Edited version of private advice

Authorisation Number: 1051993087827

Date of advice: 21 June 2022

Ruling

Subject: Section 23AG - exempt income

Question 1

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

Answer

Yes.

Question 2

Does leave accumulated as a result of foreign service in Country X form part of the period of foreign service under section 23AG of the ITAA 1936?

Answer

Yes.

Exemption from taxation under section 23AG of the 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.

•         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).

From the information provided, during your posting to Country X 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)).

Country X does not exempt from income tax income derived in the capacity of an employee. Your income is exempt in Country X solely because the local taxation authority elects not to tax the salaries of certain foreign personnel in your situation.

Therefore, subsection 23AG(2) of the ITAA 1936 will not apply to deny an exemption under subsection 23AG(1) of the ITAA 1936.

Conclusion

Accordingly, your foreign employment income (including allowances) whilst posted to Country X is exempt from taxation in Australia under section 23AG of the ITAA 1936.

Leave and section 23AG

Taxation Determination TD 2012/8 provides that under section 23AG of the ITAA 1936, 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 work overseas will constitute 'foreign service' for the purposes of subsection 23AG(7) of the ITAA 1936.

Accordingly, leave accumulated as a result of foreign service in Country X will form part of the period of foreign service under section 23AG of the ITAA 1936.

This ruling applies for the following periods:

Year ending 30 June 20XX

Year ending 30 June 20XX

The scheme commences on:

15 June 20XX

Relevant facts and circumstances

You are an Australian resident for tax purposes.

You are a full-time member of a disciplined force.

You will be posted to Country X on a full-time assignment for a period of one year.

While posted to Country X, 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 the following allowances:

•         service allowance

•         cost of posting allowance

•         separation allowance

•         language allowance

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

Country X 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.

You will remain under the employment and control of the Australian disciplined force for the duration of your posting which will exceed 91 days.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 23AG