ADF Tax Guide
Volume 11, No. 48, July 27, 2006

THE ADF Income Tax Guide 2005-2006 aims to help ADF members prepare their 2005-2006 income tax returns. The guide is designed and intended to complement the Australian Taxation Office’s (ATO’s) TaxPack 2006 and TaxPack 2006 Supplement by highlighting the more specific tax issues that impact ADF members.

It is recommended that members consult a tax adviser or the ATO, especially where income other than ADF salary and allowances has been received.

The guide cannot be used as a legal authority in the event of any dispute between an ADF member and the ATO. It is not a substitute for the income tax legislation or any income tax ruling or determination issued by the ATO.
Tax supplements for foreign countries where the ADF has had an operational presence will be issued for the 2005-2006 income year. These supplements, which must be read in conjunction with the ADF Income Tax Guide 2005-2006, will help ADF members identify assessable income and allowable deductions for 2005-2006 which relate to service in foreign countries.

The guide has been referenced to relevant questions in ATO’s TaxPack 2006 and TaxPack 2006 Supplement with relevant page number included in the headings.

ASSESSABLE INCOME
A member’s ADF payment summary includes only ADF income. Assessable income from other sources, including secondary employment, must also be included in the member’s income tax return. If income was received from secondary employment, you must obtain a payment summary from your secondary employer. For example, employment at a Service canteen, club or mess would constitute secondary employment.

Q1 – Salary or wage (pp 15-16)
Amounts disclosed in the gross earnings column of the ADF member’s payment summary for the year ended June 30, 2006, include salary, wages, commissions and bonuses. These amounts are assessable income and should be included in the member’s 2006 tax return under Question 1. Payments for lost salary or wages paid under an accident or insurance policy or worker’s compensation scheme from which tax was withheld should be also included at Question 1.

Tax withheld at Question 1
Salary and wages from which tax was withheld and which are shown on the member’s payment summary should be included at Question 1. If no income tax was withheld, the salary and wage income should be included at Question 2.

Assessable allowances, bonuses and benefits

• Flying Allowance is included in assessable income. It is possible that a deduction can be claimed as part of self-education expenses where expenditure on education in relation to flying relates directly to current income earning activities (refer to Question D4 of the TaxPack).
  
• Language Proficiency Allowance is included in gross earnings in column 1 of the payment summary. A deduction may be allowed for expenditure in the maintenance of language proficiency, for example language books, tapes, etc, where there is a direct relation to current income earning activity.
  
• Special Action Forces Allowance is included in assessable income. It may be possible to claim deductions for self-education expenditure or fitness expenditure (refer to Question D5 of the TaxPack).

Other assessable allowances, against which no specific deductions can be claimed, include:

• Arduous Conditions Allowance;
• Antarctic Allowance;
• Antarctic Parity Allowance;
• Clearance Diving Allowance;
• Common Duties Allowance;
• Difficult Post Allowance;
• District Allowance;
• Diving Allowance;
• Experimental Diving Allowance;
• Field Allowance;
• Flight Duties Allowance;
• Hard Lying Allowance;
• Home Purchase Assistance Scheme;
• Paratrooper Allowance;
• Seagoing Allowance;
• Service Allowance;
• Submarine Escape Allowance;
• Submarine Service Allowance;
• Trainee’s Dependant Allowance;
• Trainee Leader’s Allowance; and
• Unpredictable Explosives Allowance.
  

Retention payments will generally be included in assessable income unless, when the payment is received, there was a certificate issued by CDF under section 23AD of the Income Tax Assessment Act 1936 to the effect that the person is on eligible duty (not including an attaché at an Australian embassy or legation) with a specified organisation in a specified area outside Australia (see ATO Interpretative Decision ID 2004/80).

However, the retention payment will be assessable income if it was made while the taxpayer’s other income was exempt foreign employment income under section 23AG of the Income Tax Assessment Act 1936. The retention payment is not considered to be a payment arising from the “foreign service” but is paid to encourage the taxpayer to remain as a member of the ADF (see ATO Interpretative Decision ID 2003/373).

Where a retention payment has been included in assessable income and all or part of the payment is required to be repaid, under section 59-30 of the Income Tax Assessment Act 1997, you will generally be required to amend the income tax return for the year in which you originally received the retention payment and included it in your assessable income.

Q2 – Allowances, earnings, tips, director’s fees etc (pp 16-17)
Travel allowances and award overtime meal allowances which do not exceed the Commissioner of Taxation’s reasonable allowance amounts do not have to be shown on payment summaries by payers. If ADF members receive such an allowance and it is not shown on a payment summary, they do not have to include it as income at this question, provided they have fully expended the allowance on deductible expenses and they are not making a claim for expenses relating to the allowance in their tax return (see question D2 for travel expenses and question D5 for overtime meal expenses).

Other allowances, earnings, tips or directors fees received during the year that have not had tax deducted from them and have not been shown on PAYG payment summaries under individual non-business should be included at Question 2.

Uniform Maintenance Allowance
Uniform Maintenance Allowance should be included in assessable income at Question 2. A deduction can be claimed for the cost of replacement, laundry and/or repair to items of compulsory uniform. For more details in relation to the deductibility of uniform expenditure, please refer to Question D3 of the guide (page), as well as to Taxation Rulings TR 95/17 and TR 97/12 and Taxation Determination TD 1999/62.

Q3 – Lump sum payments (p 18)

Unused annual leave
Where a lump sum payment is made to an ADF member in lieu of their unused annual leave, the payment is included in the member’s assessable income in the income tax year that the amount is received. The amount is taxed at the ADF member’s marginal tax rate except where the payment is in respect of unused annual leave and associated bonus or other payment related to that leave, that accrued in respect of service before August 18, 1993.
The maximum amount of tax payable within the above exception is 30% (plus Medicare levy and surcharge, if applicable).

