INTRODUCTION

The purpose of the Australian Defence Force (ADF) Income Tax Guide 2000-2001 is to assist ADF members in preparing their 2000-2001 income tax returns. The Guide is designed to complement the Australian Taxation Office's (ATO's) TaxPack 2001 and TaxPack 2001 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 does not replace the Income Tax Legislation or any Income Tax Ruling or Determination issued by the ATO. An East Timor Supplement to the ADF Income Tax Guide 2000-2001 will be issued for the 2000-2001 income year when the ATO has provided Defence with a response to questions raised. The Supplement will assist ADF members in identifying assessable income and allowable deductions for the 2000-2001 year which relate to service in East Timor. The Supplement should be used in conjunction with this Guide. The Guide has been referenced to relevant questions in ATO's TaxPack 2001 and TaxPack 2001 Supplement. The page references were provided by the ATO. New terminology As part of the Australian Tax System Reform, new terminology has replaced several familiar terms. More specifically, the terms "Group Certificate" and "Rebate" have been replaced throughout this Guide by the terms "Payment Summary" and "Tax Offsets" respectively. The Income Tax Assessment Act 1997 (ITAA 1997) and the Income Tax Assessment Act 1936 (ITAA 1936) are complex pieces of legislation and consequently the Guide does not cover all possible taxation issues or circumstances of individual ADF members.

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.

Question 1 - Salary or wages

Amounts that are disclosed in the gross earnings column of the ADF member's payment summary for the year ended 30 June 2001 include salary, wages and commissions and bonuses. These amounts are assessable income and should be included in the member's 2001 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 commonly received by ADF members.

• MSBS Retention Benefit.

• Air Traffic Controller's Retention Bonus.

• Isolated Establishment Allowance (IEA) has been assessable income from 1 July 1989 and when received through the pay system. The value of this allowance has been included in gross earnings in column 1 of the payment summary. Members who have continued to receive IEA through their cash accounts after 1 July 1998 should have maintained records of amounts received for inclusion in their income tax return.

• 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, travels 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. Generally, no tax deduction is allowable in the case of travel between home and work.

• 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.

• 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.

• Special Action Forces Allowance is included in assessable income. It may be possible to claim deductions for self-education expenditure or fitness expenditure (for more information refer to the Other Work Related Expenses section of the Guide).

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.
• Unpredictable Explosives Allowance.

Question 2 - Allowances, earnings, tips, director's fees etc

Allowances received in relation to overtime meal expenses, domestic travel expenses and overseas travel expenses are fully assessable and should be included at this item. If an allowance is received and the amount of the claim for expenses incurred is no more than the reasonable amount, substantiation is not required. If the deduction claimed is more than the reasonable amount, the whole claim must be substantiated, not just the excess over the reasonable amount. Taxation Ruling TR 95/17 (16).

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 2001 pages 13-14 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 the allowable deductions section of the Guide as well as to Taxation Rulings TR 95/17, TR 97/12 and Taxation Determination TD 1999/62.

Question 3 - 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 was made before 18 August 1993, or is in respect of unused annual leave and associated bonus or other payment related to that leave, that accrued in respect of service before 18 August 1993.

The maximum amount of tax payable within the above exception is 30% (plus Medicare levy or 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% of the amount received in respect of unused long service annual leave that accrued before 16 August 1978. It is taxed at members' marginal tax rates.

• The whole amount received from service attributable to the period from 16 August 1978 to 17 August 1993 is included in full. It is taxed at marginal rates subject to a maximum rate of 30%.

• From 18 August 1993 all payments attributable to unused long service leave are included. They are be taxed at members' marginal 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 17 August 1993 will be subject to the concessional maximum 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.

Question 4 - Eligible termination payments

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

• Unused leave entitlements.

• Pensions or annuity.

• Tax free component of bona fide redundancy payments and approved early retirement scheme payments. In 2000-2001 the tax-free limit is $5,062 plus $2,531 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 and it is strongly recommended that members who have received an ETP should refer to TaxPack 2001 pages 16-20 or seek professional taxation advice.

A termination payments surcharge will be payable if:

• an ETP was paid to members by their employer; and
• the member's adjusted taxable income exceeded $81,493.

Please refer to TaxPack 2001 page 20 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.

Question 9 - 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 2000-2001 financial year if that member's total taxable fringe benefits amount exceeds $1,000 in the current fringe benefits tax (FBT) year (1 April 2000 to 31 March 2001).

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:

• 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) repayments.
• child support obligations.

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 2001 page 27 for more information.

What is new in reportable fringe benefits for 2000-2001?

During the past FBT year (1 April 2000 to 31 March 2001) there have been several successful private tax rulings with the ATO and submissions to Treasury that have resulted in either the exemption of benefits from fringe benefits tax or the exclusion of benefits from the reporting requirements.

