ATO Interpretative Decision

ATO ID 2010/3 (Withdrawn)

Income Tax

• This ATO ID is withdrawn as it is superseded by Taxation Determination TD 2012/8.
  This document incorporates revisions made since original publication. View its history and amending notices, if applicable.

Issue

Does the taking of maternity leave bring about a discontinuity in a period of foreign service under section 23AG of the Income Tax Assessment Act 1936 (ITAA 1936)?

Decision

Yes, the taking of maternity leave brings about a discontinuity in a period of foreign service under section 23AG of the ITAA 1936.

Facts

The taxpayer is an Australian resident for income tax purposes.

The taxpayer works as an employee of AusAID and is deployed to a particular foreign country.

The foreign service is directly attributable to the delivery of Australian official development assistance by the person's employer within paragraph 23AG(1AA)(a) of the ITAA 1936.

The taxpayer's foreign earnings are exempt from income tax in a foreign country for a reason other than only because of one or more of those listed in subsection 23AG(2) of the ITAA 1936. Therefore, subsection 23AG(2) does not apply to deny an exemption to the taxpayer (see paragraphs 1.10 -1.12 of the Explanatory Memorandum which accompanied the Tax Laws Amendment (2009 Budget Measures No. 1) Act 2009).

During the period of deployment the taxpayer is absent from work on maternity leave.

The Maternity Leave (Commonwealth Employees) Act 1973 entitles relevant employees to up to 12 weeks paid leave, generally 6 weeks before the expected date of birth and continuing 6 weeks after birth. Under the 'Australian Agency for International Development Collective Agreement 2006 to 2009', paragraph 54 provides for an additional one week to the 12 weeks mandatory absence for AusAID employees. This agreement also allows for a maximum of 104 weeks leave of absence (including the period of mandatory absence, any period of paid or unpaid leave and public holidays) for each confinement.

Reasons for Decision

Subsection 23AG(1) of the ITAA 1936 provides that, where a resident individual taxpayer is engaged in foreign service for a continuous period of not less than 91 days, any foreign earnings derived by the taxpayer from this foreign service will be exempt from Australian tax.

Subsection 23AG(7) of the ITAA 1936 (the definitions section) defines 'foreign service' to be 'service in a foreign country as the holder of an office or in the capacity of an employee'. Consistently with the decision of the Federal Court in Overseas Aircrew Basing Limited v. Federal Commissioner of Taxation [2009] FCA 7; (2009) 175 FCR 449; 2009 ATC 20-089 (Overseas Aircrew), this service involves taxpayers 'actually on the job' which is performed in a particular foreign country (see paragraph 94 of the decision).

Ordinary meaning of continuous foreign service - subsection 23AG(1)

Subsection 23AG(7) of the ITAA 1936 does not, however, define what constitutes a period of 'continuous' foreign service. The decision of the Administrative Appeals Tribunal in McCabe v. FC of T 2008 ATC 10-055; [2008] AATA 904 (McCabe) notes that the word 'continuous' in subsection 23AG(1) is not defined in subsection 23AG(7) and will accordingly bear its ordinary meaning. In McCabe, the Tribunal relied on the following definition of the word in The Macquarie Dictionary (see paragraphs 30 and 31 of the decision):

1.

having the parts in immediate connection, unbroken.

2.

uninterrupted in time; without cessation.

The taking of maternity leave by the taxpayer is an interruption or break in service during which the taxpayer is not 'actually on the job' in a particular foreign country. This interruption or break accordingly brings about a discontinuity in a period of foreign service by the taxpayer under subsection 23AG(1) of the ITAA 1936.

Extended meaning of engaged in foreign service - subsection 23AG(6)

Subsection 23AG(6) of the ITAA 1936 provides that for the purposes of section 23AG of the ITAA 1936, a period during which a person is engaged in foreign service includes any period during which the person is, in accordance with the terms and conditions of that service:

(a)

absent on recreation leave, other than:

(i)

leave wholly or partly attributable to a period of service or employment other than that foreign service;

(ii)

long service leave, furlough, extended leave or leave of a similar kind (however described): or

(iii)

leave without pay or on reduced pay; or

(b)

absent from work because of accident or illness.

This subsection accordingly extends the meaning of what constitutes continuous foreign service by deeming certain temporary absences from a period of foreign service to specifically form a part, and so preserve the continuity, of foreign service - absences that would otherwise constitute a break in a continuous period of foreign service.

As an absence from work due to the taking of maternity leave is not expressly covered in subsection 23AG(6) of the ITAA 1936, it will be necessary to consider whether it can nevertheless be classified as an absence on recreation leave or one due to accident or illness.

Absent on recreation leave

Paragraph 23AG(6)(a) of the ITAA 1936 does not apply to the taxpayer. This is because maternity leave cannot be categorised as recreation leave.