Unused long service leave
Where an ADF member receives a lump sum payment in lieu of unused long service leave, shown as an amount on the payment summary, the amount is to be included as assessable income in the year it is received, as follows:

• 5% of the amount received in respect of unused long service annual leave that accrued before August 16, 1978. It is taxed at members’ marginal tax rates.
• The whole amount received from service attributable to the period from August 16, 1978, to August 17, 1993, is included in full. It is taxed at marginal tax rates subject to a maximum rate of 30%.
• From August 18, 1993, all payments attributable to unused long service leave are included. They are taxed at members’ marginal tax rates.

Amounts at B on the payment summary relate to a payment for unused annual leave before August 16, 1978.

Don’t include amounts shown on the payment summary as lump sums D or E. For amounts shown at D, complete question 4 Eligible Termination Payments. For amounts shown at E complete question 22 Other Income.
Medicare levy and surcharge (if any) are added to whichever rate is applicable.

Bona fide redundancy, approved early retirement scheme and invalidity

Payments for annual leave and long service leave that accrued after August 17, 1993, will be subject to the concessional maximum tax rate of 30% (plus Medicare levy and surcharge, if applicable) to the extent that the payment is made under circumstances of bona fide redundancy, approved early retirement scheme or invalidity.

Q4 – Eligible termination payments (pp 19-22)

An eligible termination payment (ETP) is a payment made to a taxpayer in consequence of the termination of his or her employment (e.g. DFRDB commutation) and excludes payments such as:

• unused leave entitlements;
• pensions or annuity; and
• tax-free component of bona fide redundancy payments and approved early retirement scheme payments. In 2005-2006 the tax-free limit is $6491 plus $3246 per year of completed service with the ADF. The amount in excess of the tax-free limit is assessable as an ETP.

This list of exclusions is not exhaustive.

The tax payable on an ETP depends on the age of the member, the nature of the components making up the ETP, and whether the ETP exceeds the member’s Reasonable Benefit Limit. Tax relating to ETPs is a complex area. It is strongly recommended that members who have received an ETP should refer to pages 19-22 of TaxPack 2006 or seek independent professional taxation advice.

Q9 – Total reportable fringe benefits amounts (p 28)

ADF members who received certain fringe benefits from the ADF should find that the grossed-up taxable value of the fringe benefits received are recorded on their payment summary (in the top right-hand corner). The ADO will keep records of the value of any fringe benefits provided to their employees but will only record them on a member’s payment summary for the 2005-2006 financial year if that member’s total taxable fringe benefits amount exceeds $1000 for the FBT year (April 1, 2005, to March 31, 2006).

The value of the reportable fringe benefits amount (ie the grossed-up amount of fringe benefits) will not impact upon your taxable income (or loss). It is however used in conjunction with your taxable income, to determine your entitlement to, or liability for, the following:

• Medicare levy surcharge;
  
• deductions for superannuation contributions;
  
• superannuation contributions tax offset;
  
• tax offset for superannuation contributions on behalf of your spouse;
  
• superannuation co-contributions;
  
• mature age worker tax offset;
  
• Higher Education Contribution Scheme (HECS) and Postgraduate Education Loans Scheme (PELS) repayments. From January 1, 2005, new student assistance will be termed HELP (Higher Education Loan Program) and from January 1, 2006, all outstanding HECS and PELS debts were rolled into HELP; and
  
• child support obligations. Non-reportable fringe benefits may be considered by the Child Support Agency (CSA) when making an assessment (contact the CSA on 13 12 72 for further information).
  

The non-grossed up value of fringe benefits is used in determining the entitlement to certain income tested government benefits including the Family Tax Benefit, the Child Care Benefit, and the parental income test for the Youth Allowance. Refer to page 28 of TaxPack 2006 for more information.

Fringe benefits tax statements
FBT statements were sent to members by the DTMO in May 2006 advising the expected amount to be disclosed on their payment summaries along with details of what the total comprises. The aim of issuing the FBT statements in May was to give members the opportunity to check the reportable fringe benefits amounts prior to them being reported on the payment summaries.

At the time of the statement mail-out there would have been some minor processing still incomplete. Therefore, in some instances, there may have been variations from the statement to the final amount that appears on the individual member’s payment summary.

Where an amount has been incorrectly reported on your statement or payment summary you should contact the Defence Tax Management Office (DTMO) for investigation.

Email taxation.anagement@defence.gov.au or phone the DTMO hotline on 1800 806 053.

Subject to specific conditions, benefits which are directly related to, or in respect of deployment of ADF personnel to warlike operations (eg Afghanistan and Iraq) are not subject to FBT. The pay and allowances received while deployed do not appear on a member’s payment summary.

Q19 – Foreign source income and foreign assets or property
(Supplement pp 20-25)

Section 23AG exempt foreign earnings.

ADF members who qualify for a section 23AG exemption will be required to report the amount as exempt foreign employment income at Question 19. You should note that the exempt income although not assessed, it is used to determine the average tax rate applicable to other taxable income in Australia. Please refer to the ATO Tax Pack for further information regarding correctly completing your income tax return.

Amounts exempt under sections 23AC and 23AD are not reported on the income tax return.

TAX EXEMPT INCOME
Exempt income is not included in your assessable income. Some common types of exempt income are listed on pages 13-14 of the TaxPack 2006. Members should be aware that all expenditure incurred in deriving exempt income will not be an allowable deduction. The following is a list of more common exempt income amounts you may have received from the ADF:

• Living Out Allowance;
• Living Out Away from Home Allowances;
• Education Assistance Overseas Allowance;
• Scholarship Allowance;
• Education Allowance;
• Child Education Allowance;
• Re-engagement Bounty;
• Disturbance Allowance;
• Transfer Allowance;
• Deployment Allowance; and
• Rations and quarters supplied without charge
  
• Overseas Allowances
  Members posted overseas will be regarded as living away from their usual place of residence, and will be required to complete a statement to enable the ADF to claim a reduction in fringe benefits tax payable by the Department of Defence to the ATO.
  
  Part-time members of Defence Force Reserves or Emergency Reserve Forces
  Pay and allowances for part-time Ready Reserve, Reserve Service or Emergency Reserve Forces are also exempt. This exemption does not apply where the member of the Reserves has been called up for full time service or has volunteered for such service.
  
