Income tax: assessable income: Australian Federal Police employees deployed to the Jordan International Police Training Centre

This Ruling sets out the Commissioner's opinion on the way in which the relevant taxation provision(s) identified below apply to the defined class of entities, who take part in the scheme to which this Ruling relates.

The relevant taxation provisions dealt with in this Ruling are section 23AG of the Income Tax Assessment Act 1936 (ITAA 1936) and section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997). Changes to section 23AG of the ITAA 1936 came into effect on 19 December 2005. The Commissioner's interpretation on the treatment of absences in respect of section 23AG of the ITAA 1936 prior to the latest amendments is contained in Tax Ruling TR 96/15.

The class of entities to which this Ruling applies are: • Australian Federal Police (AFP) officers; • persons seconded to the AFP under section 69D of the Australian Federal Police Act 1979 (AFP Act 1979) for the period of deployment; and • persons appointed to the AFP as special members of the AFP under section 40E of the AFP Act 1979 for the period of their deployment, deployed to the Jordan International Police Training Centre (JIPTC) to train Iraqi police. The deployment to Jordan is under the Memorandum of Understanding between the Government of Australia and the Government of the Hashemite Kingdom of Jordan concerning the status of Australian police personnel deployed in the Kingdom of Jordan for the purposes of training Iraqi Police Forces.

Those deployed as described in paragraph 3 of this Ruling to whom this Ruling applies will be collectively referred to in this Ruling as AFP employees.

AFP employees remain Australian residents throughout the period of deployment.

AFP employees include employees who while on deployment to the JIPTC return to Australia for a period during which they utilise leave that has wholly accrued from their service in Jordan.

The class of entities does not include AFP employees: • who while on deployment to Jordan return to Australia for a period during which they utilise leave that has wholly or partly accrued from service in Australia; or • whose term of deployment to Jordan is suspended or terminated before completing a continuous period of foreign service of not less than 91 days.

The Commissioner makes this Ruling based on the precise scheme identified in this Ruling.

The class of entities defined in this Ruling may rely on its contents provided the scheme actually carried out is carried out in accordance with the scheme described in paragraphs 13 to 34 of this Ruling.

If the scheme actually carried out is materially different from the scheme that is described in this Ruling, then: • this Ruling has no binding effect on the Commissioner because the scheme entered into is not the scheme on which the Commissioner has ruled; and • this Ruling may be withdrawn or modified.

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This Ruling applies from 1 May 2004. However, the Ruling does not apply to taxpayers to the extent that it conflicts with the terms of a settlement of a dispute agreed to before the date of issue of the Ruling (see paragraphs 21 and 22 of Taxation Ruling TR 92/20). Furthermore, the Ruling only applies to the extent that: • it is not later withdrawn by notice in the Gazette ; or • the relevant taxation provisions are not amended.

The scheme that is the subject of the Ruling is described below. This description is based on the following documents which are attached to the file record maintained by the Australian Taxation Office for this Ruling. These documents, or relevant parts of them, as the case may be, form part of and are to be read with this description. The relevant documents or parts of documents incorporated into this description of the scheme are: • Application for Class Ruling (dated 10 October 2005) received 14 October 2005; • Copy of the Contractual Agreement between the Coalition Provisional Authority in Iraq and the Government of the Hashemite Kingdom of Jordan concerning access to and the use of facilities in Jordan for Iraqi police training; • AFP - International Deployment Group (IDG) - Determination No 8 of 2004; • AFP - International Deployment Group - Determination No 19 of 2005; and • Copy of the Memorandum of Understanding between the Government of Australia and the Government of the Hashemite Kingdom of Jordan concerning the status of Australian police personnel deployed in the Kingdom of Jordan for the purposes of training Iraqi Police Forces dated 14 December 2004 (the Government Treaty).

AFP employees will be deployed to Jordan as trainers because of their extensive operational experience in community policing, investigations and intelligence. They will be located at the JIPTC which is a large police training facility built specifically for the purpose of training Iraqi police.

The period of deployment will be for a period of 40, 60, 80 or 100 weeks.

For terms of deployment of 40 weeks the period of overseas duty will be two x 16 weeks of overseas service. For terms of deployment of 60 weeks the period of overseas duty will be three x 16 weeks of overseas service. For terms of deployment of 80 weeks the period of overseas duty will be four x 16 weeks of overseas service. For terms of deployment of 100 weeks the period of overseas duty will be five x 16 weeks of overseas service.

It is anticipated that AFP employees will return to Australia to reside on a permanent basis on completion of their deployment after which they will continue to remain employees of the AFP in Australia.

