Edited version of private advice

Authorisation Number: 1052410953914

Date of advice: 19 June 2025

Ruling

Subject: International income - 23AG

Question 1

From XX XXXX 20XX to XX XXXX 20XX, 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

No.

Question 2

From XX XXXX 20XX to XX XXXX 20XX, is your foreign employment income (including allowances) whilst posted in Country A exempt from taxation in Australia under section 23AG of ITAA 1936?

Answer

Yes.

Question 3

Does your leave entitlement taken throughout the year while continuously working on the project for over 91 days impact the continuity of your foreign service?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 20XX

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 currently employed by Employer A for an Australian government department funded Country A and Australia partnership.

Employer A is the managing contractor (on behalf of Australian government department) for Project A.

From XX XXXX 20XX to XX XXXX 20XX, you are contracted to be posted in Country A to provide technical advice to the government of Country A through the Australian High Commission.

You are working as part of Project A. Project A is an Australian government initiative, funded by Australian government department, supporting Country A.

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

You have provided the following information regarding your leave entitlements:

   • You will be entitled to XX days annual leave and XX days personal leave.

   • Leave is accrued pro-rata over the course of XX months and is not accrued after the XX-month period.

   • During the posting you will only take annual leave.

   • You are not entitled to take any leave accrued outside of your period of service during your post.

   • You will take annual leave during your posting, which will be accrued from your posting in Country A. You anticipate taking annual leave every XX months as the annual leave accrues and will return to Australia during this time.

   • You will not be entitled to use your leave after the end date of your contract.

Apart from your salary, you will also receive allowances under your contract.

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

From XX XXXX 20XX to XX XXXX 20XX, you were not able to travel to Country A due to a delay in receiving your visa from the government of Country A. During this time, you did not perform any of your duties from Australia.

On XX XXXX 20XX, you arrived in Country A.

From XX XXXX 20XX to XX XXXX 20XX, you travelled to Country B on a holiday. This trip was planned prior to entering your employment contract with Employer A.

While in Country B you used the following leave entitlements, which accrued from your current foreign service:

   • X days work leave

   • X days annual leave

   • X day time in lieu

   • X leave without pay

On XX XXXX 20XX, you returned to Country A.

On XX XXXX 20XX, you received a letter from your employer stating that your foreign service is covered by a memorandum of understanding between the government of Australia and the government of Country A (MoU).

Clause XX of the MoU states:

For the purposes of the Program, government of Country A will facilitate the deployment of activity personnel who are not permanent residents or nationals of Country A by:

   (a) granting exemption from taxes on salaries and allowances;

   (b) ....

Under subclause X(X) of the MoU, you will not pay tax in Country A on your salaries and allowances.

Australian does not have a tax treaty with Country A.

Relevant legislative provisions

Income Tax Assessment Act 1936 subsection 6(1)

Income Tax Assessment Act 1936 section 23AG

Income Tax Assessment Act 1997 section 6-5

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

Income Tax Assessment Act 1997 section 6-20

Income Tax Assessment Act 1997 section 11-15

Reasons for decision

Question 1

Under subsection 23AG(7) of the Income Tax Assessment Act 1936 (ITAA 1936), foreign service means service in a foreign country. This means you will not be eligible for the exemption under section 23AG for the period from XX XXXX 2020 to XX XXXX 20XX, while you were waiting for your visa in Australia.

The 1/6th rule was not satisfied and the initial period of service from XX XXXX 2020 to XX XXXX 20XX cannot be added to the subsequent foreign service after returning to Country A on XX XXXX 20XX. Therefore, your salary and wages derived for the period from XX XXXX 2020 to XX XXXX 20XX will not be exempt under section 23AG of the ITAA 1936.

Question 2

Your foreign employment income (including allowances) whilst posted to Country A for the period from XX XXXX 2020 to XX XXXX 20XX will be exempt from taxation in Australia under section 23AG of the ITAA 1936.

