Edited version of private advice

Authorisation Number: 1052067941239

Date of advice: 22 December 2022

Ruling

Subject: Foreign income - section 23AG exemption

Question

Is the foreign employment income you derive from working in the Country A exempt income in Australia under section 23AG of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

No.

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You are an Australian resident for tax purposes.

You are a member and an employee of an Australian statutory body.

You were deployed to Country A from mid- 20XX to late 20XX on an overseas work assignment with your employer.

You were deployed on an official passport.

During the period of your overseas work assignment, you took a short amount of time off (less than a week) as leave in mid to late 20XX, which was comprised of mandatory rest days, days of annual leave, and weekend days, which you advise were all classed as leave accrued as a result of your foreign service.

You returned to Australia in late 20XX, where you were directed to take another few weeks of accrued overseas leave, up to and including a few weeks after the date you returned to Australia.

Whilst you stopped receiving a specific allowance (which is paid to you in Australia as a member of the Australian statutory body), you instead received the following allowances which accompanied your base salary during your overseas work assignment with your Australian employer:

i. Flexibility Allowance

ii. Location Allowance

iii. Overseas Allowance

These allowances cover the cost of living whilst away from your regular home, however this did not cover your overseas accommodation as this was paid for separately by your employer.

You have not been deployed under a specific Memorandum of Understanding (MOU) or Agreement of co-operation.

The Country A tax authorities do not impose income tax on individuals.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 23AG

Income Tax Assessment Act 1936 Subsection 23AG (1)

Income Tax Assessment Act 1936 Subsection 23AG (1AA)

Income Tax Assessment Act 1936 Subsection 23AG (2)

Income Tax Assessment Act 1936 Subsection 23AG (6)

Income Tax Assessment Act 1936 Subsection 23AG (7)

Income Tax Assessment Act 1997 Subsection 6-5(2)

Income Tax Assessment Act 1997 Subsection 6-15(2)

Income Tax Assessment Act 1997 Section 11-15

Reasons for decision

Summary

Exempt income under section 23AG of the Income Tax Assessment Act 1936

Under subsection 23AG(1) of the Income Tax Assessment Act 1936 (ITAA 1936), your 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 foreign earnings must not be exempt in the foreign country only for one or more of the reasons covered by subsection 23AG(2) of the ITAA 1936.

Based on the information you supplied, the foreign earnings you derived from your overseas work assignment (where you were deployed to Country A from from mid- 20XX to late 20XX on an overseas work assignment with your employer) are not exempt income under section 23AG of the ITAA 1936.

This is by virtue of subsection 23AG(2) of the ITAA 1936 which in your case will operate to deny the income tax exemption under section 23AG of the ITAA 1936.

Detailed reasoning

As a general rule, and under the provisions of section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997), the assessable income of an Australian resident taxpayer includes all the ordinary income they earn from all sources, in or out of Australia in an income year.

Income in the form of salary, wages and allowances are all types of ordinary income.

Although a payment may be considered ordinary income and will generally be assessable under the provisions of section 6-5 of the ITAA 1997, there are some instances where ordinary income may be excluded from an individual's assessable income in Australia. This will be the case for example if a specific provision of the tax law makes the income exempt from taxation in Australia.

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.

Subsection 23AG(1) of the ITAA 1936 provides that where Australian resident individuals are engaged in foreign service for a continuous period of not less than 91 days, foreign earnings derived from that foreign service are exempt from tax in Australia.

Foreign earnings includes income consisting of salary, wages, bonuses or allowances (as listed in subsection 23AG(7) of the ITAA 1936).

Subsection 23AG(1AA) of the ITAA 1936, provides that those foreign earnings will not be exempt under section 23AG of the ITAA 1936 unless the continuous period of foreign service is directly attributable to any of the following:

•         delivery of Australian official development assistance by your employer;

•         activities of your employer in operating a public fund declared by the Treasurer to be a developing country relief fund, or a public fund established and maintained to provide monetary relief to people in a developing foreign country that has experienced a disaster (a public disaster relief fund);

•         activities of your employer as a prescribed charitable or religious institution exempt from Australian income tax because it is located outside Australia or the institution is pursuing objectives outside Australia; or

•         deployment outside Australia by an Australian government (or an authority thereof) as a member of a disciplined force.

