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Is the taxpayer, a dependent of a United States (US) Armed Forces member and to whom subsection 23AA(3) of the Income Tax Assessment Act 1936 (ITAA 1936) applies, entitled to claim the zone tax offset under section 79A of the ITAA 1936?

Yes. The taxpayer, a dependent of a US Armed Forces member and to whom subsection 23AA(3) of the ITAA 1936 applies, is entitled to claim the zone tax offset under section 79A of the ITAA 1936, as the taxpayer resided in a prescribed area for a period of more than 182 days.

The taxpayer is living in Australia with their spouse.

The taxpayer resided in a prescribed area for more than 182 days during the income year.

The taxpayer is the spouse of a member of the US Armed Forces who is serving in Australia under the agreement between the Australian Government and the US Government concerning the Status of US Armed Forces in Australia (the Forces Agreement).

Apart from the operation of subsection 23AA(3) of the ITAA 1936, the taxpayer would be a resident of Australia for income tax purposes under subsection 6(1) of the ITAA 1936.

Section 23AA of the ITAA 1936 gives legislative effect to certain provisions relating to income tax contained in various agreements Australia has entered into with the US Government, including the Forces Agreement.

Under the Forces Agreement, Australia agreed to exempt the pay of members of the US Armed Forces in Australia. As the pay and allowances of Armed Forces members of any foreign government who are serving in Australia are generally exempt under section 23(u) of the ITAA 1936, section 23AA ensures that the foreign source income of members of the US Armed Forces and their dependants is exempt from Australian income tax.

Section 23AA achieves this purpose by deeming the members and their dependants to be non-residents of Australia for income tax purposes.

Specifically, subsection 23AA(3) of the ITAA 1936 applies where a person: (a) has been in Australia, or has carried on business in Australia, solely for prescribed purposes during a period when he was a foreign contractor or employee; (b) has been in Australia solely for prescribed purposes during a period when he was a member of the US Forces, a civilian accompanying the US Forces or a US employee; or (c) has been in Australia during a period when he was a dependant of such a contractor, employee, member or civilian who was in Australia solely for prescribed purposes,

Subsection 23AA(3) of the ITAA 1936 provides that for the purposes of the ITAA 1936, other than Subdivision A of Division 17, the person is deemed to be a non-resident of Australia during that period and that period is disregarded in determining whether the person is a resident of Australia at any other time.

The taxpayers' spouse is in Australia for prescribed purposes as the spouse is in Australia to carry out activities pursuant to the Forces Agreement, and the taxpayer is a dependant of their spouse (subsection 23AA(1) of the ITAA 1936).

Accordingly, the taxpayer is deemed to be a non-resident of Australia for income tax purposes for the period they are present in Australia under subsection 23AA(3) of the ITAA 1936.

Section 79A of the ITAA 1936 provides that residents of prescribed areas are granted an income tax concession in recognition of the disadvantages to which they are subject because of the uncongenial climatic conditions, isolation and high cost of living in comparison to other areas of Australia.

In order to be eligible for the zone tax offset a taxpayer must satisfy one of the residency tests contained in subsection 79A(3B) of the ITAA 1936. Generally, the tests require the taxpayer to reside in, or actually be present in, a zone area for more than one half of the income year.

However, the test of where an individual resides for the purposes of section 79A is based on the ordinary meaning of that term and is not the same as the residence tests set out in subsection 6(1) of the ITAA 1936 (see paragraphs 4 to 10 and 47 to 53 of Taxation Ruling TR 94/27). In the context of section 79A, a resident of a prescribed area refers to a person who is residing, or has actually been present in, a particular area for a period of more than 182 days.

Accordingly, the fact that the taxpayer is deemed to be a non-resident of Australia under subsection 23AA(3) of the ITAA 1936 does not disqualify the taxpayer from being a resident of a prescribed area for the purposes of section 79A.

Therefore, as the taxpayer resided in a particular zone for a period of more than 182 days they are entitled to claim the Zone Tax Offset.