Issue
Do the number of days engaged in 'foreign service for a continuous period of not less than 91 days' under subsection 23AG(1) of the Income Tax Assessment Act 1936 (ITAA 1936) include a period of foreign service where a taxpayer is in receipt of 'foreign earnings' that are exempt from tax through the application of a double tax agreement provision?
Decision
Yes. The number of days engaged in 'foreign service for a continuous period of not less than 91 days' under subsection 23AG(1) of the ITAA 1936 do include a period of foreign service where a taxpayer is in receipt of 'foreign earnings' that are exempt from tax through the application of a double tax agreement provision.
Facts
The taxpayer is a resident of Australia for income tax purposes.
The taxpayer has been engaged in continuous foreign service for not less than 91 days in two countries (Country A and Country B).
The taxpayer has been employed for a continuous period of 75 days in Country A.
In Country B, the taxpayer has been employed for a continuous period of 26 days.
Australia has a double tax agreement with Country A.
The double tax agreement with Country A provides that the income received by the taxpayer in Country A will be exempt from that foreign country.
The salary and wages received by the taxpayer from employment exercised in Country B are assessable in Australia.
The taxpayer receives salary and wages from employment in the two countries.
Reasons for Decision
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.
Subsection 6-15(2) of the ITAA 1997 provides that if an amount is exempt income it is not included in 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 ITAA 1936 which deals with overseas employment income.
Subsection 23AG(1) of the ITAA 1936 provides that, where a resident taxpayer is engaged in foreign service for a continuous period of not less than 91 days, any foreign earnings derived will be exempt from tax in Australia. 'Foreign service' includes service in a foreign country in the capacity as an employee and 'foreign earnings' includes income consisting of salary and wages (subsection 23AG(7) of the ITAA 1936).
However subsection 23AG(2) of the ITAA 1936 provides that the exemption in subsection 23AG(1) of the ITAA 1936 will not apply where the income is exempt from income tax in the foreign country because of any of the reasons listed. One of the listed reasons is where the income earned by the resident in the foreign country is made exempt by the operation of a double tax agreement (paragraph 23AG(2)(b) of the ITAA 1936).
Even though the salary and wages received by the taxpayer from Country A are exempt from tax by the operation of a double tax agreement provision, the taxpayer has been engaged in 'foreign service' for a continuous period and is in receipt of 'foreign earnings' from that foreign service.
The application of paragraph 23AG(2)(b) of the ITAA 1936 to the salary and wages received from Country A will not break the period of 'that foreign service'.
Therefore, the period of service in Country A will be included in the calculation of the period engaged in 'foreign service for a continuous period of not less than 91 days' and the income earned in Country B will be exempt from tax in Australia under subsection 23AG(1) of the ITAA 1936.