What you need to know this year

The purpose of the ADF Income Tax Guide 2002-2003 (‘the Guide’) is to assist ADF members in preparing their 2002-2003 income tax returns.

The Guide is designed and intended to complement the Australian Taxation Office’s (ATO’s) TaxPack 2003 and TaxPack 2003 Supplement by highlighting the more specific tax issues that impact ADF members. It is recommended that members consult a tax adviser especially where income other than ADF salary and allowances has been received.

The Guide should not be used as a legal authority in the event of any dispute between an ADF member and the ATO. It 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 and/or Civilians have had an operational presence will be issued for the 2002-2003 income year. These Supplements must be read in conjunction with the ADF Income Tax Guide 2002-2003. These Tax Supplements will assist ADF members in identifying assessable income and allowable deductions for the 2002-2003 year that relate to service in foreign countries.

The Guide has been referenced to relevant questions in ATO’s TaxPack 2003 and TaxPack 2003 Supplement with relevant page number included in the headings.

Income tax changes for 2002-2003
Key changes for the 2002-2003 year are:

• Exempt income and fringe benefits for Iraq warlike service (see pp 9-10 of the Guide).
• Claiming the Baby Bonus (see pp 18-19 of the Guide).

Assessable income
ADF payment summary
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 wages
Amounts that are disclosed in the gross earnings column of the ADF member’s payment summary for the year ended June 30,2003, include salary, wages and commissions and bonuses. These amounts are assessable income and should be included in the member’s 2003 tax return under Question 1.

Tax withheld at Question 1
Only salary and wages from which tax was withheld and which are shown on the member’s payment summary should be included at 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.

If no income tax was withheld, the salary and wage income should be included at Question 2.

Assessable allowances, bonuses and benefits
Detailed below is a summary of fully assessable allowances, bonuses and benefits received by ADF members, and some of the deductions that may be claimed:

• 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.
• 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).
• Vehicle Allowance (VA) is payable to a member who has been authorised to use a privately owned vehicle when travelling within Australia: on duty, on leave travel, on removal, to duty during public transport stoppages, on recall outside normal working hours, or, in respect of a member who lives in, travel between the member’s normal living quarters and his or her usual place of duty.

VA is assessable income, except when paid on removal, and should be included in your tax return. A tax deduction is allowable for work-related travel expenses incurred (refer to Question D1) . Generally, no tax deduction is allowable in the case of travel between home and work.

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

Q2 – allowances, earnings, tips, director’s fees
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 member receives 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 – individual non-business should be included at Question 2. Please refer to TaxPack 2003 pages 15-16 for more information.

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 pages 13-14, as well as to Taxation Rulings TR 95/17 and TR 97/12 and Taxation Determination TD 1999/62.

Q3 – Lump sum payments
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 per cent (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, the amount is to be included as assessable income in the year it is received, as follows:

• 5 per cent 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 per cent.
• From August 18, 1993, all payments attributable to unused long service leave are included. They are be taxed at members’ marginal tax rates.

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 per cent (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
An eligible termination payments (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.
• Tax free component of bona fide redundancy payments and approved early retirement scheme payments. In 2002-2003 the tax-free limit is $5623 plus $2812 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 is dependent upon 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 TaxPack 2003 pages 18-21 or seek independent professional taxation advice.

A termination payments surcharge will be payable if:

• An ETP was paid to members by their employer.
• The member’s adjusted taxable income exceeded $90,527.

Please refer to TaxPack 2003 page 21 for more information. The surcharge assessment is sent after the income tax notice of assessment has been issued. This means that while you may have received a refund on your notice of assessment, you may still have a surcharge liability.

Q9 – Total reportable fringe benefits amounts
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 ADF 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 2002-2003 financial year if that member’s total taxable fringe benefits amount exceeds $1000 in the previous fringe benefits tax (FBT) year (April 1, 2002, to March 31, 2003).

