Issue
Is the periodical compensation received by the taxpayer in lieu of the exempt deployment allowance they were receiving for eligible duty in a warlike situation assessable income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?
Decision
No, the periodical compensation received by the taxpayer in lieu of the exempt deployment allowance they were receiving for eligible duty in a warlike situation is not assessable income under section 6-5 of the ITAA 1997.
Facts
The taxpayer is a member of the Australian Army. The taxpayer was injured while performing certain overseas duty in a warlike situation and returned to an Australian hospital for medical treatment. At the time of the accident there was a certificate in force issued by the Chief of the Defence Force which exempted the taxpayer's pay and allowances from tax. As a result of the injury the taxpayer ceased to receive the deployment allowance and received periodical compensation for loss of that allowance.
Reasons for Decision
Division 6 of the ITAA 1997 provides that ordinary income is assessable income unless it is exempt income.
Section 23AD(1) of the Income Tax Assessment Act 1936 (ITAA 1936) specifically exempts the pay and allowances of members of the Defence Force earned while performing certain overseas duty. As periodical compensation is not 'pay and allowances', it is not exempt under this provision.
The Assistant Treasurer announced on 1 August 2001 a proposed amendment to the taxation law to exempt payments to Defence Force members to compensate for the loss of deployment allowance where the allowance ceases to be paid as a result of injuries sustained during service in a warlike situation. The amendment applies to 1996-97 and later years of income.
The Commissioner will exercise his administrative powers to give immediate effect to the Government's announcement. As a consequence, compensation paid to Defence Force members for loss of exempt deployment allowance, where the allowance ceases to be paid as a result of injuries sustained during service in a warlike situation, is treated as exempt income.
If a taxpayer has included a compensation receipt for loss of an exempt deployment allowance in a return, they can seek to excise it, subject to the 4 year time limit for amended assessments set by subsection 170(3) of the ITAA 1936. For the 2000-01 and future income years, the time limit is 2 years if the taxpayer is a shorter period of review taxpayer.
The taxpayer's periodical compensation for the loss of the exempt deployment allowance is therefore exempt. Subject to the statutory time limits, the taxpayer will be able to excise any such amounts that have been assessed in previous years.