  Cash prizes under the Military Skills Awards program to members of the Army Reserve are also exempt (Taxation Ruling IT 2474).
  
  It is important to note that workers’ compensation payments received for lost civilian or reserve force income are not tax exempt and should be included in the member’s assessable income. Refer to ATO Interpretative Decisions ID 2003/260 and ID 2004/213.
  
  Warlike service
  An exemption applies to the pay and allowances earned by ADF members who serve in a defined operational area. Any members deployed to a defined warlike operation will be advised separately of the tax implications as part of their deployment administration. This includes income received by ADF personnel deployed with Operations Catalyst and Slipper.
  
  For periods of operational service:
  
• pay related to recreation leave accrued while serving in an operational area is also tax exempt.
  
• Rent, interest, dividends, capital gains or any other type of investment income that the ADF member may earn while on deployment will be subject to taxation. The exemption from tax will apply only to the salary and allowances paid to the ADF member while on eligible duty.
  

Exemption for reimbursed expenses
An exemption from income tax applies to certain payments or allowances received by members for reimbursement of expenses. Examples of these payments and allowances are:

• Home Purchases or Sale Expense Allowance
• Reimbursement of expenses for pet relocation
• Temporary accommodation allowance
• Rental allowance
  
• Note that these benefits may be subject to fringe benefits tax reporting requirements.
  
  NON-TAXABLE INCOME
  Examples of income that is generally non-taxable include:
  
  
• Quiz and sport prizes received on an amateur basis;
• Proceeds of a non-business hobby or pastime;
• Housekeeping money from a spouse;
• Refund of DFRDB contributions, which have not been claimed as a tax deduction previously (Note: MSBS contributions have never been tax deductible);
• Medical and dental services provided or paid for by the ADF; or
• Benefits received through frequent flyer schemes or other consumer loyalty programs which arise as a result of employer-paid expenditure. These are non-assessable as they arise from a personal relationship between the taxpayer and the third party provider e.g. a contract between a taxpayer and an airline under a frequent flyer scheme. Note, however, that Defence guidelines specify that frequent flyer points of this nature can only be used for certain aspects of work-related travel. Members in receipt of such points should ensure they are familiar with their proper use.
  
  

DEDUCTIBLE EXPENSES
An expense may be deductible where it was incurred for the purpose of producing assessable income. If the expense is of a capital, private or domestic nature, the expense will not be deductible.

An expense that has been, or will be, paid/reimbursed by the ADF, cannot be claimed as a deduction. If an expense is incurred for both work and private purposes, only the work-related portion of the expense may be claimed.

If you are claiming a deduction for a work related expense for which you received an allowance, include the amount of the allowance at Question 2 (that is, item 2 on the tax return).

For more details on applicable deductible expenses, refer to Taxation Ruling TR 95/17, “Income Tax: Employee work-related deductions of employees of the Australian Defence Forces”.

Goods and Services Tax-related expenditure
If any deductible work-related expenses incurred by ADF members includes an amount of goods and services tax (GST) this tax is considered to be part of the total expense and is therefore an allowable deduction.

The ATO provides specific information for ADF members relating to work-related deductions questions D1 to D5 in the ATO Occupational Summary “Australian Defence Force members 2004-05” (NAT 2321-6.2004).

This publication can be obtained from the ATO’s Publications Distributions Service which can be contacted on 1300 720 092 or from the ATO web site www.ato.gov.au.

QD1 – Work-related car expenses (pp 38-44)

A deduction for car transport costs is allowable if a member uses his or her car when the member travels directly to the place of his or her second job from his or her work as an ADF member.
Private use

A deduction is not allowed for the cost of travel by an ADF member between home and his or her normal place of work, as it is considered a private expense. This includes travel to and from an ADF base by members choosing to live “off base” or forced to due to lack of “on base” accommodation, and travel from the place of residence “on base” to where normal duties are performed for those members residing in accommodation located “on base”.

The private nature of the travel expenses is not altered by the fact that members may perform incidental tasks en route, such as deliveries or mail pick-ups for example.

Travel between home and work where home is a base of operations and work is commenced at home

It would be unusual for an ADF member to commence work before leaving home. However, where the member’s home is the base of operations for work and work is commenced at home, deductions for transport expenses may be allowed. On these occasions the member would be considered to be travelling on work as distinct from travelling to work from his or her home.

Set out below is a list of factors that may indicate that a member is travelling on work:

• The member undertakes tasks at home that cannot be done at the work site;
  
• The performance of the duties of the job commences before leaving home. The obligation should involve more than just being on stand-by/on call duty at home;
  
• The member is required to commence the task at home and the responsibility for completing it is not discharged until the member attends at the work site;
  
• The home takes on the characteristics of being a base of operations on occasions, since work has to be commenced there; or
  
• The member does not choose to perform part of the work in two separate places. The two places of work are a necessary obligation arising from the nature of the special duties of the job.
  

Travel to sporting activities
To qualify for a deduction for travelling to a sporting activity, the ADF member must be on duty while participating in the sporting activity and the member is required to participate in the activity as part of his/her normal income earning activities (eg as an official ADF representative in inter service or combined service competitions). Travel between home and the sporting event is not deductible, even where the above requirements are satisfied.

Methods for car expense deductions

There are four methods, which, depending on the work-related distance travelled, may be able to be used to calculate claims for the cost of such travel expenses. These are as follows

• cents per kilometre method (for total work-related travel of less than 5000 kilometres per annum);
  
• 12% of original value method (for total work-related travel of more than 5000 kilometres per annum);
  
• one third of actual expenses method (for total work-related travel of more than 5000 kilometres per annum) and;
  
• logbook method (for any distance travelled.).
  

Each of the four methods has different rules and requires different documentation to be kept to substantiate the claim. Pages 41-44 of TaxPack 2006 have more detail on how to calculate a claim under each of the four methods and discusses the different substantiation requirements. The cents per kilometre deduction method has new rates, which are applicable for the 2005-2006 income year. These rates can be found on page 41 of TaxPack 2006.