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.
• Superannuation contributions surcharge.
• Termination payments surcharge.
• Deductions for superannuation contributions.
• Superannuation contributions tax offset.
• Tax offset for superannuation contributions on behalf of your spouse.
• Higher Education Contribution Scheme (HECS) and Postgraduate Education Loans Scheme (PELS) repayments.

Child support obligations (non-reportable fringe benefits may be considered by the Child Support Agency (CSA) when making an assessment (refer to CSA Policy Guidlelines 14/2000 or contact the CSA on 13 12 72 for further information)

The non-grossed up value of fringe benefits is used in determining 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.
Please refer to TaxPack 2003 page 28 for more information.

What comprises my reportable fringe benefits amount?
Issue of FBT statements: FBT statements were sent to members by the DTMO in May 2003 advising the expected amount to be disclosed on their payment summary 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 summary.

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. The DTMO can be contacted by e-mail at taxation.management@defence.gov.au or by telephone on the DTMO hotline on 1800 806 053.

Benefits provided to ADF personnel in Afghanistan, East Timor and/or Iraq:
Subject to specific conditions, benefits which are directly related to, or in respect of deployment of ADF personnel to the above countries are not subject to FBT.

Fringe benefits received by ADF personnel prior to deployment to Afghanistan, East Timor and/or Iraq are subject to FBT.

However, benefits provided to ADF personnel during and immediately after deployment in Iraq which are directly related to or in respect of their deployment are not subject to FBT. Further relevant information will be provided in a Tax Supplement to be issued by the DTMO in the near future.

Tax-exempt income
Exempt income is not included in your assessable income. Some common types of exempt income are listed on page 12 of the TaxPack 2003. 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 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 Allowance.
• Disturbance Allowance.
• Transfer Allowance.
• Deployment Allowance.
• Rations and quarters supplied without charge.
• Overseas Living Allowance.

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).

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 Ops Bastille, Citadel, Catalyst, Falconer and Slipper (refer to the relevant Tax Supplement issued by the DTMO).

For periods of operational service:

• War service leave is tax exempt even if taken as pay in lieu after return to Australia.
• 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 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.
• Reimbursement of travelling and meal expenses (not including Part-day travel allowance which is assessable income).

Note that these benefits may be subject to fringe benefits reporting requirements.

Non-taxable income
Examples of income that are generally not 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.

Benefits received through frequent flyer schemes or other consumer loyalty programs which arise as a result of employer-paid expenditure 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 which 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 2002-03 (NAT 2321-6.2003). 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 For more details, refer to page 36-37 of the ATO’s TaxPack 2003.

QD1 – Work-related car expenses
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 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.
• 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.

In the case considered in Taxation Ruling TR 95/17, the taxpayer was required to participate in regular touch football games as a part of his employment. The taxpayer would travel to the sporting ground directly from his barracks and was required to return there for formal dismissal upon completion of the game. He was considered to be “on duty” until being formally dismissed at the barracks. The costs of his travel were allowable deductions as they had the necessary connection to his work related activities and were not private in nature.

Methods for car expense deductions
There are four methods, which may be able to be used to calculate claims for the cost of such travel expenses. These are as follows:

• Cents per kilometre method.
• 12 per cent of original value method.
• One third of actual expenses method.
• Logbook method.

Each of the four methods has different rules and requires different documentation to be kept to substantiate the claim.

TaxPack 2003 pages 39-43 has 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 2002-2003 income year. These rates can be found on page 41 of TaxPack 2003.

QD2 – Work-related travel expenses
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 passengers.

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.

QD3 – Work-related uniform or protective clothing
Work Uniform
Expenses incurred for compulsory military uniform 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”.

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 resistantresitant clothing.
• Safety glasses.
• Sunscreen.
• Sunprotection clothing, such as sunhats, sunglasses etc.
• Steel capped boots.
• Overalls.
• Breathing masks.
• Helmets.
• Wet weather gear.

A deduction for wet weather gear is only allowable if the nature of the work environment makes it necessary for members to protect themselves or their clothing (e.g. wet weather gear worn when using chemicals at work).

