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Are income and allowances derived in East Timor by a member of the Australian Defence Force (ADF) as part of the Australian Training Support Team (ATST) exempt from Australian income tax pursuant to section 23AG of the Income Tax Assessment Act 1936 (ITAA 1936)?

Yes. Income and allowances derived in East Timor as a member of the ADF as part of the ATST are exempt from Australian income tax pursuant to section 23AG of the ITAA 1936.

The taxpayer is a member of the ADF posted to East Timor as part of the ATST. The taxpayer commenced duties in East Timor in the 2001 financial year with an expected duration of six (6) months. The taxpayer's role is to assist the East Timor Transitional Administration in raising, developing and training the East Timor Defence Force.

The Australian Department of Defence pays the taxpayer's salary and allowances through the normal defence pay system for the duration of the posting in East Timor.

Subsection 23AG(1) of the ITAA 1936 has two conditions for an exemption from tax. These are that the resident taxpayer has income and allowances derived from foreign service and that the foreign service is for a continuous period of not less than ninety one (91) days.

Under subsection 23AG(7) of the ITAA 1936 foreign service means service in a foreign country as the holder of an office or in the capacity of an employee. As the taxpayer will be on duty as an employee of the ADF the condition of foreign service is satisfied.

As the taxpayer will be performing foreign service for a period of six (6) months the time condition is also satisfied.

The taxpayer will satisfy the requirements of section 23AG of the ITAA 1936.

Consequently the income and allowances will be exempt from income tax under 23AG of the ITAA 1936.