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Authorisation Number: 1011763773581

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Ruling

Subject: Foreign income

Is your salary and allowances from employment on a posting to Country X, exempt from tax in Australian under section 23AG of the Income Tax Assessment Act 1936?

Answer

Yes.

This ruling applies for the following period

Income year ending 30 June 2012

Relevant facts

You are a member of the Australian Defence Force (ADF).

You will be serving with the Department of Defence in a posting to Country X for one year.

You are an Australian resident for income tax purposes and you will remain an Australian resident during this posting.

You expect this period of service to be a continuous service period greater than 91 days.

You will be subject to the ADF command structure and rules of conduct of the ADF whilst you are on this posting.

Australian does not have a tax treaty with Country X.

Your income will be subject to Country X tax laws.

Relevant legislative provisions

Income Tax Assessment Act 1936 Subsection 23AG(1)

Income Tax Assessment Act 1936 Subsection 23AG(1AA)

Income Tax Assessment Act 1936 Subsection 23AG(2)

Income Tax Assessment Act 1936 paragraph 23AG(1AA)(d)

Income Tax Assessment Act 1936 paragraph 23AG(2)(a)

Income Tax Assessment Act 1936 paragraph 23AG(2)(b)

Income Tax Assessment Act 1936 paragraph 23AG(2)(c)

Income Tax Assessment Act 1936 paragraph 23AG(2)(d)

Income Tax Assessment Act 1936 paragraph 23AG(2)(e)

Income Tax Assessment Act 1936 paragraph 23AG(2)(f)

Income Tax Assessment Act 1936 paragraph 23AG(2)(g)

Reasons for decision

Subsection 23AG(1) of the Income Tax Assessment Act 1936 (ITAA 1936) provides that, where Australian resident individuals are engaged in foreign service for a continuous period of not less than 91 days, foreign earnings derived from this foreign service are exempt from Australian tax. However, new subsection 23AG(1AA) of the ITAA 1936, which took effect from 1 July 2009, provides that those foreign earnings will not be exempt under section 23AG of the ITAA 1936 unless the continuous period of foreign service is directly attributable to, amongst other things, the individual's deployment outside Australia as a member of a disciplined force.

Foreign deployment as a member of a disciplined force

Specifically, subsection 23AG(1AA) of the ITAA 1936 relevantly states:

However, those foreign earnings are not exempt from tax under this section unless the continuous period of foreign service is directly attributable to any of the following:

d) the person's deployment outside Australia as a member of a disciplined force by:

(i) the Commonwealth, a State or a Territory; or

(ii) an authority of the Commonwealth, a State or a Territory

The expression 'disciplined force' is not defined in the ITAA 1936 or in the ITAA 1997. However, the Explanatory Memorandum (EM) which accompanied Tax Laws Amendment (2009 Budget Measures No. 1) Bill 2009 introducing paragraph 23AG(1AA)(d) of the ITAA 1936 provides some guidance on this (see subparagraph 15AB(1)(b)(i) and paragraph 15AB(2)(e) of the Acts Interpretation Act 1901 ). It relevantly states:

Foreign deployment as a member of a disciplined force

1.31 A person's foreign earnings will be eligible for exemption if the foreign service is directly attributable to that person's deployment outside Australia as a member of a disciplined force by an Australian government, or an authority thereof. A disciplined force is intended to refer to a defence force, including a peacekeeping force, and a police force.

1.32 In a defence force context, the exemption would apply to a person's deployment outside Australia as part of a non-warlike operation [Schedule 1, item 1, paragraph 23AG(1AA)(d)] .

The Second Reading Speech to Tax Laws Amendment (2009 Budget Measures No. 1) Bill 2009 in the House of Representatives provides some additional guidance (see subparagraph 15AB(1)(b)(i) and paragraph 15AB(2)(f) of the Acts Interpretation Act 1901 ). In this speech, the Treasurer relevantly stated:

From 1 July 2009, an exemption will apply to income earned as an aid worker, a charitable worker or under certain types of government employment such as a defence or police deployment. It will also apply to income earned as prescribed under regulations.

Some assistance is also afforded by The Macquarie Dictionary, which relevantly defines the word 'discipline' as follows:

1. training to act in accordance with rules; drill: military discipline.

2. subjection to rules of conduct of behaviour; a state of order maintained by training and control: good disciplined in an army.

3. a set or system of rules and regulations.