QD2 – Work-related travel expenses (pp 45-46)

Work-related travel costs for vehicles other than cars should be included at this question. Examples include motorcycles, utility trucks or vans with a carrying capacity of more than one tonne and any other vehicles with a carrying capacity of nine or more occupants.

Other work-related travel expenses, such as airfares, bus, train, tram and taxi fares, bridge and road tolls, parking and car hire fees, and car-related expenses for cars not owned by the taxpayer, should also be included at this question. In addition, members may be able to claim travel expenses such as meals, accommodation and incidental expenses incurred while travelling for work, for example, going to an overnight work conference, where the expenses are not reimbursed or a travel allowance is not paid. Generally, if your travel did not involve an overnight stay, you cannot claim meal expenses, even if you were paid a travel allowance.

In response to enquiries from members regarding travel allowances receipts and substantiation a summary of the main issues is set out below:

Taxpayers on work-related overseas travel are required to keep receipts of their accommodation expenses. A travel diary recording all activities is also required to be kept by members in these circumstances.

Food drink and incidental expenses incurred on work-related overseas travel that are within the monetary limits set out by the Taxation Commissioner, are not required to be substantiated. Amounts over the limit are required to be substantiated for the total expense, not just the amount of the excess. Schedule 2 of TD 2004/19 contains the ATO guidelines.

Travel within Australia (local) is not subject to substantiation rules (records and diary) provided the amount of the allowance paid and the total amount claimed is within the amounts set out in schedule 1 of TD2004/19. Expense amounts over the limit are required to be substantiated for the total expense, not just the amount of the excess.

Allowances paid in excess of the ATO limits, should appear on an employee’s payment summary. Expenses in connection with the allowance should be claimed in the tax return as a deduction, however when they are under the limits set out, no substantiation is required.

QD3 – Work-related uniform or protective clothing (pp 47-48)

Work Uniform
Expenses incurred for compulsory military uniforms are deductible. Uniform includes such items as military white, blue or khaki shirts, matching trousers, regulation jackets and jumpers, ties, gloves, hats or caps with rank or other embellishments, camouflage clothing, official mess uniform, service shoes, socks, stockings and service handbags or clutch bags.

However, a uniform does not include civilian, ordinary or conventional items such as running shoes, t-shirts, underwear or accessories. More information about work uniforms can be found in Taxation Determination TD 1999/62, “What are the criteria to be considered in deciding whether clothing items constitute a compulsory corporate uniform/wardrobe” and Taxation Ruling 97/12, “Work-related expenses:deductibility of expenses on clothing, uniform and footwear”.

You cannot claim expenses incurred for non compulsory work uniforms unless your employer has registered the design with Ausindustry. All compulsory Defence uniforms are registered with Ausindustry.

Items of conventional clothing, specifically modified to meet the requirements of a compulsory work uniform may be deductible, where the clothing forms part of a distinctive compulsory uniform. Distinctive as to identify the wearer as a Defence employee. It is not enough that employees be required to wear clothing of a particular colour, type or style.

Protective clothing
Expenses incurred for protective clothing used for work-related purposes are deductible. Protective clothing protects the taxpayer from injury at work, or his or her everyday clothes from being damaged at work. Examples of protective clothing include:

• Fire-resistant clothing
• Safety glasses
• Sunscreen
• Sunprotection clothing, such as sunhats, sunglasses etc
• Steel capped boots
• Overalls
• Breathing masks
• Safety helmets
• Wet weather gear when used to protect against illness or injury where you work
• The cost of protective sports footwear worn by members such as physical training instructors and those in special combat squads who derive their income by performing a range of regular strenuous physical activity is deductible.
  

More information about protective items can be found in Taxation Ruling TR 2003/16, “Deductibility of Protective Items”.

Heavy-duty conventional clothing such as jeans, drill trousers and drill shorts are not considered protective. The cost of these items are a private expense and thus not an allowable deduction.

Deductions are allowable for the cost of laundering and dry cleaning of uniforms and protective clothing. Members should refer to page 48 of TaxPack 2006 for details of how to claim home laundering expenditure.

QD4 – Work-related self-education expenses (pp 49-51)

A deduction is allowable for the cost of self-education expenses if there is a direct connection between the self-education and the member’s current income-earning activities. A deduction is not allowable if the education is designed to enable the member to get employment, to obtain new employment or to open up a new income-earning activity.

The cost of formal education courses provided by professional associations should be shown at question D5, not here. Similarly the cost of attending seminars education workshops or conferences that are work related but not related to your education should be shown at D5.

Self-education expenses are defined to be expenses, other than the FEE - HELP necessarily incurred by a taxpayer in connection with a course of education provided by a school, college, university or other place of education and undertaken by a taxpayer to gain further qualifications. It should be noted that where a student is paying full fees through FEE – HELP, the cost of the course may still be deductible, it is only the repayments of the FEE – HELP debt that is specifically non-deductible. For FEE – HELP a non deductible 20% loan fee will be charged for undergraduate courses of study. For detailed explanation of the deductibility of self-education expenses, refer to Taxation Ruling TR 98/9 and for a further explanation on the deductibility of FEE – HELP, refer to the PELS and tax deductibility section of the ATO website.

In certain circumstances, a reduction of $250 is required from allowable self-education expenses. However, other types of expenses (eg travel expenses, child-care costs, capital cost of items acquired in 2005-06 and used for self education purposes) some of which are not allowable as a deduction, can be offset against the $250 before the reduction applies.

QD5 – Other work-related expenses (pp 52-53)

Following is a list of tax deductible expenses commonly incurred by ADF members. This list is not exhaustive.

