Issue
Are employees engaged in foreign service for an employer contracted by the Commonwealth of Australia to provide support services to the Australian Defence Force (ADF) entitled to claim exemption for the foreign earnings derived from this foreign service pursuant to paragraph 23AG(1AA)(d) of the Income Tax Assessment Act 1936 (ITAA 1936)?
Decision
No, employees engaged in such foreign service are not entitled to claim exemption for the foreign earnings derived from this foreign service pursuant to paragraph 23AG(1AA)(d) of the ITAA 1936.
Facts
The taxpayers are residents of Australia for income tax purposes.
The taxpayers are employed by an Australian resident company (the company).
The company entered into a contract with the Commonwealth of Australia (the contract) effective from 1 July 2009 for the provision of support services to the ADF.
The taxpayers perform these services in a foreign country for the company.
The contract provides that the taxpayers have the status of Defence Civilians under the Defence Force Discipline Act 1982 (DFDA), being persons authorised to accompany a part of the Defence Force outside Australia.
The contract also provides that the DFDA applies to the taxpayers.
The contract specifically provides that the taxpayers are deemed not to be employees of the Commonwealth by virtue of the contract.
Reasons for Decision
Subsection 23AG(1) of the ITAA 1936 provides that, where Australian resident individuals are engaged in foreign service for a continuous period of not less than 91 days, foreign earnings derived from this foreign service are exempt from Australian tax. However, new subsection 23AG(1AA) of the ITAA 1936, which took effect from 1 July 2009, provides that those foreign earnings will not be exempt under section 23AG unless the continuous period of foreign service is directly attributable to, amongst other things, the individual's deployment outside Australia as a member of a disciplined force.
Foreign deployment as a member of a disciplined force
Specifically, subsection 23AG(1AA) of the ITAA 1936 relevantly states: However, those foreign earnings are not exempt from tax under this section unless the continuous period of foreign service is directly attributable to any of the following: ... (d) the person's deployment outside Australia as a member of a disciplined force by: (i) the Commonwealth, a State or a Territory; or (ii) an authority of the Commonwealth, a State or a Territory;
What constitutes a 'deployment outside Australia as a member of a disciplined force by the Commonwealth, a State or a Territory or an authority of the Commonwealth, a State or a Territory' is not set out in section 23AG of the ITAA 1936. However, the Explanatory Memorandum (EM) which accompanied Tax Laws Amendment (2009 Budget Measures No. 1) Bill 2009) introducing paragraph 23AG(1AA)(d) of the ITAA 1936 provides guidance on this (see subparagraph 15AB(1)(b)(i) and paragraph 15AB(2)(e) of the Acts Interpretation Act 1901 ). The relevant table (found in paragraph 1.17) and paragraphs appear below: New law Current law Subject to certain existing conditions, foreign employment income derived by an Australian resident individual will only be exempt from income tax if it is derived in the person's capacity as: • an aid worker employed in the delivery of Australian official development assistance; • an aid or charitable worker employed by an organization in providing overseas aid relief; • a specified government employee deployed overseas as a member of a disciplined force; or (Emphasis added) • an employee undertaking an activity of a kind specified in the regulations. Subject to certain conditions, foreign employment income derived by an Australian resident individual is exempt from Australian income tax. This exemption is not limited to foreign employment income derived from specific employment activities. ... Eligibility for exemption 1.18 Foreign earnings derived by an Australian resident individual from continuous foreign service of not less than 91 days will only be exempt from income tax if the foreign service is directly attributable to any of the following: • the delivery of Australian official development assistance by the person's employer; • the activities of the person's employer in operating a public fund declared by the Treasurer to be a developing country relief fund; or a public fund established and maintained to provide monetary relief to people in a developing country that has experienced a disaster; • the activities of the person's employer, being a prescribed institution that is exempt from Australian income tax; • the person's deployment outside Australia as a member of a disciplined force by the Commonwealth, a State or Territory (or an authority of the Commonwealth, a State or a Territory); or • an activity of a kind specified in the regulations. [ Schedule 1, item 1, subsection 23(1AA )] ... Foreign deployment as a member of a disciplined force 1.31 A person's foreign earnings will be eligible for exemption if the foreign service is directly attributable to that person's deployment outside Australia as a member of a disciplined force by an Australian government, or an authority thereof. A disciplined force is intended to refer to a defence force, including a peacekeeping force, and a police force. 1.32 In a defence force context, the exemption would apply to a person's deployment outside Australia as part of a non-warlike operation. In a police force context, the exemption would apply to Australian Federal Police employees deployed on an International Deployment Group mission who are subject to Commanders Orders to achieve operational policing outcomes. [ Schedule 1, item 1, paragraph 23AG(1AA )( d )]
New law | Current law
Subject to certain existing conditions, foreign employment income derived by an Australian resident individual will only be exempt from income tax if it is derived in the person's capacity as: • an aid worker employed in the delivery of Australian official development assistance; • an aid or charitable worker employed by an organization in providing overseas aid relief; • a specified government employee deployed overseas as a member of a disciplined force; or (Emphasis added) • an employee undertaking an activity of a kind specified in the regulations. | Subject to certain conditions, foreign employment income derived by an Australian resident individual is exempt from Australian income tax. This exemption is not limited to foreign employment income derived from specific employment activities.
The Second Reading Speech to Tax Laws Amendment (2009 Budget Measures No. 1) Bill 2009) in the House of Representatives provides additional guidance (see subparagraph 15AB(1)(b)(i) and paragraph 15AB(2)(f) of the Acts Interpretation Act 1901 ). In this speech, the Treasurer relevantly stated: From 1 July 2009, an exemption will apply to income earned as an aid worker, a charitable worker or under certain types of government employment such as a defence or police deployment. It will also apply to income earned as prescribed under regulations. (Emphasis added)
Cumulatively, this reveals that the deployment referred to in paragraph 23AG(1AA)(d) of the ITAA 1936 is one that is confined to government employees. In order for a person's deployment outside Australia as a member of a disciplined force to be by the Commonwealth, a State or Territory (or an authority of the Commonwealth, a State or Territory), it must be directly effected by an Australian government or an authority thereof. Only those employed by an Australian government or authority thereof meet this requirement.
As the taxpayer employees are not employees of an Australian government or an authority thereof, they do not satisfy paragraph 23AG(1AA)(d) of the ITAA 1936.