The expression 'recreation leave' is not defined in subsection 23AG(7) of the ITAA 1936 and so is to be given its ordinary meaning. In The Macquarie Dictionary, the word 'recreation' is relevantly defined as:

1.

refreshment by means of some pastime, agreeable exercise, or the like.

2.

a pastime, diversion, exercise, or other resource affording relaxation and enjoyment.

So in general terms, 'recreation leave' may be described as a kind of paid leave of absence from work granted to employees for the purposes of rest, enjoyment and reinvigoration.

Maternity leave is a distinct category of leave with a different rationale. The definition of 'maternity leave' given in The Macquarie Dictionary is 'time off from one's job, usually with pay, in order to have a baby'. It is therefore a type of leave granted to a female employee prior to childbirth, to give birth and subsequently to care for an infant (consistently with entitlements under the Maternity Leave (Commonwealth Employees) Act 1973). Its evident object is to secure and promote the health and wellbeing of both mother and child. Additionally, it does not accrue in the same way as recreation leave and is not paid out on resignation or retirement.

Absent from work because of accident or illness

Paragraph 23AG(6)(b) of the ITAA 1936 also does not apply to the taxpayer. This is so because an absence from work on maternity leave cannot be described as an absence 'because of' accident or illness. The words 'because of' imply a causal connection - that the absence from work is occasioned by accident or illness (see Human Rights and Equal Opportunity Commission v. Mount Isa Mines Ltd, (1993) 46 FCR 301 at 321-322).

The words 'accident' and 'illness' are not defined in subsection 23AG(7) of the ITAA 1936 and so are to be given their ordinary meanings.

In paragraph 5 of Taxation Ruling IT 2359, the following discussion of the ordinary meaning of the term 'illness' by the Board of Taxation No. 3 in Case Q21, 83 ATC 77; (1983) 26 CTBR (NS) 570 is adopted in the context of the application of subsection 159P(4) of the ITAA 1936:

'Illness' is not defined in the Act. However, I do not accept that it is a term of art. Adopting a purposive construction, I find the term includes any condition marked by a pronounced deviation from the normal healthy state. If this is the correct view, 'illness' must include any disorder of body, function or systems.

The Macquarie Dictionary relevantly defines 'illness' as follows:

1.

a state of bad health; sickness.

Furthermore, it relevantly defines 'accident' as:

1.

an undesirable or unfortunate happening; casualty; mishap.

An absence from work on maternity leave cannot be described as an absence attributable to ill health or mishap. In the case of maternity leave, the absence is occasioned by something else - the last stages of pregnancy (typically the six weeks preceding childbirth) and subsequent childbirth. They trigger the entitlement to maternity leave and bring about the absence from work. The last stages of pregnancy or childbirth cannot of themselves be characterised as states of ill health or casualty.

Furthermore, the decision of the Federal Court in Overseas Aircrew proceeds on the assumption that paragraph 23AG(6)(b) of the ITAA 1936 is directed at absences from work on 'sick leave' (see paragraphs 52, 55 and 58 of the decision). This assumption is also reflected in paragraph 9 of TR 96/15 which notes that subsection 23AG(6) is concerned with temporary absences on 'recreation leave wholly attributable to the period of foreign service (other than, for example, long service leave, leave without pay, furlough and extended leave) and sick leave'.

Additionally, as the legislature enacted the Maternity Leave (Commonwealth Employees) Act 1973 before it enacted 23AG of the ITAA 1936 (which was enacted in 1986), it can be presumed that it was aware of the existence of maternity leave and could have made express provision for it as a category of leave preserving the continuity of foreign service in subsection 23AG(6) of the ITAA 1936 if it wished to do this.

Therefore the period during which the taxpayer is on maternity leave does not come within the extended meaning of continuous foreign service in subsection 23AG(6) of the ITAA 1936 and so will constitute a break in foreign service under section 23AG of the ITAA 1936.

Year of income:  Year ended 30 June 2010

Legislative References:
Income Tax Assessment Act 1936
   section 23AG
   subsection 23AG(1)
   paragraph 23AG(1AA)(a)
   subsection 23AG(2)
   subsection 23AG(6)
   paragraph 23AG(6)(a)
   paragraph 23AG(6)(b)
   subsection 23AG(7)
   subsection 159P(4)

Case References:
Human Rights and Equal Opportunity Commission v Mount Isa Mines Ltd
   46 FCR 301

Related Public Rulings (including Determinations)
Taxation Ruling IT 2359
Taxation Ruling TR 96/15

Other References:
The Macquarie Dictionary

Keywords
International CoE
International tax
Foreign income
Foreign salary & wages
Exempt income

Business Line:  International Centre of Expertise

Date of publication:  8 January 2010

ISSN: 1445-2782