The remuneration for AFP employees takes the form of an annual salary entitlement and the payment of various allowances. Salary and allowances will continue to be paid into the employee's nominated account on a fortnightly basis.

AFP employees are entitled to the following allowances: • pre-deployment composite allowance; • deployment composite allowance paid during overseas posting and recreation leave periods taken during the term of the overseas posting; • motor vehicle allowance (paid only to AFP employees deployed as Coordinators); • transfer allowance; • extended unaccompanied overseas service allowance; • telephone/communications allowance; • mission allowance; • camping allowance; and • meals and accommodation allowances (if applicable) and incidentals allowance.

Allowances will be paid while an AFP employee is on leave accrued during the deployment period.

During the period of deployment, AFP employees will accrue recreation leave as outlined in paragraphs 22 to 25 of this Ruling. Miscellaneous leave may also be granted for special circumstances (for example, death of a close family member).

For terms of deployment of 40 weeks, 8 weeks recreation leave will be accrued less six days for additional training, briefing, debriefing and travel.

For terms of deployment of 60 weeks, 12 weeks recreation leave will be accrued less nine days for additional training, briefing, debriefing and travel.

For terms of deployment of 80 weeks, 16 weeks recreation leave will be accrued less 12 days for additional training, briefing, debriefing and travel.

For terms of deployment of 100 weeks, 20 weeks recreation leave will be accrued less 15 days for additional training, briefing, debriefing and travel.

The general expectation is that AFP employees will be required to take recreation leave in blocks of four weeks, each block following a 16 week deployment. This may vary due to mission-specific requirements, however, employees will be provided with leave as outlined in paragraphs 22 to 25 of this Ruling. If an employee chooses to return to Australia on recreation leave they would not be expected or required to perform any work related duties in Australia.

Recreation leave and mandatory recreation leave already accrued by an AFP employee prior to their deployment will be held over until their term of deployment ceases.

During the periods of leave following each posting, AFP employees will make themselves available for additional training, briefing and debriefing at the discretion of the National Manager of the IDG.

During the term of deployment, the leave entitlements referred to in paragraphs 22 to 25 of this Ruling replace the AFP employees entitlement to recreation leave and mandatory recreation leave prescribed under the AFP Certified Agreement 2003-2006 (Certified Agreement) except for AFP employees who do not complete six months of their deployment and terminate services voluntarily.

Where an AFP employee voluntarily terminates their term of deployment prior to the completion of six months, the employee is not entitled to the recreation leave referred to in paragraphs 22 to 25 of this Ruling. The employee will then be entitled to recreation leave under the Certified Agreement.

Training, briefing and debriefing may be conducted in person, by telephone or any other communication method determined by the National Manager of the IDG.

The National Manager of the IDG may, upon request from an AFP employee, consider any special circumstances in respect of the employee (for example the death of a close family member) to determine whether to return the employee to their home base.

Employees may seek approval from the National Manager of the IDG to change, in blocks of 20 weeks only, a period of engagement provided they provide at least 24 weeks notice of their intention. However, employees on terms of deployment of 60, 80 or 100 weeks may not reduce their term of deployment below 60 weeks.

Paragraph 6 of the Government Treaty provides that Australian personnel will be provided with tax privileges consistent with Article VII of the Contractual Agreement. Article VII (paragraph B) of the Contractual Agreement grants an exemption to Coalition Provisional Authority personnel and contractors which includes AFP employees from taxation by the Government of the Hashemite Kingdom of Jordan on their income, salaries and emoluments.

Subject to paragraph 36 of this Ruling, the salary and allowances referred to in paragraphs 18 and 19 of this Ruling, derived by AFP employees described in paragraphs 3 to 6 of this Ruling deployed to Jordan are exempt from tax under section 23AG of the ITAA 1936 where: • the employee has been engaged, or is taken to have been engaged, in service in Jordan for a continuous period of not less than 91 days; and • the salary and allowances are derived from that foreign service, including payments for recreation leave that has wholly accrued from the period of service in Jordan.

The pre-deployment composite allowance and transfer allowance referred to in paragraph 19 of this Ruling are not exempt from tax under subsection 23AG(1) of the ITAA 1936.