• Mess subscription: members can claim the portion of compulsory Mess subscription that is work related only (the portion of the subscription that relates to Mess administration);
  
• Expenses of keeping fit: members can claim expenses related to their fitness if they are required to maintain a very high level of fitness that is well above the ADF general fitness standards and earn their income by performing a range of duties designed to maintain that level of fitness. For example, this would apply to physical training instructors and those members in the special action forces;
  
• Annual subscriptions to the ArFFA, the RDFWA and the United Services Institute (USI);
  
• Bank fees, Government duties or debits tax charged on accounts used solely for income producing purposes such as investment accounts, are deductible. Amounts withdrawn from general purpose accounts, where these funds are used for deductible work-related purposes are also deductible, provided the expense can be sufficiently isolated and identified. A deduction is not allowable for any other bank fees as a work-related expense (Taxation Ruling TR 95/17);
  
• The cost of a briefcase or kitbag where this item is used in connection with employment and the cost is less than or equal to $300. In other cases, the amount may be depreciated;
  
• Subscriptions to trade, business or professional associations whose principal activities specifically relate to an ADF member’s work duties (Taxation Ruling TR 2000/7);
  
• Capital allowances (previously known as depreciation): ADF members are advised to refer to the ATO’s booklet “Guide To Depreciating Assets” (NAT 1996-6.2004) in determining what can be depreciated. You can claim a deduction—called a capital allowance—for the decline in value of equipment utilised for work. If the equipment is also used for private purposes, you cannot claim a deduction for the estimated proportion of private use. You cannot claim a deduction if the equipment is supplied by your employer or any other person. The amount of your deduction depends on the effective life of the equipment. See question D5 of TaxPack 2006;
  
• There is an option to aggregate depreciable equipment into a group (known as a low-value pool) Equipment costing between $300 and $1000 and equipment written down to less than $1,000 is eligible for pooling. Depreciation is calculated using the diminishing value method. A deduction for the decline in value of equipment is worked out by multiplying the total depreciated value of all assets in the pool, by 37.5%. Assets acquired during the year are depreciated at a rate of 18.75% for the full year, regardless of when in the year they were acquired. For further information on claiming a deduction for a low-value pool, read question D6 in TaxPack 2006 and make your claim at item D6 on your tax return. Where an item costs $300 or less, it is not required to be depreciated and an immediate deduction is generally available;
  
• Books: The cost of books forming part of a professional library may be allowable provided the content of the books is directly relevant to the duties performed. Note that the capital allowance provisions apply (see capital allowances above);
  
• Computers and computer software: a deduction is allowed for capital allowances for new or second hand computers and computer software purchased by ADF members where the computer and software are used to carry out the duties of an ADF position. If the computer or software is also used for private purposes an apportionment between business and private use is necessary (see capital allowances above). Where the computer or software is used for both private and work-related purposes, substantiation of the work-related portion will be required in the form of a log book or diary;
  
• Special Watches: members can claim repair costs and capital allowances for the cost of special watches with special characteristics such as stopwatches used for work-related purposes (see capital allowances above). A capital allowance may not be claimed where the watch is provided to the member by the ADF;
  
• Extra Regimental Duties: expenses associated with Extra Regimental Duties which form part of assessable income earning activities are deductible providing they are not private or capital in nature;
  
• Home office: expenses for a private study used solely for work purposes may be deductible. Expenditure incurred for heating, cooling and lighting the room are deductible. Refer to page 53 of TaxPack 2006 and to Practice Statement PS LA 2001/6 – Home Office Expenses and Taxation Ruling TR 93/30 for more information. – Additional deductions may apply where a portion of a members residence is considered a place of business for income tax purposes. Only where a taxpayer’s home is classified as a place of business may a deduction be claimed for a percentage of occupancy costs (such as rates, rent and insurance). There are however strict criteria for classification and a portion of the residence will be liable for capital gains tax on sale of the home. If a claim for a home office deduction is being considered, we recommend members consult their tax adviser or the ATO;
  
• Postage and stationery expenses incurred which are work related;
  
• Insurance of tools and equipment used for income producing purposes;
  
• Parking fees and tolls provided the travel was work related and you are not reimbursed;
  
• Work-related conference and seminar expenses;
  
• Costs related to part-day travel allowance: this is an allowance received by employees for work-related travel where an overnight stay is not involved. Such allowance is assessable income. Any claim for work-related expenses incurred for part-day travel allowance is deductible and is subject to the normal substantiation requirements. The cost of meals in this situation is not a work-related expense;
  
• Rifles, ammunition and cleaning equipment: a deduction is allowed for the cost of additional and/or more sophisticated equipment that is used for work purposes which is not supplied or replaced by the ADF. Note that the capital allowance provisions may apply (see capital allowances above);
  
• Outdoor worker’s sun protection expenses: Outdoor workers such as ADF personnel who are required to work in the sun for all or part of the day and consequently buy sunscreen lotions, sunhats and sunglasses to use at work can now claim these sun protection products as work expenses. Make your claim for these items at question D5 of TaxPack 2006; or
  
• Telephones, mobile phones, pagers, and other telecommunications equipment: a deduction is not allowable if the ADF supplies these items to members. In the case where these items are member-owned a deduction is allowable for the rental cost to the extent of the work related use of the item.
  A deduction is allowable for the cost of work-related calls; and for the proportion of telephone rental costs if an ADF member can demonstrate that he or she is “on call”, or required to telephone his or her employer on a regular basis. Some form of log book or diary will be required to substantiate any such claim.
  

A deduction is not allowed for the cost of installing or connecting a telephone, mobile phone, pagers and other telecommunications equipment.

A deduction may also be allowable for the decline in value where mobile phones, pagers and other telecommunication equipment under the capital allowance provisions (see capital allowances above).
A deduction is not allowable for the cost of obtaining a silent telephone number.

QD10 – Cost of managing tax affairs (p 63)

Please refer to page 63 of TaxPack 2006 for details on how to claim expenses relating to managing your own tax affairs or complying with your legal obligations relating to another person’s tax affairs. A deduction is also available for expenses relating to a claim for family tax benefit lodged through the tax system.

