Edited version of private advice

Authorisation Number: 1052183424228

Date of advice: 29 November 2023

Ruling

Subject: Section 23AG income tax exemption - continuous period of foreign service

Question 1

Do your temporary absences from foreign service spent carrying out your work duties in Australia form part of a continuous period of foreign service under section 23AG of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

No.

Question 2

Is your employment income exempt under section 23AG of the ITAA 1936 for the entire income year ended 30 June 20XX?

Answer

No.

Question 3

Is the retention bonus you received from your employer exempt income under section 23AG of the ITAA 1936?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commenced on:

XX XXXX 20XX

Relevant facts and circumstances

You are an Australian resident for tax purposes.

You are employed in a full-time position.

You were posted to a foreign country as part of a disciplined force.

Your employer applied the section 23AG exemption to your employment income and ceased withholding tax.

You were directed by your employer to return to Australia for several periods of time.

You also took recreational leave occasionally.

The recreational leave entitlements you used were accrued during your time in the foreign country.

Your employer ceased your section 23AG tax exemption and started to withhold tax from your salary, wages and allowances.

Your employer recommenced your section 23AG tax exemption and stopped withholding tax. You were advised by your employer that this date marked a consecutive 91 days from when you returned to the foreign country.

You received a retention bonus requires you to stay in a job position category for a certain period of time.

The retention bonus does not require you to stay in your current role in the foreign country.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 23AG

Income Tax Assessment Act 1997 section 6-5

Reasons for decision

Questions 1 and 2

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.

Ordinary income includes salary and wages and subsection 6-15(2) provides that if an amount is exempt income, then it is not assessable. 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 ITAA 1936 which deals with exempt foreign employment income.

Section 23AG(1) of the ITAA 1936 states that 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. Foreign service includes being deployed outside of Australia as a member of a disciplined force, for example, the Australian Defence Force.

Section 23AG(7) of the ITAA 1936 provides that foreign service means service in a foreign country as the holder of an office or in the capacity of an employee. Australia is not a foreign country for the purposes of the application of section 23AG of the ITAA 1936. Therefore, service undertaken in Australia cannot be regarded as foreign service.

Section 23AG(6) of the ITAA 1936 provides that a period during which a person is engaged in foreign service includes any period during which the person is, in accordance with the terms and conditions of that service:

a)    absent on recreation leave, other than:

i.     leave wholly or partly attributable to a period of service or employment other than that foreign service;

ii.     long service leave, furlough, extended leave or leave of a similar kind (however described); or

iii.     leave without pay or on reduced pay; or

b)    absent from work because of accident or illness.

A break between the end of one period of foreign service and the beginning of a later separate period of foreign service cannot form part of a continuous period of foreign service under section 23AG of the ITAA 1936.

However, in some circumstances the 1/6 legislative rule in subsection 23AG(6A) of the ITAA 1936 allows periods of foreign service before and after a break in foreign service to be added together and treated as a continuous period of foreign service.

The Commissioner's view on temporary absences is contained 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 (TD 2012/8).

Paragraph 1 of TD 20212/8 states that in addition to the reasons listed in section 23AG(6) of the ITAA 1936, a temporary absence from foreign service will also include an absence that is both:

•    in accordance with the terms and conditions of that foreign service (that is, the absence is permitted by the employer, whether in an employment contract or under a separate arrangement); and

•    in the course of carrying out either duties or training required by the employer under a continuing foreign service engagement (that is, work related trips directly related to the foreign service) provided the absences are not excessive by comparison with the scheduled period of foreign service.

It is important to note that the inclusion of the concept of a short work related absence as written in paragraph 1 of TD 2012/8 is not an extension of section 23AG(6). Rather, the Commissioner considers this to be a pragmatic treatment of short, temporary, one off events that were not anticipated, regular, routine, or substantial so that the continuous period of foreign service was not broken in order to achieve the policy intent of section 23AG. It is not to be used or relied upon for anticipated, regular or ongoing arrangements.

Paragraphs 71 and 72 of TD 2012/8 provide guidance on work related absences from a foreign country:

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.

