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Edited version of your private ruling
Authorisation Number: 1012603990618
Ruling
Subject: Assessability of retention benefit
Question and answer:
Is the retention benefit paid to you under the provisions of the Military Superannuation and Benefits Act 1991 exempt from income tax in Australia?
No.
This ruling applies for the following period:
1 July 2013 to 30 June 2014.
The scheme commenced on:
1 July 2013.
Relevant facts and circumstances:
You are a serving member of the Australian Defence Force (ADF).
You were deployed to a 23AD exempt tax zone.
Your deployment to the 23AD exempt tax zone ceased.
You received a retention benefit paid to you under the provisions of the Military Superannuation and Benefits Act 1991.
The benefit was credited to your nominated bank account as part of your normal fortnightly pay for a pay period.
On the day the benefit was credited to your nominated bank account your deployment to a 23AD exempt tax zone had already ceased.
Relevant legislative provisions:
Income Tax Assessment Act 1997 Section 6-5
Income Tax Assessment Act 1936 Section 23AD
Reasons for decision
Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a resident taxpayer includes all the ordinary income they derive from all sources in and out of Australia in an income year.
Ordinary income includes salary and wages and such amounts are generally taken to have been 'derived' at the time they are received.
Subsection 6-5(4) of the ITAA 1997 provides that in working out when an amount of ordinary income (such as salary and wages) is derived, the amount is taken to have been received as soon as it is applied or dealt with in any way on the taxpayer's behalf or as the taxpayer directs. For example, a taxpayer who has an amount of salary or wages deposited into a nominated bank account by an employer is taken to have derived the salary or wages on the date the amount is credited to the account. This is the date the amount is taken to have been applied or dealt with on the taxpayer's behalf or as the taxpayer directed for the purposes of subsection 6-5(4) of the ITAA 1997.
A retention benefit paid under the provisions of the Military Superannuation and Benefits Act 1991 (MSBA 1991) is an amount of salary and wages for taxation purposes. Such an amount will be assessable in Australia under the provisions of section 6-5 of the ITAA 1997 unless it is made exempt from taxation in Australia by another provision of the tax law.
Section 23AD of the ITAA 1936 provides an exemption from taxation in Australia for 'pay and allowances' earned by ADF members who are on eligible duty in specified locations.
A retention benefit paid under the MSBA 1991 falls within the meaning of the term 'pay and allowances' for the purposes of section 23AD of the ITAA 1936.
Considering the above, a retention benefit paid under the provisions of the MSBA 1991 to a serving member of the ADF will only be exempt from taxation in Australia if it is 'earned' while the taxpayer is on eligible service in a 23AD exempt tax zone. If a taxpayer is not on eligible service in a 23AD exempt tax zone at the time such a payment is earned, the amount will be included in the taxpayer's assessable income in Australia under the provisions of section 6-5 of the ITAA 1997.
A retention benefit paid under the provisions of MSBA 1991 to a serving member of the ADF is 'earned' at the time it is received. Considering such a benefit is an amount of salary or wages for taxation purposes, this means that under the provisions of subsection 6-5(4) of the ITAA 1997, a retention benefit that is credited to a taxpayer's nominated bank account is taken to be received on the day the amount is credited to that account. It follows therefore that the date such an amount is credited to a nominated bank account is the date the amount is earned for the purposes of section 23AD of the ITAA 1936.
Conclusion
The day the retention benefit was credited to your nominated bank account is the date you are taken to have 'derived' the retention benefit for the purposes of section 6-5 of the ITAA 1997 and it must follow, is the date you are taken to have 'earned' the retention benefit for the purpose of section 23AD of the ITAA 1936.
As you derived the retention benefit after your deployment to a 23AD exempt tax zone ceased, the retention benefit is not exempt from taxation under the provisions of section 23AD of the ITAA 1936 because it cannot be said the amount was earned while you were on eligible service in a 23AD exempt tax zone.
The full amount of the retention benefit will be included in your assessable income as an amount of ordinary income that is assessable under the provisions of section 6-5 of the ITAA 1997.