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Ruling

Subject: Payment of a retention benefit

Question and answer

Is the pay and allowances including a retention benefit payment you receive exempt from income tax in Australia under section 23AD of the Income Tax Assessment Act 1936 (ITAA 1936)?

Yes.

This ruling applies for the following periods:

Year ending 30 June 2013

The scheme commenced on:

1 July 2012

Relevant facts and circumstances

You are an Australian resident for taxation purposes.

You were on eligible duty as defined in section 23AD of the ITAA 1936 in overseas.

You received pay and allowances including a retention payment.

You accrued leave while on deployment.

For a period you were on eligible accrued leave as defined under section 23AD of the ITAA 1936.

You chose to be in Australia while taking your leave.

Relevant legislative provisions:

Income Tax Assessment Act 1997 subsection 6-5(2)

Income Tax Assessment Act 1997 subsection 6-15(2)

Income Tax Assessment Act 1997 Section 11-15

Income Tax Assessment Act 1936 Section 23AD

Income Tax Assessment Act 1936 Subsection 23AD(2)

Reasons for decision

Subsection 6-5(2) of the ITAA 1997 provides that the income of an Australian resident includes ordinary income derived from all sources, whether in or out of Australia, during the year of income.

A retention bonus is an additional reward payment derived by a taxpayer in the capacity as an employee (Dean & Anor v. Federal Commissioner of Taxation (1997) 78 FCR 140; (1997) 37 ATR 52; 97 ATC 4762 (Dean's Case)).

A retention payment paid by your employer is therefore ordinary income for the purposes of subsection 6-5(2) of the ITAA 1997.

Subsection 6-15(2) of the ITAA 1997 provides that if an amount is exempt income then it is not assessable income.

Section 11-15 of the ITAA 1997 lists those provisions dealing with income which may be exempt. Included in this list is section 23AD of the ITAA 1936 which deals with pay and allowances received by ADF members performing certain overseas duty.

Subsection 23AD(1) of the ITAA 1936 provides that the pay and allowances earned by a person serving as a member of the Defence Force are exempt from tax if:

Subsection 23AD(2) of the ITAA 1936 provides that the regulations may declare that duty with a specified organisation, in a specified area outside Australia and after a specified day, is eligible duty for the purposes of the exemption.

Pay and allowances

The retention benefit will fall for consideration under section 23AD of the ITAA 1936 if it falls within the meaning of the term 'pay and allowances'.

The term 'pay and allowances' is not defined in section 23AD of the ITAA 1936 or elsewhere, but it may reasonably be construed to refer to salary, wages, bonuses and allowances received by an ADF member in their capacity of an employee.

Dean's Case provides authority for the proposition that a retention bonus is salary and wages for tax purposes. In that case, it was decided that a retention bonus was 'in substance and reality' an additional reward for services provided, and was received by the taxpayer in their capacity as an employee. In addition, it was found that the retention bonus was 'principally for the labour' of the taxpayer and therefore were within the definition of 'salary or wages' for tax purposes.

As such, we accept that as a retention benefit is salary and wages, it falls within the term 'pay and allowances' for the purposes of section 23AD of the ITAA 1936.

Earned while certificate in force

A retention bonus is derived at the time it is received ((1958) 9 TBRD Case J20; 7 CTBR (NS) Case 130; and (1958) 9 TBRD Case J60; 8 CTBR (NS) Case 50). The fact that the receipt may have to be repaid if certain events subsequently occur does not affect the character of the receipt (Case A59 69 ATC 334; 15 CTBR (NS) Case 34).

Therefore, the retention benefit is earned by the taxpayer at the time it is received.

While it will usually be the case that section 23AD of the ITAA 1936 will apply to the pay and allowances earned by an ADF member from eligible duty, there is no requirement in section 23AD of the ITAA 1936 that the pay and allowances be connected to that eligible duty.

Rather, section 23AD of the ITAA 1936 only requires that the pay and allowances are earned by an ADF member while there is a certificate in place declaring that the member is on eligible duty.

At the time the taxpayer received the retention benefit, the relevant certificate was in place declaring that ADF members deployed overseas as part of the particular military operation were on eligible duty. Further, Regulation 7A of the Income Tax Regulations 1936 (the 1936 Regulations) had been amended to reflect the fact that duty with that overseas deployment was eligible duty for the purposes of subsection 23AD(2) of the ITAA 1936.

Therefore, the pay and allowances including the retention payment received by you will be exempt under section 23AD of the ITAA 1936 and will not be assessable under subsection 6-5(2) of the ITAA 1997.

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