The cost of protective sports footwear worn by members such as physical training instructors in special combat squads who derive their income by performing a range of regular strenuous physical activity is deductible.

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 TaxPack 2003 page 48 for details of how to claim home laundering expenditure.

QD4 – Work related self-education expenses
A deduction is allowable for self-education expenses if the education is for the direct use of the member’s current employment or is likely to lead to an increase in income from current employment. A deduction is not allowable if the education is designed to enable a member to get employment, to obtain new employment or to open up a new income-earning activity.

Self-education expenses are defined to be expenses, other than the HECSPELS 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. For detailed explanation of the deductibility of self-education expenses, refer to Taxation Ruling TR 98/9.

QD5 – Other work-related expenses
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 tax or Debits Tax charged on amounts withdrawn from accounts, where these amounts are used for purposes for which a work-related deduction is allowable. 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.

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 Depreciation” 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 that part of the decline in value. 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 2003.

There is also an option to pool equipment (known as low-value pool) costing less than $1000 and equipment written down to less than $1000 under the diminishing value method. A deduction for the decline in value of equipment in such a low-value pool is worked out by a single calculation using the diminishing value method and a 4-year effective life. For further information on claiming a deduction for a low-value pool, read question D6 in TaxPack 2003 and make your claim at item D6 on your tax return.

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 may 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).

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).

Extra Regimental Duties: expenses associated with Extra Regimental Duties which form part of assessable income 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 TaxPack 2003 page 53 for more information. If a taxpayer’s home is used as a place of business there may be CGT implications on the sale of their home. If this is the case 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.
  
• Work-related conference and seminar expenses.
  

Part-day travel allowance 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.

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 you claim for these items at question D5 of TaxPack 2003.

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.
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
Please refer to TaxPack 2003 page 61 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 that 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 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.
• 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.
• Relocation expenses.

Personal tax offsets
QT3 – Superannuation contributions, annuity and pension
This question has been divided into two parts in TaxPack 2003. Part A covers how to record your personal undeducted superannuation contributions and how to calculate the superannuation contributions tax offset. Part B shows you how to calculate the superannuation annuity or pension tax offset.

Personal undeducted superannuation contributions are those contributions made by ADF members into complying superannuation funds or retirement savings account (RSA) for which no income tax deduction has been claimed. Personal undeducted superannuation contributions do not include contributions made by an employer, made as part of a salary sacrifice, or contributions made on behalf of another person, for example a member’s spouse.

Contributors to DFRDB, MSBS or to a retirement savings account (RSA) may be eligible to claim a rebate of tax for their contributions. The rebate will apply to members whose sum of assessable income and reportable fringe benefits amounts is less than $31,000.

QT4 – 30 per cent Private Health Insurance
The private health insurance rebate is 30 per cent 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 cash or cheque rebate from Medicare or as a rebate in the taxpayer’s income tax return at the end of the year. A combination of all three of these options is also possible.

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.

However, members are still able to claim the 30 per cent rebate for premium payments made for private health cover.

QT5 – Baby bonus
What is it?
The baby bonus is a Commonwealth government initiative assisting families when they have an infant. Instructions on how to claim the baby bonus are detailed at page 90 of TaxPack 2003.

Who is it for?
If you had a baby or you gained legal responsibility of a child aged under five (for example, through adoption), after June 30, 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?
Many families 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). Some families will be entitled to a higher amount.

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 five. Most families will only ever claim for one child.

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 2002-2003, you need to obtain the 2003 baby bonus instructions and claim (ATO form number NAT 6580-6.2003), complete the claim and lodge it with your tax return.

If you are not required to lodge a tax return for 2002-2003, 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 2003 baby bonus instructions and 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 2003.

Please note that references to year are to income year, being July 1 to June 30. For example, the income year July 1, 2002, to June 30, 2003, is 2003.

QT7 – Zone or overseas forces
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 uncomfortable climate, 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 page s51 of the TaxPack Supplement.