Further assistance is provided by the broader statutory context (see Cooper Brookes (Wollongong) Pty Ltd v. Federal Commissioner of Taxation (1981) 147 CLR 297; 81 ATC 4792; (1981) 11 ATR 949). Specifically, subject to certain conditions, section 23AD of the ITAA 1936 exempts the pay and allowances earned on overseas duty of a person serving as a 'member of the Defence Force'. The use of capitals in this cognate provision reveals that the words 'Defence Force' do not bear their ordinary meaning but one coming from the Defence Act 1903 . It indicates that the exemption in section 23AD of the ITAA 1936 is confined to persons appointed or enlisted as members of the Australian Navy, Army and Air Forces within section 30 of the Defence Act 1903 (see Case T39 86 ATC 330; (1986) 29 CTBR (NS) Case 51 ). Accordingly, the use of a different phrase in lower case in paragraph 23AG(1AA)(d) of the ITAA 1936 - 'disciplined force' - suggests that it has a broader meaning. It suggests that exemption pursuant to paragraph 23AG(1AA)(d) of the ITAA 1936 is not confined to Defence Force members. Otherwise, paragraph 23AG(1AA)(d) of the ITAA 1936 would unnecessarily cover the same ground as section 23AD of the ITAA 1936 or have no work to do, something the legislature is unlikely to have intended (see Minister for Resources v. Dover Fisheries Pty Ltd (1993) 43 FCR 565). This is confirmed in the second sentence of paragraph 1.31 of the EM by the use of the words 'defence', 'peacekeeping' and 'police' - all in lower case - to describe the particular force to which paragraph 23AG(1AA)(d) of the ITAA 1936 is intended to apply.

The language used in the provision, the EM, Second Reading Speech, and statutory context of paragraph 23AG(1AA)(d) of the ITAA 1936 therefore reveals that a 'disciplined force' within paragraph 23AG(1AA)(d) of the ITAA 1936 is an organisationally coherent and identifiable body of persons forming a defence, peacekeeping or police force. Such a force may or may not be multilateral and is tasked with the maintenance or establishment of law and order, stability and/or security.

The members of such a force will commonly, but not necessarily, be subjected to a common command structure and rules of conduct. Such a force will generally include persons who perform adjunctive roles relating to the overseas deployment. A 'disciplined force' will thus comprise persons specifically performing the defence, policing and peacekeeping functions of the deployment but will also include those accompanying and providing assistance and support to those so engaged. Persons providing such ancillary support will be considered part of the 'disciplined force' provided they are effectively integrated into the force performing the primary functions of defence, peacekeeping and policing.

These people will be so integrated into the primary force where they are subject to the same or similar command structure and rules of conduct as those performing the primary functions of that 'disciplined force'.

As an employee of the Department of Defence subject to the command structure of the ADF during your posting, you are considered a members of a 'disciplined force' within paragraph 23AG(1AA)(d) of the ITAA 1936.

However, the foreign earnings of individuals engaged in foreign service that are directly attributable to one of the activities referred to in subsection 23AG(1AA) will not be exempt if one of the conditions for non-exemption contained in subsection 23AG(2) applies.

Subsection 23AG(2) applies, to deny an exemption, if the foreign earnings are exempt from tax in the foreign country only because of one or more of the following reasons:

· a double tax agreement with Australia or a law giving effect to a double tax agreement (paragraphs 23AG(2)(a) and 23AG(2)(b) of the ITAA 1936);

· a law of that foreign country which generally exempts from, or does not provide for, the imposition of tax on income derived in the capacity of an employee, income from personal services or any other similar income (paragraphs 23AG(2)(c) and 23AG(2)(d) of the ITAA 1936), or

· a law or international agreement dealing with privileges and immunities of diplomats or consuls or of persons connected with international organisations (paragraphs 23AG(2)(e), 23AG(2)(f) and 23AG(2)(g) of the ITAA 1936).

Australian does not have a tax treaty with Country X therefore paragraphs 23AG(2)(a) and 23AG(2)(b) of the ITAA 1936 do not apply.

The law of Country X provides for the imposition of income tax on employment income and you will be subject to Country X tax laws, therefore paragraphs 23AG(2)(c) and 23AG(2)(d) of the ITAA 1936 do not apply.

Further, your earnings are not subject to any laws or agreements relating to privileges and immunities granted to persons connected with international organisations. Therefore, paragraphs 23AG(2)(e), 23AG(2)(f) and 23AG(2)(g) of the ITAA 1936 do not apply.

As none of the reasons listed in subsection 23AG(2) of the ITAA 1936 apply, the salary and wages received by you from your posting to Country X will be exempt from income tax under subsection 23AG(1) of the ITAA 1936 .