Edited version of private advice

Authorisation Number: 1051908218867

Date of advice: 27 October 2021

Ruling

Subject: Foreign employment income

Question

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

Answer

Yes.

This private ruling applies for the following periods:

Year ending 30 June XXXX

Year ending 30 June XXXX

Year ending 30 June XXXX

The scheme commences on:

1 June XXXX

Relevant facts and circumstances

You stated that:

•         You are an Australian resident for tax purposes.

•         You have been deployed to XXXX to work on the XXXX Redevelopment Project.

•         You are employed by XXXX as employee, with your job title being Project Director.

•         Your period of foreign service began on XXXX, and is expected to complete in 20XX, after which you will return to Australia.

•         For the duration of your deployment, you will be based in XXXX.

•         You will be working in XXXX for a period greater than 91 days.

•         You have supplied a letter from your employer which confirms that you will be employed with them and will be deployed in XXXX under the Australian Official development Activity.

•         You are not liable for tax in XXXX.

•      You have supplied a letter dated 12 July 20XX from XXXX which confirms that your foreign service is covered under Section 11 of the "Subsidiary Arrangement between the Government of Australia and the Government of XXXX relating to the XXXX Redevelopment".

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

Issue

Foreign employment income under Section 23AG of the Income Tax Assessment Act 1936?

Question

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

Summary

You will be eligible for an exemption under subsection 23AG(1) of the ITAA 1936.

Detailed reasoning

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)).

Your employment income is not exempt from tax in XXXX for any of the above reasons that are listed in subsection 23AG(2) of the ITAA 1936.

In this case, Australia has signed a double tax agreement (DTA) with XXXX which is called The Agreement between Australia and the XXXX for the avoidance of Double Taxation and the prevention of Fiscal evasion with respect to taxes on income (XXXX agreement).

Article 15 of The XXXX agreement provides that salaries, wages, and similar remuneration derived by an individual who is a resident of Australia in respect of an employment can be taxed in XXXX in circumstances which include where the employment is exercised in XXXX for a period or periods exceeding 90 days in a year of income.

Section 11 of the "Subsidiary Arrangement between the Government of Australia and the Government of XXXX relating to the XXXX Redevelopment" confirms:

The Government of XXXX will facilitate the deployment of Government of Australia funded personnel required for the purposes of the program by granting exemption from income or other taxes on salaries and allowances.

Therefore, your foreign service is covered under the "Subsidiary Arrangement between the Government of Australia and the Government of XXXX relating to the XXXX Redevelopment" which exempts your employment income from tax in XXXX.

Thus, 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 XXXX is not assessable in Australia under section 6-5(2) of the ITAA 1997 for the periods of your deployment to XXXX.

Furthermore, any 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 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).