Income - Defence Force personnel on long-term, non-diplomatic posting to East Timor

Are income and allowances received by the taxpayer exempt from income tax under section 23AG of the Income Tax Assessment Act 1936 (ITAA 1936) where the taxpayer is a member of the Australian Defence Force on a long-term, non-diplomatic posting to East Timor?

Yes. The income and allowances received by the taxpayer are exempt from income tax under section 23AG of the Income Tax Assessment Act 1936 (ITAA 1936) where the taxpayer is a member of the Australian Defence Force on a long-term, non-diplomatic posting to East Timor as the taxpayer has derived income and allowances from foreign service and their foreign service was more than ninety days.

The taxpayer is a member of the Australian Defence Force.

The taxpayer is posted to East Timor for a period of 12 months. The taxpayer is not considered to be diplomatic staff or attached to a diplomatic mission.

The taxpayer's income is not exempt under section 23AD of the ITAA 1936 as they do not have a written certificate from the Chief of the Defence Force to the effect that they are on eligible duty with a specified organisation in a specified area outside Australia.

Section 23AG of the ITAA 1936 provides a general exemption from income tax for the foreign earnings of an Australian resident taxpayer who works overseas for a continuous period of not less than 91 days.

Section 23AG of the ITAA 1936 does not apply where the income is exempt from income tax in the foreign country only because of any of the following reasons: • A double tax agreement or law of that foreign country that gives effect to a double tax agreement; • The foreign country exempts income from employment or does not tax employment income generally; or • A law of another country or an international agreement with which Australia is a party dealing with the privileges and immunities of diplomats or consuls, or of persons connected with international organisations.

Australia does not currently have a domestically implemented double tax agreement with East Timor.

There are currently no exemptions from income tax in East Timor for employment income derived in that country. Under East Timor's current tax laws employment income earned in East Timor may be subject to taxation in East Timor. The fact that there is not yet a functioning collection authority is not relevant.

The privileges and immunities of persons connected with the United Nations do not apply to the situation in East Timor due to East Timor's unique political situation.

The taxpayer was engaged in foreign service for a period exceeding 91 days. The foreign earnings derived from that service is not exempt from taxation in East Timer. Accordingly, the income and allowances received by the taxpayer from their employment in East Timer will be exempt from Australian income tax under section 23AG of the ITAA 1936. Note: the taxpayer will need to declare their income and allowances as exempt foreign employment income in their Australian tax return as it is taken into account when determining the amount of tax payable on the taxpayer's other income.