Government introduces amendments to section 23AG ITAA 1936

Recently, the federal treasurer announced changes to tax exemptions applying to Australian resident taxpayers who work in low-tax jurisdictions to ensure they pay the same rate of Australian tax as those taxpayers who work in Australia.

However, the Government intends to continue to exempt from tax any income earned by Australian residents who are employed in foreign service as aid or charitable workers, or in certain types of government employment such as defence or police deployment.

Currently, subsection 23AG(1) ITAA 1936 provides that where an Australian resident, who is a natural person and not a body corporate, 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 are exempt from tax.

Under proposed subsection 23AG(1AA) ITAA 1936, introduced in Tax Laws Amendment (2009 Budget Measures No.1) Bill 2009, the foreign earnings mentioned in existing subsection 23AG(1) are not exempt from tax unless the continuous period of foreign service is 'directly attributable' to any of the following activities:

• the delivery by the person's employer of Australia's official development assistance
• the activities of the person's employer in operating a public fund where the employer has been declared to be an 'international affairs deductible gift recipient' under the relevant provisions of the ITAA 19974
• the activities of the person's employer if the employer is either (i) a prescribed institution which is located outside Australia and is exempt from income tax in the country in which it is resident; or (ii) a prescribed institution that has a physical presence in Australia but which incurs its expenditure and pursues its objectives principally outside Australia
• the person's deployment outside Australia as a member of a 'disciplined force' by the Commonwealth, a State or a Territory (or by an authority of one of them) or
• an activity of a kind specified in the regulations.

If an individual is no longer exempt from paying tax on foreign earnings as a result of the operation of proposed subsection 23AG(1AA), he or she will be eligible to claim a non-refundable foreign tax offset under Division 770 of the ITAA 1997 for any foreign income tax paid on the earnings.

Implications for employers

If an individual is no longer exempt from paying tax on foreign earnings as a result of proposed subsection 23AG(1AA), his or her employer will be required to comply with:

• the pay-as-you-go (PAYG) withholding rules in Division 12 of the Taxation Administration Act 1953; and
• the Fringe Benefits Tax Assessment Act 1986 in relation to any fringe benefits provided to the employee.

The amendment made by Schedule 1 applies to foreign earnings derived on or after 1 July 2009 from foreign service performed on or after this date.

Even if the foreign income of an Australian resident is not exempt from tax under proposed subsection 23AG(1AA) from 1 July 2009, the exemption in existing subsection 23AG(1) continues to apply to foreign income earned before this date. Further, even if the foreign income earned after 1 July 2009 is no longer exempt from Australian income tax, employment after this date will still be included in the calculation of the period of continuous foreign service.