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Is income derived by a taxpayer who is to be temporarily employed in Korea and paid by an Australian employer, exempt from tax under section 23AG of the Income Tax Assessment Act 1936 (ITAA 1936)?

Yes, the overseas employment income is exempt foreign income under section 23AG of the ITAA 1997.

The taxpayer is to be employed in Korea for approximately 18 months.

Wages will continue to be paid by the taxpayer's Australian employer.

The taxpayer will be present in Korea for more than 183 days during the Korean year of income (1 January to 31 December).

The taxpayer is a resident of Australia for income tax purposes.

Subsection 23AG(1) of the ITAA 1936 states that 'where a resident, being a natural person, has been engaged in foreign service for a continuous period of not less than 91 days, any foreign earnings derived by the person from that foreign service is exempt from tax'. This section is subject to the proviso contained in subsection 23AG(2) of the ITAA 1936, which removes the exemption for income that is treated as exempt income in the foreign country in which it is earned.

Subsection 23AG(7) of the ITAA 1936 defines 'foreign service' as service in a foreign country as the holder of an office or in the capacity of an employee, and 'foreign earnings' include salary, wages, commission, bonuses or allowances.

Article 15 of Schedule 22 to the International Tax Agreements Act 1953 provides that salary and wages derived in Korea from employment exercised may be taxed in Korea. However, this will only apply if the taxpayer is present in Korea for more than 183 days of the Korean year of income and the remuneration is paid by an Australian employer.

If the taxpayer was not present in the Korea for more than 183 days in the Korean year of income, the income derived will not be taxable in Korea but subject to tax in Australia. Consequently an exemption from tax under subsection 23AG(1) of the ITAA 1936 would not apply.

The taxpayer travelled to Korea to be temporarily employed in that country. The taxpayer was present in Korea for more than 183 days of the Korean year of income. The taxpayer's Australian employer paid the taxpayer wages while working in Korea. As the period of employment was greater than 91 days, the taxpayer's wages are exempt from tax in Australia under subsection 23AG(1) of the ITAA 1936 but are subject to tax in Korea. Note: if a payment is exempt income, an employer is not required to withhold an amount of tax from salary and wages (subsection 12(1) of Schedule 1 to the Taxation Administration Act 1953 ).