You are a member of an Australian statutory body who was deployed to work overseas. You were deployed from from mid- 2021 to late 2021.

Paragraph 9 of Taxation Ruling TR 2013/7 Income tax: foreign employment income: interpretation of subsection 23AG(1AA) of the Income Tax Assessment Act 1936 defines the phrase 'disciplined force' as:

The phrase 'disciplined force' in paragraph 23AG(1AA)(d) refers to the Australian Defence Force (ADF), Australian Federal Police (AFP) and the State and Territory police forces.

As your employer is covered in Paragraph 9 of TR 2013/7, you are a member of a disciplined force for the purposes of subsection 23AG(1AA).

You are also an employee for this work assignment in accordance with and as defined in subsection 23AG (7) of the ITAA 1936.

Continuous foreign service

For the exemption from Australian tax to apply, your foreign service must be for a continuous period of 91 days or more.

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?

Temporary Leave Absences

Temporary leave absences from foreign service can be included in the total foreign service if they are in accordance with the terms and conditions of that foreign service and constitute recreational leave on full pay that is attributable to the period of foreign service.

You undertook periods of leave during your foreign service. This leave was termed as annual leave, mandatory rest days and weekend days, which were all classed as leave accrued as a result of your foreign service.

As the leave taken in mid to late 20XX constitutes leave attributable to your foreign service within the meaning of subparagraph 23AG(6)(a)(i), it does not count as absences which can break the continuity of your foreign service.

As such the entire period of your posting was continuous foreign service and exceeded 91 days.

In addition, and despite the fact that you returned to Australia late 20XX, where you were directed to take another few weeks of accrued overseas leave, up to and including a few weeks after your return date to Australia, the amount of foreign employment income received which specifically relates to this accrued leave entitlement (accrued as part of your foreign service) would still qualify for the exemption under section 23AG of the ITAA 1936, so long as all of the other requirements of section 23AG are satisfied (as per paragraph 81 of TR 2012/8).

Non-exemption conditions

Foreign earnings are not exempt from income tax in the foreign country only because of one of the reasons listed in subsection 23AG(2)

The foreign earnings of individuals engaged in foreign service that are directly attributable to one of the activities referred to in subsection 23AG(1AA) will not be exempt if one of the conditions for non-exemption contained in subsection 23AG(2) applies.

Subsection 23AG(2) applies, to deny an exemption, if the foreign earnings are exempt from tax in the foreign country only because of one or more of the following reasons:

•         a double tax agreement with Australia or a law giving effect to a double tax agreement (paragraphs 23AG(2)(a) and 23AG(2)(b) of the ITAA 1936);

•         a law of that foreign country which generally exempts from, or does not provide for, the imposition of tax on income derived in the capacity of an employee, income from personal services or any other similar income (paragraphs 23AG(2)(c) and 23AG(2)(d) of the ITAA 1936), or

•         a law or international agreement dealing with privileges and immunities of diplomats or consuls or of persons connected with international organisations (paragraphs 23AG(2)(e), 23AG(2)(f) and 23AG(2)(g) of the ITAA 1936).

Australia does not have a double tax agreement with Country A, therefore paragraphs 23AG(2)(a) and 23AG(2)(b) of the ITAA 1936 do not apply.

However, your employer has advised that you have not been your deployed under a under a specific Memorandum of Understanding (MOU) or Agreement of co-operation. Therefore your foreign income is not exempt from tax due to such an agreement.

In addition, as Country A does not impose income tax on individuals, paragraphs 23AG(2)(a) and 23AG(2)(b) of the ITAA 1936 will apply.

As you have not provided any other reasons other than those listed in subsection 23AG(2) of the ITAA 1936 for your income being exempt from income tax in Country A, you have not met the above criteria and as such subsection 23AG(2) of the ITAA 1936 will operate to deny the income tax exemption under section 23AG of the ITAA 1936.

Conclusion

The income derived from your foreign service deployment to the UAE with the AFP is therefore not exempt under section 23AG of the ITAA 1936.