Assessability of eligible termination payment received by Australian Defence Force member on eligible duty outside Australia

Is an eligible termination payment (ETP) received by a resident taxpayer serving as a member of the Australian Defence Force (ADF) in an area for which a certificate has been issued for the purposes of paragraph 23AD(1)(a) of the Income Tax Assessment Act 1936 (ITAA 1936) assessable under subsection 6-10(4) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes. The ETP received by a resident taxpayer serving as a member of the ADF in an area for which a certificate has been issued for the purposes of paragraph 23AD(1)(a) of the ITAA 1936 is assessable under subsection 6-10(4) of the ITAA 1997.

The ETP is not exempt under section 23AD of the ITAA 1936 as an ETP is not considered to be pay and allowances for the purposes of that section. Nor is the ETP exempt under section 23AG of the ITAA 1936 as an ETP is excluded from the definition of foreign earnings for the purposes of that section and was not derived from the period of foreign service undertaken by the taxpayer.

The taxpayer is an Australian resident for income tax purposes.

The taxpayer is a member of the ADF.

The taxpayer served in a foreign country for a continuous period of not less than 91 days.

A certificate under paragraph 23AD(1)(a) of the ITAA 1936 was issued by the Chief of the Defence Force to the effect that the taxpayer was on eligible duty with a specified organisation in a specified area outside Australia.

The taxpayer received a payment from an Australian superannuation fund while performing that eligible duty.

The payment is an ETP for the purposes of paragraph (b) of the definition of ETP in subsection 27A(1) of the ITAA 1936.

Section 6-10 of the ITAA 1997 provides that a taxpayer's assessable income includes statutory income amounts that are not ordinary income but are included in assessable income by another provision. Subsection 6-10(4) of the ITAA 1997 states that the assessable income of an Australian resident includes statutory income from all sources, whether in or out of Australia.

Section 10-5 of the ITAA 1997 lists those provisions about assessable income. Included in this list are eligible termination payments dealt with under sections 27A to 27H of the ITAA 1936.

The payment received by the taxpayer from an Australian complying superannuation fund is an ETP for the purposes of section 27A of the ITAA 1936 and is therefore included in statutory income for the purposes of section 6-10 of the ITAA 1997.

However, 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 23AD of the ITAA 1936 which deals with pay and allowances received by ADF members performing certain overseas duty and section 23AG of the ITAA 1936 which deals with exempt foreign employment income.

Pay and allowances earned by ADF members on certain overseas duty

Subsection 23AD(1) of the ITAA 1936 provides that the pay and allowances earned by a person serving as a member of the Defence Force are exempt from tax if: (a) they are 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 (b) the eligible duty is not as, or under, an attaché at an Australian embassy or legation.

Subsection 23AD(2) of the ITAA 1936 provides 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 purposes of the exemption.

The ETP received by the taxpayer will fall for consideration under section 23AD of the ITAA 1936 if it falls within the meaning of the term 'pay and allowances'.

The term 'pay and allowances' is not defined in section 23AD of the ITAA 1936 or elsewhere, but it may reasonably be construed to refer to salary, wages, bonuses and allowances received by an ADF member in their capacity as an employee of the ADF.

The terms salary, wages, bonuses and allowances carry their ordinary meaning. At common law, salary or wages denotes money payable to an individual for work or services performed ( Mutual Acceptance v. Federal Commissioner of Taxation (1944) 69 CLR 389; (1944) 7 ATD 506; W A Flick and Co. Pty Ltd v. Federal Commissioner of Taxation (1959) 103 CLR 334; (1959) 12 ATD 98; Commissioner of Pay-roll Tax (Vic) v. Reserve Bank of Australia 86 ATC 4373; Terry Shields Pty Ltd v. Commissioner of Pay-roll Tax (NSW) 89 ATC 4674; (1989) 20 ATR 901; Deputy Commissioner of Taxation v. Applied Design Development Pty Ltd (In Liq) (2002) 117 FCR 336; 2002 ATC 4193; (2002) 49 ATR 196.)

In Abrasiflex Products (WA) Pty Ltd v. Commissioner of State Taxation (WA) 93 ATC 4197; (1993) 25 ATR 325, the Supreme Court of Western Australia considered whether an ETP fell within the ordinary meaning of wages. White J considered the ordinary meaning of the terms salary, wages, bonuses and allowances and considered that the feature that those terms had in common was that they are all payments made to reward services rendered by an employee to his or her employer. White J said: Payments made to employees or former employees by way of retirement benefits and to compensate for the termination of their employment are, in my opinion, not benefits which can properly be said to be ejusdem generis as wages, salaries, commission, bonuses, or allowances payable to an employee as such. The nature of such benefits is quite different from payments made as a reward for services rendered by an employee to an employer and quite different from the ordinary meaning of the word "wages". See FCT v J Walter Thompson (Aust) Pty Ltd (1944) 69 CLR 227 at 234.

The ETP received by the taxpayer is a capital payment made because of the taxpayer's membership of an Australian superannuation fund and is not a payment made as a reward for services rendered by the taxpayer to the ADF. We do not consider that an ETP is salary, wages, bonuses or allowances according to the ordinary meaning of those terms.

Therefore, the ETP is not 'pay and allowances earned by a member of the ADF' and cannot be exempt under section 23AD of the ITAA 1936.

Exempt foreign 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 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 (subsection 23AG(7) of the ITAA 1936).

'Foreign earnings' is defined in subsection 23AG(7) of the ITAA 1936 to mean income consisting of earnings, salary, wages, commission, bonuses or allowance but does not include any payment, consideration or amount that: (a) is included in assessable income under Subdivision AA of Division 2 of the ITAA 1936, or (b) is excluded from the definition of 'eligible termination payment' in subsection 27A(1) because of paragraph (ja), (k), (ka), (m), (ma), (n) or (p) of that definition.

The ETP received by the taxpayer is an ETP for the purposes of subsection 27A(1) of the ITAA 1936. The various components of the ETP are assessable under sections 27B and 27C of Subdivision AA of Division 2 of the ITAA 1936.

Accordingly, the ETP received by the taxpayer is excluded from the definition of foreign earnings and cannot be exempt under section 23AG of the ITAA 1936.

Therefore, the components of the ETP received by the taxpayer that are assessable under sections 27B and 27C of the ITAA 1936 are included in the taxpayer's assessable income under subsection 6-10(4) of the ITAA 1997.