Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)Chapter 2 Exempting compensation for loss of defence remuneration
Outline of chapter
2.1 Schedule 2 to this bill amends the ITAA 1997 to exempt various payments of compensation to members of the ADF and Reserve Defence Forces.
Context of amendments
Compensation payments made to ADF members
2.2 Section 23AD of the ITAA 1936 authorises an exemption from income tax for the pay and allowances earned by members of the ADF on eligible duty with a specified organisation in a specified area outside Australia.
2.3 The exemption under section 23AD of the ITAA 1936 is available to ADF personnel deployed overseas where the Chief of the Defence Force issues a certificate in writing to the effect that the person is on eligible duty. The certificate will only be issued if the specified area is categorised as warlike. Warlike operations occur where the application of force is authorised to pursue specific military objectives and there is an expectation of casualties.
2.4 When ADF personnel are deployed in warlike operations they are eligible for a deployment allowance which is exempt from income tax under section 23AD of the ITAA 1936. If an ADF member is repatriated to Australia the deployment allowance ceases to be payable. Where the repatriation occurs due to injury, the ADF member is compensated under the Safety, Rehabilitation and Compensation Act 1988 for the loss of the deployment allowance. The lump sum compensation payment covers the period that the ADF member would have been deployed on warlike service were it not for being injured.
2.5 While the compensation is paid specifically for the loss of the deployment allowance, the compensation does not fall within the statutory meaning of the words 'pay and allowances'. Therefore, the compensation payments are not exempt from income tax by section 23AD of the ITAA 1936. The compensation payments are not made exempt from income tax by any other provision.
2.6 Therefore, the deployment allowance paid in respect of warlike operations to ADF members is exempt income, but the compensation paid to ADF members for the loss of the deployment allowance is assessable income.
Exemption of compensation received by Ex-Reserve Force personnel
2.7 The pay and allowances of members of the Reserve Defence Forces are exempt from income tax by section 51-5 of the ITAA 1997. A person who leaves the Reserve Defence Forces due to injury sustained whilst performing employment for one of the Reserve Forces is entitled to receive compensation for loss of Reserve Defence Force income.
2.8 However, the compensation payment is subject to income tax as compensation does not fall within the statutory meaning of the words 'pay and allowances'. The compensation payments are not made exempt from income tax by any other provision. Therefore, while the pay and allowances of a member of the ADF are exempt from income tax, the compensation payments are not exempt from income tax.
Summary of new law
Compensation payments made to ADF members
2.9 This measure inserts section 51-32 into the ITAA 1997 which provides for the income tax exemption of compensation payments for the loss of deployment allowance where an ADF member is repatriated to Australia due to injury on warlike service.
Exemption of compensation received by Ex-Reserve Force personnel
2.10 This measure inserts section 51-33 into the ITAA 1997 which provides for the income tax exemption of compensation payments for the loss of pay and/or allowances of a former member of the Reserve Defence Forces who resigned due to injury sustained while performing employment for one of the Reserve Defence Forces.
Detailed explanation of new law
Compensation payments made to ADF members
2.11 Schedule 2 amends the income tax law to exempt from income tax compensation paid to ADF members for the loss of deployment allowance where the ADF member is repatriated to Australia due to injury on warlike service.
2.12 For the compensation payment for the loss of deployment allowance to be exempt from income tax the deployment allowance must have been payable under a determination under the Defence Act 1903. The compensation must be paid under the Safety, Rehabilitation and Compensation Act 1988 in respect of an injury as defined under that Act and the loss of the payment of the deployment allowance must have resulted from the injury. The injury must have been suffered whilst serving in warlike service as specified by a certificate in force under paragraph 23AD(1)(a) of the ITAA 1936. [Schedule 2, item 4, section 51-32]
Exemption of compensation received by Ex-Reserve Force personnel
2.13 Schedule 2 amends the income tax law to exempt from income tax compensation paid to taxpayers who leave the Reserve Defence Forces due to injury sustained whilst performing employment for one of the Reserve Forces.
2.14 For the compensation payment to be exempt from income tax it must be paid under the Safety, Rehabilitation and Compensation Act 1988 in respect of an injury as defined under that Act. The injury must have occurred whilst the member of the Reserve Force was actually serving in that Reserve Force and the pay and allowances which were lost must have been payable for services performed in the Reserve Forces. The injury must have been the sole or dominant reason for the taxpayer resigning from the Reserve Force. If the member's injury was considered severe enough of itself to cause the member to resign, it would not matter if there were other reasons contributing to the taxpayer resigning. [Schedule 2, item 4, section 51-33]
2.15 The exemption from income tax of the compensation payment will not apply to a member of the Reserve Defence Forces where that member was on continuous full-time service. A member of the Reserve Defence Forces on continuous full-time service is treated, for income tax purposes, in the same way as full-time ADF members. [Schedule 2, item 4, paragraph 51-33(b)]
Application and transitional provisions
2.16 The amendments are to apply to the 1996-1997 and later years of income. [Schedule 2, item 5]