The most significant has been the FBT exemption of benefits provided to members while serving in East Timor. While benefits that would have been received by a member irrespective of their deployment to East Timor are still subject to FBT and FBT reporting, any benefits provided to members whilst in East Timor which are directly related to their deployment are not subject to FBT. In addition, accommodation and other benefits such as meals and clothing, provided immediately after their deployment would be exempt from FBT and FBT reporting.

Defence also obtained an exclusion from the FBT reporting requirement of many types of local removals. Only two types of local removals will still be reported: a local removal to a member's own home; or a local removal from a subsidised private rental residence to another subsidised private rental residence where the removal occurs after 12 months of a member's commencement of duties in a new locality.

The Defence Tax Management Office (DTMO), part of the Chief Finance Officer Group, is responsible for the calculation and reporting of fringe benefits on payment summaries. Any queries should be directed to DTMO in the first instance. The DTMO hotline and email address is detailed under "Defence Hotline" section.

TAX EXEMPT INCOME

Exempt income is not included in your assessable income. Some common types of exempt income are listed on page 10 of the TaxPack 2001. 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.

Benefits or allowances

The provisions of the ITAA exempt the following benefits or allowances from income tax:

• 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.

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.

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 the United Nations Assistance Mission in East Timor (UNAMET), the United Nations International Force East Timor (INTERFET) or the United Nations Transitional Administration in East Timor (UNTAET) (Refer to the East Timor Supplement).

For periods of operational service:

• war service leave is tax exempt even if taken as pay in lieu after return to Australia; and
  
• pay related to recreation leave accrued while serving in an operational area is also tax exempt.

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.
  
• In port allowance.
  
• Pet relocation allowance.
  
• Retention of lodging allowance.
  
• Temporary accommodation allowance.
  
• Temporary rental allowance.
  
• Reimbursement of travelling and meal expenses (not including Part-day travel allowance which is assessable income).

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. 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 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) which 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 2001.


Question D1 - Work related car expenses

A deduction for car transport costs is allowable if a member uses his or her car when travel is between two unrelated places of employment; for example, a 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 for work as distinct from travelling to work from his or her home.

The following factors may indicate that a member is travelling for 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; and

• 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, having the necessary connection to his work related activities and not being 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:

• A cents per kilometre basis.
  
• 12 % of original cost.
  
• One third of actual expenses.
  
• Logbook method.

Each of the four methods has different rules and requires different documentation to be kept to substantiate the claim. TaxPack 2001 pages 38-44 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 2000-2001 income year. These rates can be found on page 41 of TaxPack 2001.

Question D2 - 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.

Question D3 - Work related uniform or protective clothing

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:

• Safety glasses.

• 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 and drill shirts are not considered protective. The cost of these items are private 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 2001 page 49 for details of how to claim home laundering expenditure.

Question D4 - 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 HECS, 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 Rulings TR 98/9 and TR 92/8.

Question D5 - 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).

• Financial Institutions Duty charged on amounts deposited into a Bank or Building Society account, where these amounts form part of a taxpayer's assessable income (e.g. salary, wages, allowances from ADF) and Debits Tax charged on amounts withdrawn from such 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).

• Depreciation: in view of the changes made to the depreciation legislation during the last financial year, ADF members are advised to refer to the ATO's booklet "Guide To Depreciation".

• Books: depreciation of books forming part of a professional library may be allowable provided the content of the books is directly relevant to the duties performed.

• Computers and computer software: a deduction is allowed for depreciation of 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.

• Special Watches: members can claim repair costs and depreciation of the cost of special watches with special characteristics such as stopwatches used for work related purposes.

• 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 2001 page 54 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 is 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 are not supplied or replaced by the ADF.

• 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 or for depreciation on the purchase price 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 is not allowable for the cost of obtaining a silent telephone number.

Question D9 - Cost of managing tax affairs

Please refer to TaxPack 2001 page 61 for detail on how to claim expenses relating to managing your own tax affairs or complying with legal obligations relating to another person's tax affairs.

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:

• 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.

• Re location expenses.

PERSONAL TAX OFFSETS

Question T3 - Superannuation contributions, annuity and pension

This question has been divided into two parts in TaxPack 2001. 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 assessable income (total income including reportable fringe benefits before deductions) is less than $31,000.

Question T4 - 30% Private Health Insurance

The private health insurance rebate is 30% of the premium paid to a registered health fund for appropriate health private insurance cover from 1 January 2000. 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% rebate for premium payments made for private health cover.

Question T6 - Zone and overseas forces

Zone tax offset

ADF members living or serving in certain parts of Australia are entitled to a zone rebate. The rebate 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 rebate: 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 rebate.

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 s52 of the TaxPack Supplement.

