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International assignment services
- By Michael van Schaik
- Published 3/01/2007
- Beyond Numbers
- Unrated
Section 23AG: The attractiveness of the new "one-sixth absence rule"
Section 23AG of the Income Tax Assessment Act 1936 is important to Australian residents who work overseas. In broad terms, it grants an exemption from Australian income tax from foreign sourced employment earnings derived by an Australian resident in respect of overseas work assignments that are not less than 91 continuous days in duration in a location that ordinarily imposes income tax on that income.
Historically the section contained the “absentee credit rule” which provided a mechanism by which short breaks from the foreign service would not be deemed to break the continuity of service requirement. After 19 December 2005, the “absentee credit rule” was replaced by the new “one-sixth absence rule” which when applied has the potential to significantly extend the periods of time that the individual can be absent from the foreign service whilst still preserving the operation of the section 23AG exemption.
Old rule: Pre – 19 December 2005: "absentee credit rule"
Under this rule, taxpayers were granted a ‘credit’ of 31/334 days for each completed dayof foreign service, up to a limit of 31 days. For each day of absence from foreign service not considered to be part of the service, 24 hours absentee ‘debit’ would be deducted from the individual’s accumulated absentee credit.
As long as the taxpayer maintained an absentee credit balance (in whole days), the taxpayer would not be deemed to break the continuity of foreign service requirement. If the total days of absence exceeded the taxpayer’s accumulated absentee credit, the continuity of the foreign service period would be deemed to be broken. The individual would begin a new period of foreign service when he/she next engaged in foreign service and had to determine again whether that foreign service lasted for at least 91 continuous days.
New rule: Post – 19 December 2005: "one-sixth absence rule"
Under the new "one-sixth absence rule", an absence from foreign service does not break the continuity of foreign service if the total period of absence is not greater than one-sixth of the total period of foreign service. The 31-day credit limit that applied to the absentee credit rule does not apply to the one-sixth rule.
If the total period of absence is not greater than one-sixth of the total period of foreign service, 2 or more periods in which a person has been engaged in foreign service will be taken together to form a continuous period of foreign service.
However, if the total days of absence exceed one-sixth of foreign service days at any time, the continuity of foreign service will be deemed to be broken and a taxpayer will not satisfy the 91 day continuous service requirement.
Case scenario
Robert (an Australian resident taxpayer) works in Singapore for a continuous period of 60 days. What is the maximum absence that Robert may take without breaking his continuous foreign service period?
Illustration 1: Using "absentee credit rule"
Robert would be entitled to take a maximum of 9 days without breaking his continuous foreign service period, calculated as follows:
Absentee credits at commencement of leave of absence:
(31/334) x 100 days = 9 whole days = break entitlement.
Illustration 2: Using "one-sixth rule"
Robert would be entitled to take a maximum of 16 days without breaking his continuous foreign service period, calculated as follows:
"Allowable" absence at commencement of leave of absence:
1/6 x 100 days = 16 days
Robert is better off under the "one-sixth rule" because he has an entitlement to 16 days of absence without him breaking the continuity of his foreign service (in contrast to only 9 days he would have obtained under the "absentee credit rule").
Any Australian resident individual currently working overseas, or planning to work overseas should seek taxation advice regarding their ability to qualify for the 23AG exemption. In particular, those individuals planning to take breaks from the foreign service should seek advice to ensure that the “one-sixth absence rule” is not breached and foreign employment income derived by them does not inadvertently become subject to Australian income tax.
Questions
Please contact Michael van Schaik or Alex Duonis
Phone: +61 (0) 3 9614 4444
Email: mvanschaik@moorestephens.com.au
Email: aduonis@moorestephens.com.au
Section 23AG of the Income Tax Assessment Act 1936 is important to Australian residents who work overseas. In broad terms, it grants an exemption from Australian income tax from foreign sourced employment earnings derived by an Australian resident in respect of overseas work assignments that are not less than 91 continuous days in duration in a location that ordinarily imposes income tax on that income.
Historically the section contained the “absentee credit rule” which provided a mechanism by which short breaks from the foreign service would not be deemed to break the continuity of service requirement. After 19 December 2005, the “absentee credit rule” was replaced by the new “one-sixth absence rule” which when applied has the potential to significantly extend the periods of time that the individual can be absent from the foreign service whilst still preserving the operation of the section 23AG exemption.
Old rule: Pre – 19 December 2005: "absentee credit rule"
Under this rule, taxpayers were granted a ‘credit’ of 31/334 days for each completed dayof foreign service, up to a limit of 31 days. For each day of absence from foreign service not considered to be part of the service, 24 hours absentee ‘debit’ would be deducted from the individual’s accumulated absentee credit.
As long as the taxpayer maintained an absentee credit balance (in whole days), the taxpayer would not be deemed to break the continuity of foreign service requirement. If the total days of absence exceeded the taxpayer’s accumulated absentee credit, the continuity of the foreign service period would be deemed to be broken. The individual would begin a new period of foreign service when he/she next engaged in foreign service and had to determine again whether that foreign service lasted for at least 91 continuous days.
New rule: Post – 19 December 2005: "one-sixth absence rule"
Under the new "one-sixth absence rule", an absence from foreign service does not break the continuity of foreign service if the total period of absence is not greater than one-sixth of the total period of foreign service. The 31-day credit limit that applied to the absentee credit rule does not apply to the one-sixth rule.
If the total period of absence is not greater than one-sixth of the total period of foreign service, 2 or more periods in which a person has been engaged in foreign service will be taken together to form a continuous period of foreign service.
However, if the total days of absence exceed one-sixth of foreign service days at any time, the continuity of foreign service will be deemed to be broken and a taxpayer will not satisfy the 91 day continuous service requirement.
Case scenario
Robert (an Australian resident taxpayer) works in Singapore for a continuous period of 60 days. What is the maximum absence that Robert may take without breaking his continuous foreign service period?
Illustration 1: Using "absentee credit rule"
Robert would be entitled to take a maximum of 9 days without breaking his continuous foreign service period, calculated as follows:
Absentee credits at commencement of leave of absence:
(31/334) x 100 days = 9 whole days = break entitlement.
Illustration 2: Using "one-sixth rule"
Robert would be entitled to take a maximum of 16 days without breaking his continuous foreign service period, calculated as follows:
"Allowable" absence at commencement of leave of absence:
1/6 x 100 days = 16 days
Robert is better off under the "one-sixth rule" because he has an entitlement to 16 days of absence without him breaking the continuity of his foreign service (in contrast to only 9 days he would have obtained under the "absentee credit rule").
Any Australian resident individual currently working overseas, or planning to work overseas should seek taxation advice regarding their ability to qualify for the 23AG exemption. In particular, those individuals planning to take breaks from the foreign service should seek advice to ensure that the “one-sixth absence rule” is not breached and foreign employment income derived by them does not inadvertently become subject to Australian income tax.
Questions
Please contact Michael van Schaik or Alex Duonis
Phone: +61 (0) 3 9614 4444
Email: mvanschaik@moorestephens.com.au
Email: aduonis@moorestephens.com.au
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