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Ruling
Subject: Foreign income
Question and answer
Is your salary and wages exempt from tax in Australia for the period you were on sick leave, where that sick leave was converted from leave accrued from your deployment in Country X?
No.
This ruling applies for the following periods:
Year ended 30 June 2011
The scheme commenced on:
1 July 2012
Relevant facts and circumstances
You were the member of a disciplined force deployed to Country X.
Your scheduled deployment was for a period of 52 weeks.
You took leave at the end of your deployment that was accrued while you were in Country X.
This leave was later converted to sick leave when a compensation claim was accepted for a work-related injury.
You took the accrued leave from your Country X deployment at a later date.
Relevant legislative provisions:
Income Tax Assessment Act 1936 Section 23AG.
Reasons for decision
Section 23AG of the Income Tax Assessment Act 1936 (ITAA 1936) provides that where Australian resident individuals are engaged in certain kinds of foreign service for a continuous period of not less than 91 days, any earnings derived from that foreign service will be exempt from tax in Australia.
The types of foreign service earnings that are tax exempt include those derived from deployment outside Australia by the Australian government (or an authority thereof) as a member of a disciplined force. Deployment with the AFP is an example of this type of foreign service.
Although the period of foreign service must be continuous, some temporary absences from foreign service that are related to the service can be taken that will not constitute a break in the period of foreign service.
The Commissioner's view of temporary absences is contained in Taxation Determination TD 2012/8 Income tax: what types of temporary absences from foreign service form part of a continuous period of foreign service under section 23AG of the Income Tax Assessment Act 1936 (TD 2012/8).
Paragraph 1 of TD 2012/8 specifies that a period during which a person is engaged in foreign service for the purposes of section 23AG of ITAA 1936 includes a temporary absence from that service because of an accident or illness of the taxpayer. This is subject to the absence being both within the scheduled period of foreign service and in accordance with the terms and conditions of that foreign service (that is, the absence is permitted by the employer, whether in an employment contract or under a separate arrangement.
In addition, paragraph 59 of TD 2012/8 states that there is no limit to the period of temporary absence that can be treated as foreign service providing the leave is during the scheduled period of foreign service, and is allowed under the terms and conditions of that foreign service.
In your case, you were deployed for a scheduled period of 52 weeks.
You then commenced accrued leave at the end of this scheduled period, which was later determined to be a compensation claim, and thus converted to sick leave.
The view of the Commissioner in regard to the intent of the legislative provisions regarding foreign service is that for any sick leave to be included in the period of foreign service, the leave must be taken during the scheduled period of foreign service. However, it is clear that you commenced sick leave after your scheduled 52 week deployment period had concluded. Therefore the sick leave component of the salary you received is taxable income.
The fact that the leave was originally accrued leave from your deployment in Country X and then converted to sick leave does not change the fact that the leave is sick leave and therefore the salary for that period is taxable income.
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