To be eligible for the tax offset, the member must have resided or served in the area for more than 182 days of the 2002-2003 income year or for more than 182 days during the period July 1, 2001, to June 30, 2003, including one day in the 2002-2003 income year and where no tax offset was claimed in your 2001 tax return.

Members who lived in a zone for less than 183 days in 2002-2003 may still be eligible for tax offset if they meet the following conditions:

• The member lived in a zone area for a continuous period of up to five income years after July 1, 1997, but who has not resided in a zone for more than half of either the first or 2002-2003 of those income years.
• The member was unable to claim in the first year because he or she was there less than 183 days.
• The total of the days the member was there in the first year and 2002-2003 is 183 or more.

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.
• 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 TaxPack 2003 Supplement pages s45-s51 or consult your tax adviser.

Overseas forces tax offset
Section 79B of the 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 Income Tax Assessment Act 1936 (this section deals with warlike operations). After July 1, 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 s23AG (generally non-warlike) are required to be included in your tax return (See TaxPack 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 2002-2003 tax year. Note that not all these localities may necessarily have had ADF personnel deployed in them during 2002-2003.

• 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 comprising Bougainville and Buka Islands and the Papua New Guinea territorial waters surrounding those islands.
• Area comprising the political boundaries and airspace 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.
• Area of operations defined as the political boundaries and airspace of Iraq, Kuwait and Saudi Arabia.
• 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.

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 the TaxPack Supplement at pages 46-47 of for information about how you can do this.

Medicare levy-related items
QM1 – Medicare levy reduction or exemption
The Medicare levy for 2002-2003 is 1.5 per cent of taxable income and will apply as follows:

Single members without dependants are exempt from the Medicare levy.

Married member’s liability is as follows:

Working spouse (not an ADF member) – no children. If the spouse earns sufficient income to be liable for the levy, the ADF member can claim an exemption from the standard Medicare levy of 1.5 per cent and the spouse pays the full levy, otherwise the member is subject to half of the Medicare levy of 1.5 per cent.

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 2003 at page 97 and must be retained for five 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.

A limited Medicare levy exemption is available for members of the reserves rendering part-time service. With regard to continuous training, an exemption is granted for the number of days involved. For home training the following applies:

• Where a member attends a home training parade for a period of six hours or more in one day, the member is entitled to one day’s exemption.
• Where a member attends a home training parade for a period of less than six hours, the member is entitled to a proportion of one day’s exemption, viz three hours attendance equates to a half day’s exemption.

QM2 – Medicare levy surcharge
A Medicare Levy surcharge was introduced from July 1, 1997. Generally, higher income individuals and families will pay an extra 1 per cent 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 2003 page 99) of themselves and their spouse is in excess of $100,000, increasing by $1500 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 2003 at pages 96-97 .

For example:
A taxpayer has a spouse and two 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 per cent) 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 $15,062.

Superannuation Surcharge
A superannuation surcharge of up to 15 per cent applies to all surchargable contributions made by or on behalf of “higher income earners”. In 2002-2003, the full 15 per cent surcharge applies to members whose taxable income, reportable fringe benefits amount plus surchargable contributions is $109,924 or over, with the surcharge phasing in from $90,528 .

As the superannuation surcharge law is complex, it is recommended that you consult your tax adviser or the ATO. For both DFRDB and MSBS members, Comsuper should be contacted if further surcharge information is required.

The obligation to pay tax correctly

Individual taxpayers are required to lodge an income tax return if assessable income from any source was received during the year ended June 30, 2003 (refer TaxPack 2003 page 2).

When preparing the 2003 income tax return, ADF members should review TaxPack 2003 and TaxPack 2003 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 five 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, 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.

TaxPack lodgement or E-Tax
ADF members should lodge their returns at the nearest branch of the ATO on or before October 31, 2003. TaxPack 2003 page 106 has further details showing where returns should be lodged. If a Registered Tax Agent completes the return, different lodgement deadlines may apply.