Question 3

The period you work overseas will constitute 'foreign service' for the purposes of subsection 23AG(7) of the ITAA 1936. 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. Accordingly, as stated in paragraph 3 of TD 2012/8, the XX annual leave days taken throughout the year will not impact the continuity of your foreign service.

Detailed reasoning

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) 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.

To be entitled to an exemption under section 23AG of the ITAA 1936, a taxpayer must meet three requirements:

   • The requirement of subsection 23AG(1) must be satisfied;

   • The taxpayers' continuous foreign service must be directly attributable to one of the listed reasons in subsection 23AG(1AA); and

   • The taxpayers' foreign earnings must either be not exempt or exempt from income tax in the foreign country for a reason other than those listed in subsection 23AG(2).

Subsection 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.

Subsection 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.

Subsection 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 3 of TD 2012/8 states:

3. An absence from foreign service does not form part of a continuous period of foreign service under section 23AG if it is of any of the following kinds:

   • any recreation leave which is not attributable to the period of foreign service; that is, recreation leave that did not accrue during the period of foreign service;

   • long service leave, regardless of whether or not it accrued during a period of foreign service;

   • purchased leave, or other leave without pay or on reduced pay, other than any of the following: sick leave, leave because of an accident or illness of a person other than the taxpayer, including the death of another person (see Explanation at paragraphs 55 and 57 to 59);

   • furlough;

   • extended leave;

   • any kind of leave that is similar to long service leave or extended leave or furlough, regardless of how it is described;

   • maternity leave or parental leave.

Taxation Ruling TR 2013/7 Income tax: foreign employment income: interpretation of subsection 23AG(1AA) of the Income Tax Assessment Act 1936, provides the Commissioner's views on the interpretation of aspects of subsection 23AG(1AA) of the ITAA 1936. The ruling specifically considers:

   • what is the 'delivery of Australian official development assistance by the person's employer' within the meaning of paragraph 23AG(1AA)(a)

   • when foreign service is 'directly attributable' to the activities listed in subsection 23AG(1AA)

   • what is a 'disciplined force' within the meaning of paragraph 23AG(1AA)(d)

   • what is the meaning of 'deployment' within the meaning of paragraph 23AG(1AA)(d); and

   • who is a 'member' of a disciplined force within the meaning of paragraph 23AG(1AA)(d).

Application to your circumstances

Question 1

From XX XXXX 20XX to XX XXXX 20XX

Under subsection 23AG(7) of the ITAA 1936, foreign service means service in a foreign country. This means you will not be eligible under section 23AG for the period from XX XXXX 20XX to XX XXXX 20XX while you were waiting for your visa in Australia.

From XX XXXX 20XX to XX XXXX 20XX

The period XX XXXX 20XX to XX XXXX 20XX will not form a continuous period of at least 91 days. Under subsection 23AG(6)(a)(iii) of the ITAA 1936, your leave without pay you took during the period you were in Country B does not constitute a temporary absence forming part of a period of foreign service. 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 1/6th legislative rule.

Subsection 23AG(6A) of the ITAA 1936 outlines the 1/6th 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 1/6th the total number of days of foreign service.

If the period of absence exceeds 1/6th of the total period of foreign service at any time, continuity of foreign service is broken. An employee will then 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.

The 1/6th rule was not satisfied and the initial period of service from XX XXXX 20XX to XX XXXX 20XX cannot be added to the subsequent foreign service after returning to Country A on XX XXXX 20XX.

Therefore, your salary and wages derived for the period from XX XXXX 20XX to XX XXXX 20XX will not be exempt under section 23AG of the ITAA 1936.

Question 2

From XX XXXX 20XX to XX XXXX 20XX

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 for the period from XX XXXX 20XX to XX XXXX 20XX will be exempt from taxation in Australia under section 23AG of the ITAA 1936.

Question 3

Leave entitlement

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.

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.

Accordingly, as stated in paragraph 3 of TD 2012/8, the annual leave days taken throughout the year will not impact the continuity of your foreign service.