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Is salary earned by an Australian resident while employed on a project in a foreign country exempt from tax under section 23AG of the Income Tax Assessment Act 1936 (ITAA 1936)?

Yes. Salary earned by an Australian resident while employed on a project in a foreign country continuously for not less than 91 days is exempt from tax under section 23AG of the ITAA 1936.

A taxpayer is employed on a project in a foreign country continuously for not less than 91 days. The Australian and the foreign country governments have signed a Memorandum of Understanding (MoU). The article in the MOU states that salary earned by Australian personnel employed on the project is exempt from tax in the foreign country. Australia does not have a Double Tax Agreement with the foreign country.

Foreign earnings of an Australian resident derived during a continuous period of not less than 91 days employment in a foreign country are generally exempt (Section 23AG ITAA 1936).

The exemption does not apply if the income is exempt from tax in the foreign country because of any of the reasons listed in subsection 23AG(2) of the ITAA 1936.

It is the agreement reached between Australia and the foreign country, in the form of a MoU, which exempts the taxpayer's earnings from tax in the foreign country.

As none of the other reasons listed in subsection 23AG(2) applies, the earnings are not exempt from tax in the foreign country because of one of the reasons listed in subsection 23AG(2) (ITAA 1936).

Consequently, the salary earned by the taxpayer is exempt from tax in Australia under section 23AG of the ITAA 1936.