Edited version of private advice

Authorisation Number: 1052056817562

Date of advice: 22 November 2022

Ruling

Subject: Foreign earnings - disciplined force

Question

Are the salary and allowances you receive while posted to XXX as a member of a disciplined force exempt from income tax in Australia under section 23AG of the Income Tax Assessment Act 1936?

Answer

No.

This ruling applies for the following periods:

Financial Year ended 30 June 20XX

Financial Year ended 30 June 20XX

Financial Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You are an Australian resident for taxation purposes.

You are a member of XXX.

You are being deployed to XXX under the auspices of the XXX Joint Defence Program. You will be employed as XXX in support of the XXX programs.

You will not have diplomatic status or receive diplomatic privileges. You will be travelling on an Official Passport and not a Diplomatic Passport.

Whilst in XXX, you will continue to receive your normal salary and associated allowances from XXX.

Your deployment fits the definition of being a deployment outside Australia by an Australian Government as a member of a disciplined force for the purposes of section 23AG(1AA) of the Income Tax Assessment Act 1936 (ITAA 1936).

There is a tax treaty between Australia and XXX called the XXX.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 23AG.

International Tax Agreements Act 1953.

Reasons for Decision

Subsection 23AG(1) of the Income Tax Assessment Act 1936 (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 includes income consisting of salary, wages, bonuses or allowances (subsection 23AG(7) of the ITAA 1936).

Section 23AG of the ITAA 1936 has been amended so that foreign employment income derived by Australian residents will only be exempt in certain circumstances. These amendments are effective from 29 June 2009.

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;

•         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 accordance with subsection 23AG(2) of the ITAA 1936, the exemption under subsection 23AG(1) of the ITAA 1936 will not apply if the income is exempt from income tax in the foreign country only because of one or more of the following conditions:

•         a tax treaty with Australia or a law giving effect to a treaty 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

In determining your liability to pay tax in Australia it is necessary to consider not only the domestic income tax laws but also any applicable double tax agreements.

Section 4 of the International Tax Agreements Act 1953 (Agreements Act) incorporates that Act with the ITAA 1936 and the ITAA 1997 so that all three Acts are read as one. The Agreements Act overrides both the ITAA 1936 and ITAA 1997 where there are inconsistent provisions (except in some limited situations).

Section 5 of the Agreements Act states that, subject to the provisions of the Agreements Act, any provision in an Agreement listed in section 5 has the force of law. The Agreement with XXX is listed in section 5 of the Agreements Act.

The XXX Agreement is located on the Austlii website (www.austlii.edu.au) in the Australian Treaties Series database. The XXX Agreement operates to avoid the double taxation of income received by residents of Australia and XXX.

Article X of the Agreement provides that remuneration paid by Australia to an individual in respect of services rendered in the discharge of governmental functions shall be taxable only in Australia. However, such remuneration shall be taxable only in XXX if the services are rendered in XXX and the recipient is a resident of XXX who:

(a) is a citizen or national of XXX; or

(b) did not become a resident of XXX solely for the purpose of performing the services.

You do not satisfy either of those conditions. Consequently, Australia retains the sole taxing right to your salary and allowances and the income is exempt from tax in XXX.

Paragraph 23AG(2)(b) of the ITAA 1936 provides that where income is exempt in a foreign country solely as a result of the operation of a tax treaty, the income will not be exempt in Australia under subsection 23AG(1). Your salary and allowances are exempt in XXX because of Article X of the Agreement.

Therefore, if the XXX Agreement is the only reason that your income is exempt in XXX, your salary and allowances will not be exempt from income tax in Australia under subsection 23AG(1) if the ITAA 1936.

You have not provided information that your posting to XXX is covered by any other type of agreement or memorandum of understanding. In the absence of confirmation that your posting to XXX falls under a reason other than, or in addition to the conditions listed under 23AG(2), the employment income that you derive while you are in XXX is not considered to be exempt from tax in XXX for a reason other than the XXX agreement

Consequently, as your income is exempt in XXX solely because of the XXX Agreement, your salary and allowances will not be exempt from income tax in Australia under subsection 23AG(1) of the ITAA 1936.