Private ruling: Foreign source income
Date of advice: 28 September 2018
Published: November 2018
Ruling period: Year ending 30 June 20xx
Date scheme commenced: 1 July 20xx

Ruling: Q1: Is the foreign income you derived while working overseas, exempt income in Australia under section 23AG of the Income Tax Assessment Act 1936 (ITAA 1936)? | A1: No

Relevant facts and circumstances: You are an Australian resident for income tax purposes. You are and will be an employee of Company X as a Defence civilian in Country Y. You signed an official Australian Defence Force (ADF) document which states you are subject to defence force discipline during the course of your deployment. You were deployed as a Defence Civilian by signing the official ADF document. A Defence Civilian is a person who, with the authority of an authorised officer, accompanies a part of the Defence Force outside Australia and who has consented, in writing, to subject himself or herself to Defence Force discipline while so accompanying that part of the Defence Force. You are not a serving member of the Australian Defence Force (ADF).

Relevant legislative provisions: Income Tax Assessment Act 1936 Section 23AD | Income Tax Assessment Act 1936 Section 23AG

Reasons for decision: Detailed Reasoning - Detailed Reasoning: Subsection 23AG(1) of the Income Tax Assessment Act 1936 (ITAA 1936) provides that foreign earnings are exempt from income tax where all of the following requirements are satisfied: ● you are a resident of Australia and a natural person, ● you are engaged in foreign service, ● the foreign service is for a continuous period of at least 91 days, ● you derive foreign earnings from that foreign service, ● the foreign service is directly attributable to an activity that is listed in subsection 23AG(1AA) of the ITAA 1936, and ● the foreign earnings are not exempt from income tax in the foreign country only because of one of the reasons listed in subsection 23AG(2) of the ITAA 1936. Subsection 23AG(1) of the Income Tax Assessment Act 1936 (ITAA1936) provides that where a resident taxpayer is engaged in foreign service for a continuous period of not less than 91 days, any foreign earnings derived from the foreign service will be exempt from tax in Australia. The term 'foreign service' means service in a foreign country as the holder of an office or in the capacity of an employee and the term 'foreign earnings' includes income consisting of salary and wages and allowances. Subsection 23AG (1AA) of the ITAA 1936 provides that foreign earnings are not exempt from tax unless the continuous period of Foreign Service is directly attributable to any of the following: ● Delivery of Australian official development assistance by your employer. ● Activities of your employer in operating a public fund declared by the Treasurer to be a developing country relief fund, or a public fund established and maintained to provide monetary relief to people in a developing foreign country that has experienced a disaster (a public disaster relief fund). ● Activities of your employer as a prescribed charitable or religious institution exempt from Australian income tax because it is located outside Australia or the institution is pursuing objectives outside Australia. ● Deployment outside Australia by an Australian government (or an authority thereof) as a member of a disciplined force. Accordingly, for your payments from work as an employee with an Australian company to be exempt under 23AG of the ITAA 1936, you must have been a member of a disciplined force. A Defence Civilian is not a person serving as a member of the Defence Force. Section 23AD of the Income Tax Assessment Act 1936 (ITAA 1936) exempts from tax the pay and allowances earned by persons serving as members of the Defence Force on eligible duty outside Australia. The opening words of subsection 23AD (1) of the ITAA 1936 set out the threshold requirement for entitlement to the exemption must be ‘serving as member of the Defence Force’. A ‘member of the Defence Force’ refers to a member of Australia’s Naval, Army and Air Forces. The view is supported by a Taxation Board of Review decision, (1986) 29 CTBR (NS) 379 Case 51 ; Case T39 86 ATC 330 (Case 51 ). In that decision the Board considered the meaning of the same phrase in section 79B of the ITAA 1936. It unanimously held that a defence civilian is not a member of the Defence Force for the purposes of the section 79B of the ITAA 1936. It unanimously held that a defence civilian is not a member of the Defence Force for the purposes of section 79B. Chairman H.P. Stevens reasoned as follows: 7. The term Defence Force is not defined in the Income Tax Assessment Act and it was the taxpayer's submission that within the terms of the Defence Force Discipline Act he was a "defence civilian" - inter alia "a person (other than a defence member) who (a)... accompanies a part of the Defence Force that is - (i) outside Australia; or (ii) on operations against the enemy" - and that it was the clear intention that such person is part of the Defence Force. I am unable to agree for I think it is obvious that the term Defence Force - particularly as capitals are used - has not an ordinary meaning but one flowing from the Defence Act . The Defence Force Discipline Act itself constantly uses the term Defence Force and, whilst for certain purposes refers to a person "being a defence civilian or a defence member" - inter alia "a member of the Permanent Naval Forces, the Australian Regular Army, The Regular Army Supplement or the Permanent Air Force" - it also refers to the Defence Force and to members of the Defence Force in such terms as to indicate that a defence civilian is not a member of the Defence Force. 8. I should add that, even if it could be said a defence civilian was a part of the defence force, there still would be the question of whether he was in fact "serving" as a member thereof. As set out in para 5 re "employed in the service of an Australian force" the taxpayer was thus "serving" as a member of the APS rather than as a member of the Defence Force. Expanding on the reasons given above by the Taxation Board of Review in Case 51, the meaning of the term ‘Defence Force’ in the Defence Act 1903 (DA 1903) will be relevant in determining the meaning of the phrase ‘member of the Defence Force’ in section 23AD of the ITAA 1936 ( Federal Commissioner of Taxation v. Imperial Chemical Industries of Australia and New Zealand (1971) 127 CLR 529; (1971)3 ATR 321; (1971)72 ATC 4213). Specifically, section 17 of the DA 1903 states: ‘The Defence Force’ consists of the ‘Australian Navy, the Australian Army and the Australian Air Force’. The identical use of capitals in the same phrase in section 23AD of the ITAA 1936, together with the use of the definite article ‘the’, suggests that the legislature intended that the expression ‘the Defence Force’ in section 23AD of the ITAA 1936 bear the same meaning it does in the DA 1903. Accordingly, a 'member of the Defence Force' in section 23AD of the ITAA 1936 is confined to those appointed or enlisted as members of the Australian Navy, Army and Air Forces. This interpretation is consistent with the definition of 'defence member' in section 3 of the Defence Force Discipline Act 1982 (DFDA 1982). The definition of 'defence civilian' in section 3 of the DFDA 1982, expressly excludes a 'defence member' as defined in that section. The view that a 'defence civilian' is not a member of the Defence Force is reinforced by the use of the words 'accompanies' and 'accompanying' in the definition of 'defence civilian' which indicate that they are distinct from and do not form a part of the Defence Force. You are an employee of an Australian company. You are a defence civilian who was deployed with a disciplined force to a designated area of operations by the Chief of the Defence Force. Although you worked side by side with the ADF personnel, you were not appointed or enlisted as a member of the Australian Navy, Army and Air Forces. Accordingly, you are not a ‘member of the Defence Force’ within subsection 23AD (1) of the ITAA 1936. Therefore, your foreign employment income is not exempt under section 23AD of the ITAA 1936.