In the 2004-2005 income year, Daniel, an AFP employee derives the following types of income: • Australian employment income of $60,300; • allowable deductions against Australian income of $300; • foreign exempt employment income of $30,100; and • expenses directly related to exempt foreign employment income of $100. Assume that Daniel has appropriate private patient hospital cover for Medicare levy surcharge purposes. The total amount of Australian tax payable will be calculated with reference to the following formula: (Notional gross tax/Notional gross taxable income) x Other taxable income Step 1 Daniel's notional gross taxable income is $90,000 ([$60,300 - $300] + [$30,100 - $100]). Step 2 The notional gross tax is $29,362 (the normal Australian income tax and Medicare levy payable on a taxable income of $90,000). Step 3 The other taxable income is $60,000 (Australian employment income). Step 4 The Australian tax payable (including Medicare levy) on Daniel's Australian income is: ($29,362/$90,000) x $60,000 = $19,574.67

Subsection 6-5(2) of the ITAA 1997 provides that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources, whether in or out of Australia, during the income year.

Salary and wages are ordinary income for the purposes of subsection 6-5(2) of the ITAA 1997.

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 23AG of the ITAA 1936 which deals with exempt foreign employment income.

Section 23AG of the ITAA 1936 provides an exemption from Australian tax on the foreign earnings derived by an Australian resident who has been engaged in foreign service continuously for 91 days or more.

Subsection 23AG(1) of the ITAA 1936 states:

The basic tests for the exemption of foreign employment income in subsection 23AG(1) of the ITAA 1936 are: • the taxpayer must be a 'resident of Australia'; • the taxpayer must be engaged in 'foreign service'; • the foreign service must be for a continuous period of not less than 91 days; and • the taxpayer must derive 'foreign earnings' from that 'foreign service'. However, certain foreign earnings that meet these tests may not be exempt from tax (see paragraphs 82 to 87 of this Ruling).

The determination of a person's residency status depends on that person's circumstances and is a determination made in relation to each year of income. For further information see Taxation Ruling IT 2650. This Ruling only applies to the class of entities described in paragraphs 3 to 6 of this Ruling who remain Australian residents for tax purposes during their deployment to Jordan.

This Ruling is based on the assumption that AFP employees deployed to Jordan will remain Australian residents for tax purposes throughout the period of their deployment.

'Foreign service' is defined as 'service in a foreign country as the holder of an office or in the capacity of an employee' (subsection 23AG(7) of the ITAA 1936).

The term 'employee' is defined within subsection 23AG(7) of the ITAA 1936 to include 'a person employed by a government or an authority of a government or by an international organisation'.

AFP employees referred to in paragraphs 3 to 6 of this Ruling are considered to meet the above definition of an 'employee'.

Deployment of AFP employees to Jordan constitutes 'foreign service' as each employee is undertaking 'service in a foreign country as a holder of an office or in the capacity of an employee'.

Each AFP employee based in Jordan is expected to serve continuously in Jordan for a period of at least 91 days. These periods of 'foreign service', if met, satisfy the test that Australian residents working overseas must be engaged in foreign service 'for a continuous period of not less than 91 days'.

Should an AFP employee depart Jordan prior to the completion of 91 days of continuous service, that employee will normally be ineligible for the exemption.

However, in certain instances, an employee who departs Jordan prior to serving the necessary number of days, may still qualify for exemption if they return to continue their posting at a later date (refer paragraphs 9 to 16 of Taxation Ruling TR 96/15).

Subsection 23AG(6) of the ITAA 1936 treats certain temporary absences from foreign service as forming part of the period of foreign service. The Commissioner's view on the application of that subsection is reflected in paragraphs 9 to 11 of TR 96/15.

Absences which form part of the period of foreign service include absences taken in accordance with the terms and conditions of employment because of accident or illness or recreation leave, other than: (a) leave wholly or partly attributable to a period of service or employment other than the foreign service; (b) long service leave, furlough, extended leave or leave of a similar kind (however described); or (c) leave without pay or on reduced pay.

As the overseas employment of the AFP employees are performed under a cyclical arrangement, the whole of the work cycle (times on and off) are regarded as a continuous period of employment (Taxation Ruling IT 2441 and TR 96/15).

IT 2441 states that where a resident is employed in a foreign country, leave taken in circumstances similar to those mentioned in Taxation Ruling IT 2015 is treated as recreation leave that forms part of a period of foreign service under subsection 23AG(6) of the ITAA 1936. Subsection 23AG(6) states that the period of foreign service will include recreation leave other than long service leave or leave without pay or reduced pay and will not constitute a break in a period of foreign service.

IT 2015 refers to employees who are engaged in uninterrupted cycles of five weeks on site and five weeks leave in Australia, without any entitlement for additional annual leave and who are not required to attend company offices in Australia during leave periods.

