Edited version of private advice

Authorisation Number: 1052385568161

Date of advice: 15 April 2025

Ruling

Subject: Exemption of income earned in overseas employment

Question 1

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

Answer 1

Yes

Question 2

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

Answer 2

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 A 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 reasons:

•                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)).

Your income will not be exempt from income tax in Country A only because of one or more of the above reasons.

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

Accordingly, your foreign employment income (including allowances) whilst posted to Country A 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 A will form part of the period of foreign service under section 23AG of ITAA 1936.

This ruling applies for the following period:

Year ended 30 June 20XX

Year ended 30 June 20XX

The scheme commenced on:

XX XXXX 20XX

Relevant facts and circumstances

You are an Australian tax resident.

You are a member of the Australian Defence Force (ADF).

You will be serving with the Australian Army in a posting to Country A from XX XXXX 20XX to XX XXXX 20XX.

On XX XXXX 20XX, you will depart Australia and travel to the Country A for a period of X year for your posting with the ADF.

The purpose of the posting is as continuation of the internation engagement relationship between the Country A military and the ADF as part of the training of their military.

You will be subject to the ADF command structure and rules of conduct of the ADF whilst you are on this posting.

While posted to Country A, you will not be 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.

Apart from your salary, you will also receive allowances.

You will not pay tax on your income in Country A because the Country A government elects not to tax the salaries of foreign military personnel.

You will take annual leave during your posting, which will be accrued from your posting in Country A.

When you take annual leave in Australia, you will not perform your work duties.

Upon completion of your posting, you will return to Australia.

You can use your unused annual leave from your posting when you return to Australia.

Australian does not have a tax treaty with Country A.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 23AG