Edited version of private advice

Authorisation Number: 1051997199879

Date of advice: 23 June 2022

Ruling

Subject: Foreign employment income tax exemption

Question 1

Does your temporary absence from foreign service still form part of a continuous period of foreign service under any of the provisions in section 23AG of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

No.

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You were employed in a full-time position by an employer on the Country A-Australia Governance Partnership Program funded by the Department of Foreign Affairs and Trade (DFAT).

Your employment contract was from 20XX until 20XX.

Your employment contract states that you accrue annual leave at a rate of four weeks per year and personal leave at a rate of two weeks per year.

You worked in Australia prior to your deployment to Country A.

You started work in Country A in 20XX.

You intended to complete the remainder of your employment contract in Country A.

You have been diagnosed with a disease which compromises your immune system.

While working in Country A you received medical advice that you should receive a vaccination which was unavailable in Country A at the time.

You returned to Australia in 20XX.

You received a vaccination in 20XX.

You had scans done for review by your doctor.

You also met with a doctor at the earliest available appointment.

You returned to Country A in 20XX which you have stated was the next available flight.

You provided the following table summarising your annual leave balance:

You used 14 days of annual leave over the period you were in Australia.

You had remote access to your emails while you were in from Australia.

Your employment contract states that you are not entitled to payment for any unused accrued annual leave at the end of the term of employment.

You stated that you did not use personal leave in case of illness relating to your medical condition.

You completed the remainder of your employment contract in Country A after you returned in 20XX.

Relevant legislative provisions

Income Tax Assessment Act 1936 subsection23AG(1)

Income Tax Assessment Act 1936 paragraph23AG(6)(b)

Income Tax Assessment Act 1936 subsection 23AG(6A)

Reasons for decision

Subsection 23AG(1) of the ITAA 1936 states that an any foreign earnings derived by an Australian resident who has been engaged in foreign service for a continuous period of not less than 91 days are exempt from income tax in Australia subject to the qualifying provisions of section 23AG.

Subsection 23AG(6) of the ITAA 1936 treats certain temporary absences from foreign service as forming part of the period of foreign service. The Commissioner's view on temporary absences is discussed 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?

If a person engaged in foreign service is required by their employer to spend a short time in Australia or in another foreign country during a period of foreign service for reasons directly related to that person's continuing foreign service engagement, that time will be treated as part of the person's continuous period of foreign service provided it is not excessive by comparison with the scheduled period of foreign service. For example, this will apply to time spent to attend conferences, training sessions or briefing sessions.

Paragraph 23AG(6)(b) of the ITAA 1936 operates to allow a period of absence to be included in the period of continuous foreign service where that absence was due to accident or illness.

Prior to your deployment to Country A you received medical advice from your haematologist that you are healthy enough to perform your role in country and that your medical condition would not prevent you from doing so. This was reconfirmed after you received the vaccination as your haematologist approved your return to Country A to complete your contract.

On the period of absence, you used annual leave to return to Australia. While your period of absence was to undergo a medical procedure, it was not due to illness or injury. This is evident in your statement that you endeavoured to preserve your medical leave balance in case of a medical emergency relating to your medical condition.

Your temporary absence does not constitute part of your total period of foreign service as it does not meet any of the requirements of subsection 23AG(6).

Where an employee takes leave which does not constitute a temporary absence forming part of a period of foreign service, it needs to be determined whether the continuity of service can be maintained under the 1/6^th legislative rule.

Subsection 23AG(6A) of the ITAA 1936 outlines the 1/6^th legislative rule. This allows two or more periods of foreign service to be added together and treated as a continuous period of foreign service, unless, at any time, the total period of absence (in days) between the periods of foreign service exceeds 1/6^th the total number of days of foreign service. If the period of absence exceeds 1/6^th of the total period of foreign service at any time, continuity of foreign service is broken. An employee will begin a new period of foreign service when he or she next engages in foreign service again and must determine whether that period of foreign service lasts for at least 91 continuous days.

As no single period of your foreign service was 91 days or more in length, two or more periods must be added together as per the 1/6^th legislative rule in order to satisfy this requirement.

At the time you returned to Australia for the vaccination you had accrued 3.33 days of annual leave during your period of foreign service. As you took 14 days of annual leave over the period of absence the remainder of your leave taken (10.66 days) is deemed to have accrued during your period of domestic work prior to deployment.

Your period of work in Country A totals 40 workdays prior to your return to Australia, and the 3.33 days annual leave accrued during your period of foreign service is included in the calculation of allowable absence without breaking the continuous period of foreign service. 43.33/6 = 7.22 days of absence which may be taken without breaking your period of foreign service.

As you took 14 total days of annual leave, of which 3.33 were accrued during your period of foreign service, there remain 10.66 days during your period of absence. As this absence exceeds the 1/6 allowable without breaking your continuous period of foreign service, the absence constitutes a break in foreign service under the provisions of subsection 23AG(6A) of the ITAA 1936.