TR 96/15 in referring to the recreation leave under subsection 23AG(6) of the ITAA 1936 considers extended leave not be part of the recreation leave. However, additional recreation leave entitlements granted to employees posted overseas are not extended leave where the additional leave is reasonable. For example where it is granted due to the hardship involved in the postings resulting in the need for more rest and recreation.

The period of taking recreation leave in blocks of four weeks, each block following a 16 week deployment, is granted to AFP employees replacing the recreation leave and mandatory recreation leave entitlements under the Certified Agreement and having regard to the conditions under which they are deployed to Jordan. Therefore, it is considered that the recreation leave granted is reasonable and is considered to be recreation leave under subsection 23AG(6) of the ITAA 1936 and would not be considered as extended leave (see paragraph 55(b) of this Ruling).

In respect of periods spent by AFP employees on visits to Australia as described in paragraphs 22 to 26 of this Ruling, these periods are temporary absences from duty authorised by the terms and conditions of the employee's foreign service and it is considered that the work arrangement is a cyclical arrangement as defined in IT 2441 and TR 96/15. Therefore, the entire period of the cyclical arrangement forms part of a continuous period of foreign service and is taken to form part of the employee's foreign service period. These absences will not break the continuity of eligible foreign service.

If an AFP employee who is in Australia as described in paragraphs 22 to 26 of this Ruling, extends their stay to take further recreational leave, that further recreation leave will not be taken to form part of the foreign service. As the normal leave accruals are replaced with the leave entitlements referred to in paragraphs 22 to 26 of this Ruling while on deployment, any further leave taken will not have accrued wholly from foreign service in Jordan.

It is considered that during the periods of leave following each posting, when AFP employees make themselves available for additional training, briefing and debriefing at the discretion of the National Manager of the IDG, should be treated as part of the person's continuous period of foreign service provided they are not excessive.

Miscellaneous leave granted to the AFP employee because of the accident, illness or death of another person will also form part of the employee's period of continuous foreign service where the leave is for a short period.

In certain limited circumstances, breaks other than those specified in paragraph 55 of this Ruling are also taken to form part of a period of foreign service. Such breaks include weekends, public holidays, rostered days off, and days off in lieu of such, where such breaks are authorised by the terms and conditions of the deployment. However, where such breaks are used to return to Australia they must not be excessive. Where the break is excessive the period of foreign service will still not be broken if continuity of the foreign service period can be maintained by application of the rules outlined in paragraph 67 of this Ruling.

Breaks taken to visit or return to Australia are considered excessive when the total of such breaks are more than one-sixth of the period of scheduled foreign service or, if the period of foreign service is ongoing, more than one-sixth of the income year. This one-sixth administrative test is different to the 1/6 legislative rule covered in paragraphs 68 to 70 of this Ruling.

In determining whether the continuity of foreign service can be maintained, the AFP employee should consider the application of: • the former subsections 23AG(6A) to 23AG(6E) of the ITAA 1936 if the break occurs prior to 19 December 2005. The Commissioner's view on the application of those subsections is reflected in paragraphs 14 to 16 and the accompanying examples in paragraphs 30 and 31 of TR 96/15, and the examples in paragraphs 31A and 31B of the addendum to TR 96/15; or • subsection 23AG(6A) of the ITAA 1936 if the break occurs on or after 19 December 2005. Paragraphs 68 to 70 of this Ruling provide an explanation of this tax provision. Alternatively, the AFP employee could seek professional advice from their taxation adviser or the Australian Taxation Office.

The 1/6 legislative rule allows two or more continuous periods of foreign service to be joined as a total period of foreign service, unless, at any time, the total period of absence (in days) from foreign service between the continuous periods of foreign service exceeds 1/6 of the number of days of the total period of foreign service.

If the period of absence exceeds 1/6 of the total period of foreign service at any time, continuity of foreign service is broken. The AFP employee will begin a new period of foreign service when he or she next engages in foreign service and must determine whether that period of foreign service lasts for at least 91 continuous days (subsections 23AG(6A) of the ITAA 1936).

The 1/6 legislative rule should not be confused with the one-sixth administrative test outlined at paragraphs 65 and 66 of this Ruling. The 1/6 legislative rule in subsection 23AG(6A) permits two or more periods of foreign service to constitute a continuous period of foreign service where continuity would be otherwise broken by absence. Absences between the periods of foreign service under the 1/6 legislative rule do not form part of the continuous period of foreign service. In contrast, the one-sixth rule is an administrative test which permits what would otherwise be a break in the foreign service to be included in a continuous period of foreign service.

