The section 23AD exemption of the Income Tax Assessment Act 1936 applies to ADF members on warlike service during or after 2002.
Section 23AD exempts from tax the salary and allowances of members performing specified overseas duties. Members who have a certificate from the CDF stating that they are on eligible duty with a specified organisation in a specified area have an Australian pay and allowances tax exemption.
Note: A rebate may be available to members serving in a qualifying overseas locality under section 79B of the 1936 Act in respect of pay and allowances which are not tax-exempt under section 23AD.
Overseas forces rebate
Section 23AD of the Income Tax Assessment Act 1936
Rent, interest, dividends, certain capital gains or any other type of investment income that members may earn while on deployment will be subject to taxation. The exemption from tax applies only to the salary, allowances and bonuses paid to the member while on the deployment. An eligible termination payment (ETP) does not constitute salary and wages and is not exempt from income tax under section 23AD.
Members are issued with an 'allotment certificate' in writing by the CDF. The certificate should state that they are on eligible duty under section 23AD of the Income Tax Assessment Act 1936. The certificate should also specify the period and the area of operations. The certificate is used as proof to the Australian Taxation Office that the member is entitled to have their salary and allowances exempt from income tax.
An Australian Taxation Office Private Ruling to Defence dated 21 June 2000 in respect of members serving in East Timor may be used to outline some basic principles in respect of section 23AD and fringe benefits.
Benefits provided to members who have been issued an allotment certificate in respect of operational service in a specified section 23AD area which are directly related to, or in respect of their deployment are not subject to fringe benefits tax. Accommodation and other benefits, such as meals and clothing, provided immediately after their deployment are also exempt from fringe benefits tax.
Benefits provided to members unrelated to their deployment (for example, benefits such as a housing benefit provided to a member's spouse and dependants irrespective of their deployment) are subject to fringe benefits tax. Benefits provided to members prior to their deployment (for example while a member is on pre-deployment leave) are also subject to the normal fringe benefits tax rules.
However, an accommodation benefit provided prior to their deployment is a specifically exempt benefit under section 47(5) of the Fringe Benefits Tax Assessment Act 1986 (living away from home accommodation). Members' declarations are required.
Only compassionate travel relating to cases of serious illness and death may be exempt from fringe benefits tax.
See: Section 58LA of the Fringe Benefits Tax Assessment Act 1986
Unlike income subject to the section 23AG exemption, income subject to the section 23AD exemption is not taken into account by the ATO in calculating tax on other assessable income.
Members serving in a specified overseas locality for more than half the financial year [183 days] who are allotted for duty on specified non-warlike operations, or who die while on service, are entitled to a rebate. The rebate is $338 plus 50% of the 'base amount'. The base amount is the total of the rebates allowable in respect of any dependants.
If less than half of the income year is spent in qualifying overseas localities, the rebate is apportioned on a time basis.
See: Section 79B of the Income Tax Assessment Act 1936 (Overseas forces rebate)
The total period of service in qualifying overseas localities includes any period during which the member served in Zone A or Zone B. It does not include any period of service which entitles the member to an exemption under section 23AD. Section 23AD exempts from tax the salary and allowances of members performing specified overseas duties.
See: Eligible duty under section 23AD
If a member's service in qualifying overseas localities was less than 183 days in the relevant financial year, they are able to claim part of the rebate based on this formula.
Days served in an overseas locality/183 days x full allowable rebate
Members who qualify for both an overseas forces rebate under section 79B and a zone rebate can only claim the higher of those rebates.
For further information on preparing their income tax returns, members should refer to the ADF Income Tax Guides and the Australian Taxation Office TaxPack Supplement. To identify whether members qualify for the rebate, they should check their overseas service location.
Foreign earnings derived by an Australian resident taxpayer from at least 91 days' continuous employment in a foreign country are generally exempt from Australian income tax under section 23AG, provided certain other conditions are met.
See: Overseas employment income
After 1 July 2001, any period of service for which an exemption from Australian income tax applies under section 23AG is excluded from a member's period of service in qualifying overseas localities for section 79B rebate purposes. Subject to eligibility for the rebate, periods of overseas service by members prior to 1 July 2001 counted for both the section 23AG exemption and the section 79B rebate.
Section 23AG of the Income Tax Assessment Act 1936 grants an exemption from Australian income tax for members who meet all of the conditions listed below. This exemption includes any service on naval vessels within territorial waters of a foreign country (but may not extend to international territorial waters).
The member serves overseas for a continuous period of 91 days or more.
The member earns foreign employment income.
Examples: Salary or wages.
The member is an Australian resident for income tax purposes.
The section 23AG exemption is not available if the member's foreign employment income is exempt from income tax in the foreign country only because:
of a double tax agreement, or a law of the foreign country giving effect to the double tax agreement;
the foreign country does not tax employment income; or
of a number of other similar reasons.
Foreign employment income and related fringe benefits received from foreign employers by members who meet the requirements of section 23AG are exempt from tax in Australia.
Whether or not the section 23AG exemption applies to a member's foreign employment in a foreign country depends on the circumstances of duty in each country. Specific information in relation to such employment in a foreign country would be required.
Example: These are examples of information that might be needed to make an assessment.
When and in what capacity the member served in a particular country.
Whether the member served under the control of the ADF or another organisation.
Details of the relevant taxation arrangements of the particular country. This includes whether or not:
the foreign country taxes employment income;
there is a double tax agreement between Australia and the foreign country; and
Australia and the foreign country have signed an international agreement regarding the privileges and immunities of diplomats or consuls, or of persons connected with international organisations.
Note: As a general guide, if the member's foreign employment income is subject to income tax under the foreign country's laws and the member worked continuously in the foreign country for more than 91 days, the member's employment income is likely to be exempt from Australian income tax.
If the member's foreign employment income was exempt from tax in the foreign country because of a reason not listed in section 23AG (such as the Coalition Provisional Authority Orders outlining the Iraq Tax Strategy for 2004), the member's employment income may be exempt from tax in Australia, provided that the requisite foreign service period is satisfied.
Some double tax agreements specify a longer foreign service period (such as 183 days) than the 91 days specified in section 23AG before foreign income may be exempt in Australia.
Income subject to the section 23AG exemption is taken into account by the ATO in calculating tax on other assessable income.
A member on a long-term posting overseas is fully exempt from the Medicare levy if both these conditions are met.
The member is entitled to free medical treatment for the whole of the relevant financial year.
The member meets any of these conditions.
They do not have any dependants (spouse, including de facto, and children under 16 years of age or under 25 years of age receiving full-time education at school or university and with separate net income of less than $1,786).
They have dependants who are also entitled to free medical treatment in their own right.
They have dependants who are all required to pay the Medicare levy on their separate income.
They have a spouse who is liable to pay the Medicare levy and the spouse contributes to maintenance of the dependant.
If a member and their spouse are both members, a child may be treated as a dependant of only one spouse. In this case, a family agreement may be entered into whereby one member will be exempt from the Medicare levy and the other spouse liable for one-half of the levy.
If a member is not exempt from the Medicare levy, they are required to pay one-half of the levy.
Special Medicare levy rules apply if the parents of a child are living separately and both are eligible for Family Tax Benefit Part A.
See: Division 4, Medicare levy
See also: Sections 251T (a) and 251U (1) (a) of the Income Tax Assessment Act 1936
APS employees who perform operational support overseas may be eligible for some taxation exemptions. They should seek advice from the Defence Tax Management Office.
See also: Overseas employment income