NON-DEDUCTIBLE EXPENSES

Expenses of a capital, private or domestic nature, and those not incurred in gaining assessable income, are not allowable deductions. This is the case even if the expenses have been incurred at the direction of a member’s Unit Commander. In addition no deductions can be claimed on expenditure which is incurred in the derivation of exempt income. Examples of non-deductible expenses include:

• Reimbursements: where an employer or any other person reimburses you for expenses you have actually incurred you cannot claim the expense as a deduction. Any amounts you receive for car expenses calculated by reference to the distance travelled by the car is generally not a reimbursement and you must show that amount of the reimbursement or allowance as income at Question 2. A deduction may be available in these circumstances. See question D1 for guidance.
• Charges for compulsory or non-compulsory attendance at Mess functions;
• Child-minding expenses (a portion of these may be deductible where they relate to self education expenses. Refer question D4 TaxPack2006 for additional information);
• Meals, entertainment, personal and family living expenses;
• Purchase, laundry, dry cleaning and maintenance of civilian, conventional or ordinary clothing worn to work;
• Normal cost of travel, including parking fees and tolls, between home and the base is a non-deductible expense (whether an allowance is paid or not). This principle is not altered by doing small work-related tasks en route;
• Fines for breaches of ADF or civilian law;
• Rates and taxes on non-income producing property;
• Haircuts and grooming costs;
• Membership fees for sporting and social clubs;
• Personal superannuation contributions;
• Purchase of or repairs to ordinary watches;
• Weight reduction expenses;
• Glasses, make up, shaving equipment, hair products, clips, bobby pins, or underclothing;
• Newspapers; and
• Relocation expenses.
  

PERSONAL TAX OFFSETS

QT4 – Superannuation annuity and pension (p 89)

Pension income at question 7 may be eligible for a tax offset equal to 15% of all or part of your taxable pension or annuity income. To work out the tax offset you will need to know:

• Whether it qualifies for a tax offset and if so what proportion of the payment qualifies. Information on this can be obtained from the fund itself.
  
• What the rebateable proportion is. For assistance phone the Superannuation Infoline on 13 10 20.
  Additional information can be found on page 89 of Taxpack 2006.

Superannuation Co-contribution
The Federal Government will match eligible personal superannuation contributions made from after tax income with a Super Co-contribution payment. The Super Co-contribution is paid dollar-for-dollar by the Government, up to a maximum of $1,500 for taxpayers with assessable incomes (plus reportable fringe benefits) of $28,000 or less. This threshold is reduced by 5 cents for every dollar the taxpayer’s assessable income (plus reportable fringe benefits) exceeds $28,000, phasing out completely at $58,000.

The contribution is paid into a nominated superannuation fund after submission of the income tax return and advised by letter.

Contributors to DFRDB, MSBS or to a retirement savings account (RSA) may be eligible for the Super Co-contribution. The ATO will work out your Super Co-contribution from information provided in your tax return and by your superannuation fund.

QT5 – 30% Rebate on Private Health Insurance Premiums (pp 90-91)

The private health insurance rebate is currently 30% of the premium paid to a registered health fund for appropriate health private insurance cover. This rebate is not affected by the taxpayer’s level of income.
There are a variety of ways the rebate may be claimed. As a reduction in private health insurance premiums paid to the health fund, a cheque from Medicare, or as a rebate in the taxpayer’s income tax return at the end of the year.

If part or all of the entitlement to the rebate has already been received either through the taxpayer’s health fund or from Medicare, the taxpayer is not eligible to claim that part of the rebate in their income tax return.

Eligibility for Rebate
Payments made on the taxpayer’s behalf by their employer for example, as part of a salary package, are eligible for the rebate. The employee not the employer can claim the rebate.

ADF members, who are a prescribed person under the Medicare Levy Act 1986, are exempt from paying the Medicare Levy. Members are still able to claim the 30% rebate for premium payments made for private health cover.

If you have a spouse or dependants, your level of Private Health Insurance will also be relevant for determining if you have a Medicare levy surcharge liability.

QT6 – 30% Child care tax rebate (pp 92-94)

What is it?
The child care tax rebate is a rebate of 30% for the out-of-pocket child care expenses you had to pay for the period 1 July 2004 to 30 June 2005. Out-of-pocket child care expenses are your total fees for approved child care less the childcare benefit (CCB) to which you were entitled. You will be eligible to claim the rebate for child care fees you had to pay if for at least one week in the period 1 July 2004 to 30June 2005:

• You used approved child care;
  
• You were entitled to receive CCB; and
  
• You passed the CCB work/training study test.
  

You cannot claim the rebate if your employer provided you with a child care service on their business premises under a salary sacrfice arrangement.

The rebate is limited to $4,000 per child.
Instructions on how to claim the child care tax rebate are detailed at pages 92-94 of Tax Pack 2006.

Question T7 – Baby bonus (pp 95-96)

What is it?
The baby bonus is a Commonwealth government initiative assisting families when they have an infant. Essentially subject to income limitations, you receive back over a 5 year period, the income tax you paid in a nominated year (called the base year), which is either the year you became responsible for the child or the year prior to the birth. The amount you receive in later years is subject to income earned in the years after you become responsible for the child and the amount of tax paid in the base year.

Instructions on how to claim the baby bonus are detailed at pages 95-96 of TaxPack 2006.

Who is it for?
If you had a baby or you gained legal responsibility of a child aged under 5 (for example, through adoption), after 30 June 2001—whether or not you already have other children—you could receive the baby bonus.
The baby bonus is paid whether or not you currently get any other family benefits. There is no upper limit on taxable income when getting the baby bonus.

How much will you get?
How much baby bonus you get each year, depends on your taxable income in the nominated base year and your taxable income for the next 5 years. If your taxable income for the base year was $25,000 or less, you will be entitled to an annual amount of $500, although this will be less in the first year, calculated from the baby’s date of birth (or the date you gained legal responsibility).

If your taxable income was higher, you will receive a higher amount each year, subject to your taxable income in the years after you became responsible for the baby.

How long will you keep getting the baby bonus?
It depends on your own taxable income each year, but you could claim the baby bonus for one child at the end of each income year until your child turns 5.

How do you make a claim?
You cannot claim the baby bonus at this question. How you can claim the baby bonus for this year depends on whether you are required to lodge a tax return this year.

