAA 1936 as you were deployed:

•         to Country A for a continuous period of service that exceeded 91 days, and

•         as a member of a disciplined force

However, certain earnings that meet the requirements of subsections 23AG(1) and 23AG(1AA) may not be exempt if the amount is exempt from income tax in the foreign country only because of any of the reasons listed in subsection 23AG(2).

Your employment income is exempt in Country A, as per paragraph 23AG(2)(b) due to the application of a double tax agreement, that being Article X of the Agreement between Australia and Country A (the DTA). Article X applies because you derived salary or wages paid by the Australian government. Therefore, your salary or wages are taxable solely in Australia, with Country A not having any right to tax them.

The following exceptions to the application of Article 19(1) do not apply to you:

•         resident (for taxation purposes) of that State who is also a citizen or national of that State - you are neither a resident or a citizen or national of Country A. We consider that, based on the information available to us, that you are a resident of Australia for taxation purposes, and, even if you were also a resident of Country A for taxation purposes during this time, that you would tiebreak to Australia under the DTA.

•         resident of that State who did not solely become such a resident for the purpose of performing those services - as noted above you are not regarded as being a resident of Country A for taxation purposes.

•         the salary or wages relate to work undertaken in connection with any trade or business conducted by one of the Contracting States - you are undertaking work which is a government function.

Article X applies in preference to Article Y about other employment, and so it is not necessary to consider the later article in your case.

Furthermore, you believe that your foreign earnings from working in Country A are exempt from taxation in Country A because an Article of the Treaty applies to them. This Treaty is not listed in section 23AG(2), so if that was the case it would mean that this provision would not apply to deny the section 23AG exemption from applying to your salary or wages derived in Country A.

However, for that to be the case it needs be demonstrated that the activities you conducted in Country A are covered by the Treaty.

For activities to be arranged between the parties, being Australia and Country A, at the governmental level it would require 'official agreement' between them. An agreement, being an expression by two parties to work towards the same object or goal together, would require a positive action from each of them to acknowledge that this is what they are doing. At a governmental level, agreements would be reached in writing, through the exchange of letters or other official correspondence, or if reached orally, there would be an official record that this has occurred.

To date no evidence of any agreement that the work conducted by you was recognised as an activity for the purposes of the Treaty has been located.

We do not have access to specific details about the operations in Country A and the specific activities conducted. However, generally with work of this nature, donor countries fund the improvement of the policing services in the donee country with the primary aim of it having greater capacity to prevent crimes of certain types (including things such as terrorism, drug growing and supply, radicalisation and inciting to violence and money laundering). This is aimed at preventing criminals and criminal networks establishing themselves in the donee countries which may later lead to criminal activities or other threats posed to the donor countries and its citizens.

Generally the primary beneficiary of these programs is the donor country, protecting itself and its citizens from the disruption that comes about from the consequences of the crimes committed by the criminals and criminal networks occurring in them. Programs under which the donor country is the primary beneficiary or benefitting to a degree that is much more than minimal, incidental or secondary are not activities which are development assistance within the scope of the Treaty.

We are not of the view that the activities you undertook in Country A come within the definition of 'activities' for the purposes of the Treaty.

It therefore follows that the only reason that your salary or wages were not taxed in Country A was due to the application of the DTA. Therefore, subsection 23AG(2) of the ITAA 1936 applies to deny the section 23AG exemption. Given this situation, your foreign income from the deployment is subject to taxation in Australia.