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Is the retention bonus received by a member of the Australian Defence Force (ADF) while deployed as part of the Peace Monitoring Group on the island of Bougainville assessable income under subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes. The retention bonus received by a member of the ADF while deployed as part of the Peace Monitoring Group on the island of Bougainville is assessable income under subsection 6-5(2) of the ITAA 1997.

The taxpayer is a member of the ADF and is also a resident of Australia for income tax purposes.

The taxpayer is deployed to the island of Bougainville as part of the Peace Monitoring Group for a continuous period of not less than 91 days.

The salary and wages earned by the taxpayer for service on the island of Bougainville are exempt under section 23AG of the Income Tax Assessment Act 1936 (ITAA 1936).

The ADF offers the taxpayer a bonus (the retention bonus) to remain as part of the ADF for a period of three years.

While on deployment to Bougainville, the taxpayer executes an agreement (the retention agreement) with the ADF to remain as part of the ADF. If the specified period of service is not completed, the taxpayer is required to repay to the ADF, a proportion of the retention bonus.

The retention bonus is paid while the taxpayer is deployed to Bougainville.

Subsection 6-5(2) of the ITAA 1997 provides that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources, whether in or out of Australia, during the income year.

The retention bonus comes within the meaning of ordinary income under subsection 6-5(2) of the ITAA 1997. The retention bonus is an additional reward payment derived by the taxpayer in the capacity as an employee ( Dean & Anor v. Federal Commissioner of Taxation (1997) 78 FCR 140; (1997) 37 ATR 52; 97 ATC 4762).

Subsection 6-15(2) of the ITAA 1997 provides that if an amount is exempt income then it is not assessable income.

Section 11-15 of the ITAA 1997 lists those provisions dealing with income which may be exempt. Included in this list is section 23AG of the ITAA 1936 which deals with overseas employment income.

Subsection 23AG(1) of the ITAA 1936 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 by the taxpayer from that foreign service will be exempt from tax in Australia. 'Foreign service' includes service in a foreign country in the capacity as an employee and 'foreign earnings' include income consisting of earnings, salary, wages, commission, bonuses and allowances (subsection 23AG(7) of the ITAA 1936).

For the purposes of section 23AG of the ITAA 1936, there must be a direct connection between the entitlement to the foreign earnings and the foreign service for the payment to be considered as derived 'from that foreign service'. The retention bonus is not considered to be a payment 'from that foreign service' as it was paid to remain as a member of the ADF. Therefore, the retention bonus is not exempt from tax in Australia under subsection 23AG(1) of the ITAA 1936.

Accordingly, the retention bonus received by a member of the ADF while deployed as part of the Peace Monitoring Group on the island of Bougainville is assessable income under subsection 6-5(2) of the ITAA 1997.