Private ruling: Exempt income - injured on foreign service
Published: February 2012
Ruling period: Year ended 30 June 2009
Date scheme commenced: 1 July 2008

Ruling: Q1: Is the income you earned in Australia from the date of your discharge from hospital until the expected end date of your overseas deployment exempt from income tax in Australia under subsection 23AG(1) of the Income Tax Assessment Act 1936 (ITAA 1936)? | A1: Yes

Relevant facts and circumstances: You are an Australian resident for taxation purposes. You are a member of the Australian Defence Forces (ADF). You were deployed to Country X. A certificate under paragraph 23AD(1)(a) of the ITAA 1936 was issued by the Chief of the Defence Force for the deployment. You were wounded and returned to Australia for hospital treatment before your deployment was due to end. You were discharged from hospital, and took leave after you left the hospital. The tax laws of Country X provide for the imposition of income tax on employment income and do not generally exempt such income from tax. There is no tax treaty between Australia and Country X.

Relevant legislative provisions: Subsection 23AG(1) of the Income Tax Assessment Act 1936 | Paragraph 23AD(1)(a) of the Income Tax Assessment Act 1936 Subsection 23AD(1) of the Income Tax Assessment Act 1936 | Paragraph 23AD(3)(c) of the Income Tax Assessment Act 1936 Subsection 23AG(7) of the Income Tax Assessment Act 1936 | Paragraph 23AG(6)(b) of the Income Tax Assessment Act 1936 Subsection 23AG(2) of the Income Tax Assessment Act 1936 | Paragraph 23AG(2)(a) of the Income Tax Assessment Act 1936 | Paragraph 23AG(2)(b) of the Income Tax Assessment Act 1936 | Paragraph 23AG(2)(c) of the Income Tax Assessment Act 1936 | Paragraph 23AG(2)(d) of the Income Tax Assessment Act 1936 Section 23AG of the Income Tax Assessment Act 1936

Reasons for decision: Summary: Subsection 23AD(1) of the Income Tax Assessment Act 1936 (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 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. The period of eligible duty includes any period of hospital treatment resulting from an illness contracted, or injuries sustained, during a person's eligible duty (paragraph 23AD(3)(c) of the ITAA 1936). In your case, the pay and allowances you earned serving as a member of the ADF in Country X, and for the period you were in hospital in Australia, were earned during a period of eligible duty and are exempt from income tax in Australia under subsection 23AD(1) of the ITAA 1936. Exempt income - date of discharge to expected end of deployment Subsection 23AG(1) of the ITAA 1936 provides that foreign earnings of an Australian resident for taxation purposes derived during a continuous period of foreign service of not less than 91 days in a foreign country are exempt from income tax in Australia. Foreign earnings include income consisting of salary, wages, bonuses or allowances (subsection 23AG(7) of the ITAA 1936). Paragraph 23AG(6)(b) of the ITAA 1936 provides that the period during which a person is engaged in foreign service includes any period during which the person is, in accordance with the terms and conditions of that service, absent from work because of accident or illness. Members of the ADF are entitled to leave for whatever time is necessary to recuperate from injuries sustained. In your case, you were injured while on deployment with the ADF in Country X, and were on leave after your discharge from hospital. The period from after your discharge from hospital to the expected end date of your deployment is therefore considered foreign service under paragraph 23AG(6)(b) of the ITAA 1936 as you were absent from work due to injuries sustained while on overseas deployment. There is nothing in the legislation to preclude a general exemption under subsection 23AG(1) of the ITAA 1936 from following a specific exemption under subsection 23AD(1) of the ITAA 1936. Subsection 23AG(2) of the ITAA 1936 provides that the exemption in subsection 23AG(1) of the ITAA 1936 will not apply where the income is exempt from income tax in the foreign country only because of any of the reasons listed in that subsection. One of the reasons listed is where the income is exempt in the foreign country because of a tax treaty (paragraphs 23AG(2)(a) and 23AG(2)(b) of the ITAA 1936). There is no tax treaty between Australia and Country X. Therefore, paragraphs 23AG(2)(a) and 23AG(2)(b) of the ITAA 1936 will not apply. As the laws of Country X provide for the imposition of income tax and do not generally exempt employment income from income tax, paragraphs 23AG(2)(c) and 23AG(2)(d) of the ITAA 1936 will also not apply. None of the other reasons in subsection 23AG(2) of the ITAA 1936 apply to your situation. You satisfy the conditions for exemption under section 23AG of the ITAA 1936 for the year ending 30 June 2009. Consequently, the salary and allowances you earned after your discharge from hospital until the date your deployment was due to end are exempt from income tax in Australia under subsection 23AG(1) of the ITAA 1936. | Detailed Reasoning - Note: Foreign earnings exempt under section 23AG of the ITAA 1936 are taken into account in calculating the tax payable on other income derived by a taxpayer. This method of calculation referred to as exemption with progression prevents the exempt income from reducing the Australian tax payable on the other income. This income needs to be included as exempt foreign employment income in your Australian tax return.

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