ADF members may use the ATO’s secure electronic tax return preparation and lodgement software, e-tax 2003, instead of TaxPack 2003 to prepare and lodge their income tax returns. This Internet software program will take members through an on-screen interview, complete their tax returns and provide an estimate of any tax payable or refund applicable. Tax returns lodged via e-tax will generally be processed within 14 days. More information on e-tax can be found on the ATO’s Internet site at www.ato.gov.au

ADF members lodging their own returns may apply to the ATO for an extension of time if they are unable to lodge their returns by the due date. Reasons for the failure to lodge the return by the due date should be sent in writing to the branch of the ATO where you last lodged. An extension will not necessarily be granted if the reasons provided are not considered adequate.

Penalties may be imposed for late lodgement. ADF members on an overseas deployment may be able to obtain an extension to lodge their return where their circumstances make this necessary.

The ADF member is required to sign the return and any relevant declarations.

An income tax return is not considered lodged until it is correctly completed and received by the ATO.

If members lose their original payment summary, they should contact Defence Force Pay Accounting Centre (DEFPAC) direct to obtain a copy and other documentation that will need to be supplied to the ATO. If members consider there is an error in, or an omission from, their payment summary, they should contact DEFPAC and request a pro-forma to be issued to correct the appropriate information.

If a member considers that the “reportable fringe benefits amount” on their payment summary is incorrectly reported, they should contact the DTMO in the first instance. The DTMO email address is taxation.management@defence.gov.au

The members must state in their email to DTMO: their name, service number, amount on the payment summary and detailed reasons why they consider the amount is incorrect. The DTMO will investigate the query and inform the DEFPAC of any corrections so that they can issue a revised payment summary to the member.

The DTMO and DEFPAC aim to have a turnaround time of 15 working days. Therefore your co-operation and provision of timely detailed explanation would assist in expediting the process.

Who to contact for issues

Australian Taxation Office (Income). Phone: 13 28 61.Web: www.ato.gov.au

Australian Taxation Office (FBT). Phone: 13 72 86 Web: www.ato.gov.au

Child Support Agency Phone: 13 12 72 Web: www.csa.gov.au

Comsuper (DFRDB, MSBS) Phone: 13 23 66 Web: www.comsuper.gov.au

Defence Housing Authority. Phone: 1800 249 711 Web: www.dha.gov.au

Defence Pay Accounting Centre Phone 03 9282 3502
Web: http://defweb.cbr.defence.gov.au/dpedefpac

Defence Payroll Management Phone 02 626 63352
Web: http://defweb.cbr.defence.gov.au/dpedpmd

Defence Personnel Executive Phone: 02 626 53622
Web: http://defweb.cbr.defence.gov.au/dpe

Department of Veterans’ Affairs Phone: 133 254 Web: www.dva.gov.au

Discharge Phone: See website Web: http://defweb.cbr.defence.gov.au/dpectap

Family Assistance Office Phone: 13 61 50 Web: www.familyassist.gov.au

HECS/PELS Phone: 1800 020 108 Web: www.hecs.gov.au

Smart Salary (Salary Packaging) Phone: 02 9299 9111
Web: www.smartsalary.com.au or 1800 632 496. Please quote Employer Code: A100

How to contact the Defence Tax hotline

The DTMO provides an e-mail and telephone hotline service to assist ADF members with queries relating specifically to this Guide. Inquiries can be forwarded to the following e-mail address: taxation.management@defence.gov.au An electronic copy of this Guide can also be obtained via the Defweb at http://defweb.cbr.defence.gov.au/cfo/tax/adf/default.htm or the internet at http://www.defence.gov.au/cfo/

If you do not have access to intranet/Internet facilities, you can contact DTMO during business hours in Australia (AEST) on 1800 806 053 and we will provide you with a copy of this Guide. The DTMO does not provide personal taxation advice. If ADF members require advice on personal taxation matters they should contact their tax adviser.

• The ADF Income Tax Guide 2002-2003 has been prepared by DTMO and DPE, June 2003.

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