If you are required to lodge a tax return for 2005-2006, you need to obtain the 2006 baby bonus instructions and claim (ATO form number NAT 6580-6.2006), complete the claim and lodge it with your tax return.

If you are not required to lodge a tax return for 2005-2006, you can lodge your baby bonus on its own by one of the following ways:

• 1. Use e-tax and complete and lodge your claim over the Internet. See below for more information.
  
• 2. Use the 2006 claim form and once you have completed it post your claim to the ATO.
  
• 3. Go to a registered tax agent.
  

Lodge your claim at the end of the income year — any time after 30 June 2006.

Please note that references to year are to income year, being 1 July to 30 June. For example, the income year 1 July 2005 to 30 June 2006 is 2006.

From 1 July 2004 – Baby bonus was replaced by a maternity payment administered by Centrelink. However those that have already claimed under the Baby bonus scheme can continue to claim until the child turns 5.

QT8 – Superannuation contributions on behalf of your spouse (Supplement ps 42)

A tax offset of up to $540 may be available where you have made non-deductible superannuation contributions on behalf of your spouse and:

• Both you and your spouse were Australian residents at the time the contibutions were made;
  
• You and your spouse were not living separately and apart on a permanent basis at the time the contributions were made; and
  
• The sum of your spouse’s assessable income and total reportable fringe benefits was less than $13,800.

The amount of the tax offset is 18% of the lesser of:

• $3,000 reduced by $1 for every $1 that the sum of your spouse’s assessable income and reportable fringe benefits exceeded $10,800; or
  
• the total of your contributions for your spouse for the year.

Refer to page s42 of TaxPack 2006 Supplement for further information on superannuation contributions on behalf of your spouse.

QT9 – Zone or overseas forces (Supplement pp 43-49)

Zone tax offset
ADF members living or serving in certain parts of Australia are entitled to a zone tax offset. The tax offset is granted because of the isolation and high cost of living in those areas.

There are two zones which are eligible for the tax offset: Zone A and Zone B. Further, certain areas within those two zones are described as “special areas” and residents of those areas are entitled to a higher tax offset.

A listing of localities within Zone A and Zone B and the special areas within those zones can be obtained from the ATO by viewing the ATO internet site or ringing the ATO Personal Tax infoline. A brief listing of selected localities within these zones and special areas can also be found at pages 48 to 49 of the TaxPack 2006 Supplement.

To be eligible for the tax offset, the member must have resided or served in the area for more than 183 days of the 2005-2006 income year or for more than 183 days during the period 1 July 2004 to 30 June 2006, including at least one day in the 2004-2005 income year and where no tax offset was claimed in your 2005 tax return.

Members who lived in a zone for less than 183 days in 2005-2006 may still be eligible for tax offset if they meet the following conditions:

• the member lived in a zone area for one half or less of the 2005-06 income year and for one half or less of the 2004-05 income year and the total of the two periods is more than 183 days; or
  
• the member lived in a zone area for one half or less of the 2005-06 income year and for one half or less of any of the previous four income years (except the 2004-05 year) and the total of the two periods is more than 183 days;
  
• In both of the two exceptions above, the member was unable to claim in the first year because he or she was there less than 183 days.

The factors which the ATO considers in deciding if someone has resided in a zone area are set out in Taxation Ruling TR 94/27. These include:

• the intended and actual length of the taxpayer’s stay in the relevant area; and
  
• whether the taxpayer maintains a place of abode inside the relevant area.
• Having a usual place of residence in a zone area may constitute residing in a zone area even though the member did not physically reside there for more than half of the year.
  
  For further information on the relevant tax offsets please refer to pages s 43-49 of TaxPack 2006 Supplement or consult your tax adviser.
  
  Overseas forces tax offset
  Section 79B of the Income Tax Assessment Act 1936 (“ITAA 1936”) provides that taxpayers who served in a specified overseas locality (for more than half a year) as a member of the ADF and were allotted for duty on the specified non-warlike operation, are entitled to claim a tax offset. Service in a locality for less than half the income year attracts a portion of the tax offset.
  
  Please note that the relevant service period should not relate to earnings that are specifically exempt from tax under section 23AD of the ITAA 1936 (this section deals with warlike operations). After 1 July 2001, the offset excludes any period of service for which an exemption from income tax applies under section 23AG of the Income Tax Assessment Act 1936 (‘ITAA 1936’) (see the relevant Tax Supplement for further information). All amounts that are exempt from tax under section 23AG (generally non-warlike) are required to be included in your tax return (See page 20 of TaxPack 2006 Supplement Question 19, Label N) to correctly determine your tax liability on your taxable income.
  
  The following localities, listed in Taxation Ruling TR 97/2, qualify under the ITAA 1936 for Overseas forces tax offset in the 2005-2006 tax year. Note that not all these localities may necessarily have had ADF personnel deployed in them during 2005-2006:
  
• Malaysia and its contiguous waters for a distance of 100 nautical miles seaward;
  
• The areas in Syria, the Arab Republic of Egypt, Jordan, Lebanon and Israel, including territories occupied by Israel in which Australian personnel are serving with the United Nations Truce Supervision Organisation;
  
• The waters of the Arabian Gulf, the Gulf of Oman and the Northern Arabian Sea , the Gulf of Aden and the Red Sea bounded to the south and east by coordinates, 25 00’ N -61 50’ E, 20 00’ - 61 50’ E, 11 50’ N – 51 17’ E;
  
• The Sinai;
  
• Cambodia;
  
• Mozambique;
  
• Area of operations comprising the political boundaries of Iraq, Kuwait and Saudi Arabia;
  
• The sea area comprising the Arabian Gulf, the Gulf of Oman and the northern Arabian Sea bounded by 61 degrees 50 minutes east longitude and 20 degrees north latitude, together with the ports contiguous to that sea area and the airfields and military facilities adjacent to those ports;
  
• Area comprising the political boundaries and airspace of the Federal Republic of Yugoslavia (including the province of Kosovo), Albania and the former Yugoslav Republic of Macedonia;
  
• Area comprising East Timor and the territorial sea of Indonesia adjacent to East Timor;
  
• Total land area, territorial waters and superjacent airspace within the internationally recognised boundaries of Israel, Jordan, Syria, Lebanon and Egypt;
  
• Areas of operations defined as comprising the Soloman Islands and its territorial seas;
  
• Area of operations defined as comprising Ethiopia and Eritrea;
  
• Area of operations defined as comprising Sierra Leone;
  
• Total land areas, territorial waters and superjacent airspace boundaries of the Solomon Islands;
  
• Total land areas, territorial waters and superjacent airspace boundaries of East Timor; and
  
• East Timor and the territorial sea of East Timor.

