Issue
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 23AD of the Income Tax Assessment Act 1936 (ITAA 1936)?
Decision
No. Income and allowances derived in East Timor by a member of ADF as part of the ATST are not exempt from Australian income tax pursuant to section 23AD of the ITAA 1936.
Facts
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 training team is not attached to the International Force East Timor (INTERFET) nor the United Nations Transitional Administration in East Timor (UNTAET).
A certificate under paragraph 23AD(1)(a) of the ITAA 1936 was not issued by the Chief of the Defence Force to the effect that the taxpayer is on eligible duty with a specified organisation in a specified area outside Australia.
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.
Reasons for Decision
After 25 October 1999 East Timor is considered to have its own domestic tax law in force generally following the Indonesian tax law existing at the time of its separation from Indonesia, with a taxing right on income from employment or personal services. There is no double tax agreement in force with East Timor after this date.
Whilst East Timor may not be in a position to collect any tax payable at this stage that would not in itself mean there is an exemption from tax in East Timor. Any liability would be owing to either the United Nations Transitional Administration in East Timor or the East Timor tax authorities (when established).
Subsection 23AD(1) of the ITAA 1936 states that the income and allowances earned by a person serving as a member of the Defence Force are exempt from tax if certain conditions are satisfied. Income and allowances must be 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 and the eligible duty is not as, or under, an attache at an Australian embassy or legation.
Subsection 23AD(2) states that the regulations may declare that duty with a specified organisation, in a specified area outside Australia and after a specified day, is eligible duty for the purpose of this section.
Regulation 7A of the Income Tax Regulations 1936 (ITR 1936) states that for subsection 23AD(2) of the ITAA 1936 to apply the basic requirement for eligible duty is duty with INTERFET or UNTAET.
As the taxpayer does not satisfy the basic requirements of regulation 7A of the ITR 1936, the taxpayer is not on eligible duty and consequently does not have a certificate as required by paragraph 23AD(1)(a) of the ITAA 1936.
The pay and allowances are therefore not exempt from income tax under section 23AD of the ITAA 1936. Note: An exemption under section 23AG of the ITAA 1936 may apply in certain circumstances.