Employee income exemptions in a foreign country and in Australia

16 June 2011

A recent ruling from the ATO highlights some of the tax issues for employees who work overseas in a humanitarian capacity or in foreign service.

Why the ruling?
At the heart of the ruling was whether income that is exempt in a foreign tax jurisdiction (due to of a specific exemption) because they work in humanitarian or reconstruction services is actually taxable in Australia? 

The decision from the ATO is that no, it isn't, based on a number of specific criteria:
  • The taxpayer is a natural person and resident of Australia for tax purposes
  • The taxpayer derived foreign earnings in a particular year for a continuous period of not less than 91 days
  • In that foreign country, there is specific relief provided to employees who are non-residents and are involved in humanitarian aid or reconstruction services.
What is the decision based on?

The decision was based on legislation contained in s23AG(2) (c)ITAA 1936, which stipulates that the employee's income is not generally exempt from foreign tax where they are employed in foreign service and hence that income will not be assessable in Australia. 

The fact that the employee's income is exempt from foreign tax under a specific exemption will not disqualify the income from being exempt under section 23AG in Australia because it is not generally exempt.

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 unless these earnings are generally exempt from tax in that foreign jurisdiction.

More information
If you want to find out more about international tax and foreign service, contact Matt Zhou on 02 9957 4033 or email him at for more information.

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This article is provided for information purposes only and correct at the time of publication. It should not be used in place of advice from your accountant. Please contact us on 02 9957 4033 to discuss your specific circumstances.

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