Private ruling: foreign source income
Date of advice: 18 September 2017
Published: January 2018
Ruling period: Year ending 30 June 2018
Date scheme commenced: 1 July 2017

Ruling: Q1: Are your industry pension payments exempt income under section 23AD of the Income Tax Assessment Act 1936 (ITAA 1936) (s23AD)? | A1: No.

Relevant facts and circumstances: You are a government employee. You joined the government agency a number of years ago and became a contributing member of the pension scheme. You ceased being a member of the pension scheme a few years later. You received a pension and a partial commutation of their benefit amount. In the 2016 income year you rejoined the government agency on a two year contract and started contributing to the pension scheme again. Due to a legislative change, from 1 July 2016 members are required to leave the pensions scheme if there is a break in their contract. In the 2017 income year you signed a further contract to work overseas. Signing this contract resulted in you being ineligible to contribute to the pension scheme. You received a lump sum commutation and now receive a fortnightly pension scheme pension. Your income and allowances are exempt under 23AD of the ITAA 1936.

Relevant legislative provisions: Income Tax Assessment Act 1936 Section 23AD | Income Tax Assessment Act 1936 Subsection 23AD(2)

Reasons for decision: Summary: Subsection 23AD(1) of the ITAA 1936 provides that the pay and allowances earned by a person serving as a member of the Defence Force are exempt from tax if: (a) they are earned while there is in force a certificate in writing issued by the Chief of the Defence Force to the effect that the person is on eligible duty with a specified organisation in a specified area outside Australia; and (b) The eligible duty is not as, or under, an attaché at an Australian embassy or legation. Subsection 23AD(2) of the ITAA 1936 provides that the regulations may declare that duty with a specified organisation, in a specified area outside Australia and after a specified day, is eligible duty for the purposes of the exemption. The Macquarie Online Dictionary defines the term ‘earn’ as, ‘to gain by labour or service’. This implies that there needs to be a direct relationship between the work being completed and the pay and allowances received. From the explanatory memorandum for Taxation Laws Amendment Act (No. 2) 1993 for the introduction of 23AD: Proposed new section 23AD will exempt from income tax the pay and allowances of ADF personnel who have a certificate from the Chief of Defence Force (CDF) stating that they are on eligible duty (duty as, or under, an attaché at an Australian embassy or legation is not eligible for the exemption). The proposed section will serve the same function as existing section 23AC but will enable the Income Tax Regulations to prescribe the service eligible for the concession. As the law now stands, an amendment is required to section 23AC every time a country is designated as an operational area. This process is cumbersome given the number of operational areas which have been designated in recent years. In considering the extrinsic material from the introduction of s23AD it is clear that the legislation was intended to have the same function as previous section 23AC of the ITAA 1997(s23AC). From the explanatory memorandum for Income Tax Assessment Act 1965 for the introduction of s23AC: The purpose of this clause is to provide an exemption from income tax in respect of pay and allowances earned by members of the Defence Force while serving in Vietnam and Borneo. For this purpose a new section - section 23AC - is to be inserted in the Principal Act. The exemption proposed will operate from 1st July 1965 and closely corresponds with the exemption that was accorded in respect of operations in Korea and Malaya some years ago. The proposed legislation specifies when the period of exemption commences and concludes. Broadly stated, it commences when a member leaves Australia for service in the special areas specified for the purposes of the exemption. It ordinarily concludes when he returns to Australia but provision is made for it to continue during any period of hospital treatment for illness contracted or injuries sustained during a member's service in a special area. The extrinsic materials from the introduction of s23AC further confirm that the intention was for pay and allowances that are earned during that period of service to be exempt. The pension is not ‘pay and allowances’ within the meaning s23AD as those payments do not relate to your service overseas. Even if the payments were considered ‘pay and allowances’ your entitlement to those payments is independent of your service as you would receive them even if you had not renewed your contract. Therefore, those payments are not ‘earned’ within the meaning of paragraph 23AD(1)(a). You have made the argument that the pension payments are a retention payment as it is paid to you for your service with the government agency and will be paid to you fortnightly even when you leave the agency. Again your entitlement to the payments has arisen independently of your contract and is not a retention payment. It has not been paid in consideration for the renewal of your contract and has merely arisen at the same time. Accordingly, your pension and lump sum payments will not be exempt from income tax under s23AD.