To be eligible for the rebate, the member must have resided or served in the area for more than one-half of the 2000-2001 income year or for more than 182 days during the period 1 July 1999 to 30 June 2001, including one day in the 2000-2001 income year and where no rebate was claimed in your 2000 tax return.

Members who lived in a zone for less than 183 days in 2000-2001 may still be eligible for a rebate if they meet the following conditions:

• the member lived in a zone area for a continuous period of up to five income years after 1 July 1995, but who has not resided in a zone for more than half of either the first or 2000-2001 of those income years;

• the member was unable to claim in the first year because he or she was there less than 183 days; and

• the total of the days the member was there in the first year and 2000-2001 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; 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 rebates please refer to TaxPack 2001 Supplement page s46 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 rebate. Service in a locality for less than half the income year attracts a portion of the rebate.

The following localities listed in Taxation Ruling TR 97/2 qualify under the ITAA 1936 for Overseas forces tax offset in the 2000-2001 tax year. Note that not all these localities may necessarily have had ADF personnel deployed in them during 2000-2001.

• 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 countries of Bahrain, Iraq, Kuwait, Oman, Qatar, Saudi Arabia, the United Arab Emirates and Turkey south of latitude 38 degrees north.

• 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 parts contiguous with the sea area and the airfields and military facilities adjacent to these ports (Operation DAMASK).

• The Sinai.

• Mozambique.

• Area comprising Bougainville and Buka Islands and the Papua New Guinea territorial waters surrounding these islands (Operation BEL ISI).

• All sea, airspace and land north and west from 5 degrees 00 minutes South 68 degrees 00 minutes East and encompassing the outer boundaries of Pakistan, Afghanistan, Iran, Iraq, Jordan, Egypt, Sudan and Kenya (Operation POLLARD).

• Area comprising East Timor and the territorial sea of Indonesia adjacent to East Timor from 6 September 2000 to 19 September 2000 (0peration SPITFIRE).

• As from 28 February 1999- the area comprising the internationally recognised territory of the Federal Republic of Yugoslavia, Albania and the former Yugoslav republic of Macedonia.

• As from 4 November 2000-the area comprising the Soloman Islands and its territorial seas.

• As from 15 January 2001- the area comprising the internationally recognised territories of Ethiopia, Eritrea and 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 rebate. Periods of operational service are not taken into account. If members qualify for both a Zone rebate and an Overseas Forces rebate they may only claim for one of them. Members should claim the higher of the two rebate amounts.

MEDICARE LEVY RELATED ITEMS

Question M1 - Medicare levy reduction or exemption

The Medicare levy for 2000-2001 is 1.5% 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% and the spouse pays the full levy otherwise 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.
  
  Members with children and/or a non-working spouse 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 2001 page 94 and must be retained for 5 years. Failure to complete and retain the agreement causes both spouses 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 would not be 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 6 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 6 hours, the member is entitled to a proportion of one day's exemption, viz 3 hours attendance equates to a half day's exemption.

Question M2 - Medicare levy surcharge

A Medicare Levy surcharge was introduced effective 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 the combined taxable income (including reportable fringe benefits) for Medicare Levy Surcharge purposes (see TaxPack 2001 page 97) 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 private patient hospital insurance. The exemption categories are set out at TaxPack 2001 page 92.

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 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 is below $13,551.

Superannuation Surcharge

A superannuation surcharge of up to 15% applies to all surchargable contributions made by or on behalf of "higher income earners". In 2000-2001, the full 15% surcharge applies to members whose taxable income, reportable fringe benefits amount plus surchargable contributions is $98,955 or over, with the surcharge phasing in from $81,493 .

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.

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 2001 (refer TaxPack 2001 page 2).

When preparing the 2001 income tax return, ADF members should review TaxPack 2001 and TaxPack 2001 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 retain a copy of the income tax return and certain other information 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 depreciation expenses, you must keep records for the entire period over which you depreciate an item. 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 31 October 2001. TaxPack 2001 page 130 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 2001, instead of TaxPack 2001 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 be processed within 14 days. More information on e-tax can be found on the ATO's Internet site 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. Penalties may be imposed for late lodgement. ADF members in 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 regarding 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 the 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 cooperation and provision of timely detailed explanation would assist in expediting the process.

DEFENCE HOTLINE

The DTMO will be providing a hotline service to assist ADF members with queries specifically relating to this Guide. The service is not intended to provide free personal taxation advice. If members require advice on personal taxation matters, they should contact their tax adviser. The hotline will be operated from Canberra for the months of July, August and September 2001 on working days between 0900 hrs and 1100 hrs (KILO) on 1800 806 053 or send inquiries to the following email address: taxation.management@defence.gov.au

The Australian Defence Force Income Tax Guide 2000-2001 has been prepared by the Defence Tax Management Office in consultation with the Australian Taxation Office and the Defence Personnel Executive.