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Edited version of your private ruling
Authorisation Number: 1012513745098
Ruling
Subject: Payments received whilst deployed with the Australian Defence Forces
Question
Do the payments made to you by your civilian employer whilst you were deployed overseas with the Australian Defence Forces (ADF) form part of your assessable income?
Answer
Yes.
This ruling applies for the following period
Year ended 30 June 2013
The scheme commenced on
1 July 2012
Relevant facts and circumstances
You are a member of the Defence Reserves.
You were deployed overseas with the ADF.
Whilst overseas your civilian employer paid you defence reservist leave, recreation leave and long service leave. Your civilian employer deducted tax from the payments.
Whilst overseas you accrued various leave and entitlements with your civilian employer.
Relevant legislative provisions
Income Tax Assessment Act 1936 Subsection 23AC(1)
Income Tax Assessment Act 1997 Section 6-5
Income Tax Regulations 1936 Regulation 7A
Reasons for decision
Summary
The payments made to you by your civilian employer form part of your assessable income and are subject to tax. Any leave and entitlements accrued with your civilian employer whilst you were overseas will not be exempt from tax when they are taken.
Detailed reasoning
Division 6 of the Income Tax Assessment Act 1997 provides that ordinary income is assessable income unless it is exempt income.
Employment income is ordinary income and as such assessable income, unless specifically exempt from tax. Payments made under reservist leave, recreation leave and long service leave provisions of employment conditions are considered to be employment income.
Subsection 23AC(1) of the Income Tax Assessment Act 1936 (ITAA 1936) states
Pay and allowances earned by a person as a member of the Defence Force are exempt from income tax where:
(a) the pay and allowances are earned during a period of operational service of the person; and
(b) the person served in an operational area during the whole or part of that period.
Subsection 23AC(1) of the ITAA 1936 combines with Regulation 7A of the Income Tax Regulations 1936 to exempt pay and allowances earned by a person as a member of the Defence Force, including Defence reservists, who served overseas.
The term 'earned by a person as a member of the Defence Force' refers to those payments that directly relate to the person's role as an ADF member. That is, payments made by the Department of Defence to the person. No exemption exists for civilian employment income paid to the person whilst they are serving as an ADF member.
The payments made to you by your civilian employer were made to you in your capacity as their employee. Whilst you may have applied for the leave and received the payments due to your absence in an ADF role, the payments were still made to you as a result of your civilian employment conditions. Therefore the payments are considered to be your civilian employment income and are not exempt from tax.
It follows that any leave or entitlements accrued with your civilian employer whilst you were deployed overseas, will retain their character as civilian employment related leave and entitlements and will not be exempt when they are taken.
The payments made to you by your civilian employer whilst you were deployed overseas form part of your assessable income.