Edited version of your written advice

Authorisation Number: 1012845903986

Date of advice: 6 August 2015

Ruling

Subject: Military Superannuation Benefits Retention Benefit

Question and answer

Is the Military Superannuation and Benefits Scheme Retention Benefit you received exempt from tax under section 23AD of the Income Tax Assessment Act 1936 (ITAA1936)?

No.

This ruling applies for the following periods:

Year ended 30 June 2014

The scheme commenced in:

1 July 2013

Relevant facts and circumstances

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

You were deployed overseas as part of a military operation.

You have a signed MSBS Retention Benefit Election form from the ADF stating that you were entitled to receive the MSBS retention benefit. The date you were entitled to the benefit (the computation date) was while you were deployed overseas.

The computation date of the retention benefit you received was several days before your deployment overseas ceased.

There is nothing in the signed MSBS Retention Benefit Election form that indicates that the retention payment will be made on the computation date, only that the relevant period of service starts on that date.

The retention payment was paid into your nominated bank account on 13 days after the computation date as part of your normal fortnightly payment cycle. 

Your 23AD exemption ceased 3 days before the payment was made. 

You have provided copies of payslips for the period that the retention benefit was paid. Tax was deducted from the payment.

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 11-1

Income Tax Assessment Act 1936 Section 23AD

Income Tax Assessment Act 1936 Subsection 23AD(1)

Income Tax Assessment Act 1936 Subsection 23AD(2)

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.

Application to your situation

You have provided evidence that you were on deployment in a 23AD exempt tax zone until date X and have stated the computation date of the retention benefit you received was 10 days before your deployment ceased.

Although the computation date was X, you did not receive the retention benefit until 13 days later when the amount was credited to your nominated bank account. This 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. This is supported by ATO Interpretative Decision 2004/80: Income Tax - Assessability of income: retention benefit paid to ADF member while serving overseas on eligible duty which clearly states that a retention bonus is derived at the time it is received. 

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.