What is considered excessive will depend on the circumstances. When determining whether the total days spent outside of the country of foreign service are excessive, all work related absences and available days (see paragraph 73) spent outside of the country of foreign service will be aggregated.

Neither the legislation nor TD 2012/8 specify a particular calculation to determine whether an absence is excessive or not. However:

•    Example 11 in TD 2012/8 indicates that an absence of 14 days in a scheduled period of foreign service of 92 days would not be excessive, while

•    Example 12 indicates that an absence of one month in a scheduled period of foreign service of 92 days in Australia would be considered excessive.

While TD 2012/8 may appear to suggest that the test for what is an 'excessive' absence is comparative to the length of the scheduled period of foreign service, examples 11 and 12 should not be interpreted to imply that longer periods of foreign service mean that a proportionately longer period of absence would not be excessive.

Further, an absence will not be a temporary absence regardless of the total overall length of service if the focus of your duties for those periods shifts to Australia and you are no longer 'actually on the job' in the foreign country as mentioned in paragraph 46 of TD 2012/8. That is, section 23AG is not directed at exempting from tax in Australia salaries derived from carrying out work duties in Australia.

Application to your situation

In your case, your scheduled period of foreign service in the foreign country totals X days. You were directed to return to Australia to carry out work duties here for several separate periods as follows:

Your total absence from the foreign country to carry out work duties in Australia totals Y days, or approximately 10% compared to your scheduled period of foreign service, where these absences from the foreign country were not anticipated or scheduled.

As noted above, an absence being excessive is not considered on a proportional basis. It should be regarded that a person who is engaged in foreign service is doing so because they are unable to carry out their activities in Australia. Work related absences in section 23AG should not be interpreted to mean that a person spending months, or even weeks at a time in Australia is allowable because they are also spending months or years in a foreign country. Further, your return visits to Australia made in a time period of approximately less than 1 year are considered to have an air of regularity to them so cannot be considered to be 'one off events'.

Accordingly, we consider that the length of time you spent outside of the foreign country and in Australia was excessive. Further, the reason for your absences was not directly related to your foreign service in the foreign country. In Example 11 of TD 2012/8, it provides that a person who returned to Australia to complete pre-deployment training and a person who returned to Australia to plan and arrange things that were needed in the foreign country would be considered a work-related absence. In these circumstances, the absences directly relate to their foreign service engagement because the work and training done in Australia was done in preparation for their work duties in the foreign country.

This is compared to your situation, where you carried out work duties in Australia. You were no longer on the job in the foreign country - that job being in the foreign country because the work duties you carried out in Australia did not have a sufficient connection to your foreign service in the foreign country, even though your employer directed you to return to Australia.

It is considered that the location in which you carried out your work duties changed temporarily, rather than your absences contributing or being related to your regular duties that were carried out in respect of your foreign service in the foreign country.

Therefore, your temporary absences from foreign service did not form part of a continuous period of foreign service with the result that your foreign service was broken from the time of the first absence in XXXX. The earnings you derived where pay as you go withholding instalments were deducted by your employer are not exempt from tax under section 23AG of the ITAA 1936.

Question 3

Section 23AG(7) states that foreign earnings includes income consisting of earnings, salary, wages, commission, bonuses or allowances.

It is important to note that section 23AG(1) specifies that foreign earnings derived by a person engaged in foreign service will be exempt so long as those foreign earnings are derived from that foreign service. This does not mean that merely showing income was received in a period during which a person is engaged in foreign service is treated as satisfying section 23AG(1).

Paragraph 79 of TD 2012/8 provides that 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.

Application to your situation

Here you received a retention bonus that required you to remain in an employment category.

The retention bonus is not considered attributable to your period of foreign service as the receipt of the bonus was not contingent on you continuing your foreign service. The bonus does not specifically relate to your service in the foreign country and is simply a bonus that was provided on the basis you remain with your employer for a particular period of time.

Further, the bonus was received when you were not eligible for the section 23AG exemption, as discussed further above.

Therefore, this retention bonus is not exempt from tax under section 23AG of the ITAA 1936.