If, during the same income year, ADF members reside or serve in a zone area of Australia and in a specified overseas locality, both periods are taken into account in determining eligibility for the offset. As stated above, periods where the member earned exempt income do not count for overseas forces or zone tax offset. If members qualify for both a Zone offset and an Overseas Forces offset they may only claim for one of them. Members should claim the higher of the two offset amounts. See pages s 43-49 of TaxPack 2006 Supplement for information about how you can do this.

MEDICARE LEVY RELATED ITEMS

QM1 – Medicare levy reduction or exemption (pp 100-103)

The Medicare levy for 2005-2006 is 1.5% of taxable income and will apply as follows:

• Single ADF members without dependants are exempt from the Medicare levy.
  
• Married ADF member’s liability is as follows:

Working spouse (not an ADF member) — no children. If the spouse earns sufficient income and the spouse pays the full levy, the ADF member can claim an exemption from the standard Medicare levy of 1.5%, If not the member is subject to half of the Medicare levy of 1.5%.

Member with children and a working spouse. If the spouse is liable for the levy and contributes to the maintenance of the children, the ADF member is exempt from the Medicare levy. However, if the spouse did not contribute to the upkeep of a child, the ADF member will be liable for a half Medicare levy in respect of that child. Where the spouse lives with the children the ATO will accept they contribute to the maintenance of the child.

Members with children and/or a non-working spouse (who is not liable to pay the Medicare levy) are subject to a half Medicare levy.

Married ADF couples without children. These members continue to be exempt from the Medicare levy.

Married ADF couples with children. If both members contribute to the maintenance of their children, only one member is liable for the half levy. The other member is exempt from the Medicare levy. The couple decides who will be subject to the half Medicare levy. To qualify, the couple must enter into a “family agreement” stating the child is a dependant of the members. The agreement form is contained in TaxPack 2006 and must be retained for 5 years. Failure to complete and retain the agreement results in both spouses be liable to pay the full Medicare levy. Where only one member is maintaining the child, the election is not available. The member maintaining the child will be liable for the half Medicare levy.

A dependant of an ADF member, who is entitled to free medical treatment, whilst overseas because they are related to or associated with the ADF member is exempt from the Medicare levy. However, if the dependant remains in Australia then they are not entitled to the exemption and the member would have to pay the half Medicare levy.

Please Note: a Medicare levy exemption is not available to Reservists rendering part-time service as they are not eligible to free hospital and medical care provided by Defence Health Services. For queries, please contact the Defence Tax Management Office on 1800 806 053.

QM2 – Medicare levy surcharge (pp 104-107 )

A Medicare levy surcharge was introduced from 1 July 1997. Generally, higher income individuals and families will pay an extra 1% of their taxable income for the Medicare levy surcharge, unless they fall within an exemption category or have the required level of private patient hospital insurance.

ADF members without dependants will not be liable for the Medicare levy surcharge.

ADF members with dependants where their combined taxable income (including reportable fringe benefits) for Medicare Levy Surcharge purposes (see TaxPack 2006 page 104) of themselves and their spouse is in excess of $100,000, increasing by $1,500 for each dependant child after the first, will be liable for the Medicare levy surcharge if any of the dependants do not fall within an exemption category and they do not have adequate private patient hospital insurance. The exemption categories are set out at TaxPack 2006 at page 102.

For example:
A taxpayer has a spouse and 2 children. The spouse and children do not fall within an exemption category. None of the family members are covered by private health insurance for any part of the year. The combined taxable income (and reportable fringe benefits amount) of the taxpayer and the spouse is $115,000 ($57,500 each).
The combined taxable income threshold above, which the surcharge will apply, is $100,000 + 1 x 1,500 = $101,500. As the combined taxable income exceeds this amount, a surcharge of $575 ($57,500 x 1%) is payable by both the taxpayer and their spouse in addition to the normal Medicare levy obligations.
Where the combined taxable income exceeds the threshold the surcharge is not payable by an individual if their own taxable income was at or below $16,284.

SUPERANNUATION SURCHARGE

The superannuation surcharge was abolished from 1 July 2005.

FAMILY TAX BENEFIT (pp 71-74)

If you were a parent who returned to work for the first time after 1 July 2005:

After the birth of your child, or

after caring for a child who has come into your care

You may be entitled to the maximum rate of FTB Part B for the period that you were not at work during the year. Eligibility for this extra assistance will be determined after the end of the income year when FTB payments are reconciled. Starting a new job may be considered a return to work.

For further information refer to page 73 of TaxPack 2006.

YOUR TAX OBLIGATIONS
Individual taxpayers are required to lodge an income tax return if assessable income from any source was received during the year ended 30 June 2006 (refer to page 2 of TaxPack 2006).
When preparing the 2006 income tax return, ADF members should review TaxPack 2006 and TaxPack 2006 Supplement carefully and follow the appropriate instructions in order to complete their return correctly.
Retention of records

It is important to note that as a taxpayer, you are required by law to keep certain tax records for a period of 5 years in the event that the particular income tax year needs to be revisited for review or the ATO requires certain information at some later date.

For capital items on which you claim a capital allowance, you must keep records for the entire period over which you claim a capital allowance. Records must be kept for a further 5 years from the date of the last claim on the item.

Supporting documents and records of all the purchase costs of items such as shares or an investment property, should be kept for use in the calculation of capital gains or loss when the asset is sold. All records should be kept for 5 years from the year the sale was reported in your tax return.