The definition of 'foreign earnings' is contained in subsection 23AG(7) of the ITAA 1936, which provides that: 'foreign earnings' means income consisting of earnings, salary, wages, commission, bonuses or allowances, or of amounts included in a person's assessable income under Division 13A, but does not include any payment, consideration or amount that: (a) is included in assessable income under Subdivision AA of Division 2; 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 exclusions to the definition of 'foreign earnings' in paragraph 71 of this Ruling are not, however, relevant to this scheme as they relate to pensions, annuities, eligible termination payments and other similar amounts.

The remuneration of deployed AFP employees takes the form of an annual salary entitlement and the payment of various allowances.

These salary and allowances which are described in paragraphs 18 and 19 of this Ruling, with the exception of the pre-deployment composite allowance and travel allowance, come within the definition of 'foreign earnings' in subsection 23AG(7) of the ITAA 1936.

Whilst the salary and allowances of AFP employees may be paid into financial institutions in Australia, those 'earnings' are still considered 'foreign earnings'.

To qualify for the exemption the 'foreign earnings' must be derived from the 'foreign service'. That does not mean that the foreign earnings need to be derived at the time of engaging in foreign service. The important test is that the foreign earnings, when derived, need to be derived as a result of the undertaking of that foreign service.

In the case of allowances paid after the taxpayer returns to Australia that relate to the period of foreign service, such allowances are treated as foreign earnings derived from that foreign service. Also, any advances against salary or allowances paid to the taxpayer prior to the undertaking of foreign service arising from the undertaking of that foreign service would be treated as foreign earnings from foreign service.

The receipt of the following allowances: • deployment composite allowance paid during overseas posting and recreation leave periods taken during the term of the overseas posting; • motor vehicle allowance (paid only to AFP employees deployed as Coordinators); • extended unaccompanied overseas service allowance; • telephone/communications allowance during the overseas posting; • mission allowance; • camping allowance; and • meals and accommodation allowances (if applicable) and incidentals allowance, are considered to be foreign earnings from the foreign service as they relate to engaging in foreign service in Jordan.

The salary that is paid when taking recreational leave that accrued during the period of foreign service is also considered to be foreign earnings from that service, even though the recreational leave may be taken after the completion of the foreign service.

An AFP employee is entitled to a composite allowance while undertaking pre-deployment training prior to engaging in foreign service. The composite allowance payable during the pre-deployment period is not derived from foreign service. It is derived as a result of the training taken prior to leaving Australia and does not, therefore, qualify for exemption under section 23AG of the ITAA 1936.

An AFP employee is also entitled to a transfer allowance prior to engaging in foreign service and after the completion of foreign service. The transfer allowance payable prior to the deployment period and after the end of the foreign service is not derived from that foreign service. It is paid as a compensation for non-reimbursed expenditure incurred by the AFP employee prior to engaging in foreign service and after completion of foreign service and does not, therefore, qualify for exemption under section 23AG of the ITAA 1936.

Subsection 23AG(2) of the ITAA 1936 provides that no exemption is available under subsection 23AG(1) of the ITAA 1936 in circumstances where an amount of foreign earnings derived in a foreign country is exempt from tax in the foreign country solely because of: • a double tax agreement or a law of a country that gives effect to such an agreement (paragraphs 23AG(2)(a) and (b)); • a law of that foreign country which generally exempts from, or does not provide for, the imposition of income tax on income derived in the capacity of an employee, income from personal services or any other similar income (paragraphs 23AG(2)(c) and (d)); and • a law or international agreement dealing with privileges and immunities of diplomats or consuls or of persons connected with international organisations (paragraphs 23AG(2)(e), (f) and (g)).

There is currently no tax treaty between Australia and Jordan.

The privileges and immunities of persons connected with an international organisation does not apply to AFP employees working in Jordan.

The foreign earnings derived by AFP employees are not currently exempt from income tax in Jordan.

Paragraph 6 of the Government Treaty provides that Australian personnel will be provided with tax privileges consistent with Article VII of the Contractual Agreement. Article VII (paragraph B) of the Contractual Agreement grants an exemption to Coalition Provisional Authority personnel and contractors which includes AFP employees from taxation by the Government of the Hashemite Kingdom of Jordan on their income, salaries and emoluments.

As a result, the foreign earnings of the deployed AFP employees are exempt from tax in Jordan solely for a reason other than those listed in subsection 23AG(2) of the ITAA 1936. Therefore, subsection 23AG(2) will not operate to deny the 'foreign earnings' exemption under subsection 23AG(1) of the ITAA 1936.

The 'foreign earnings' of AFP employees that are exempt from Australian tax under section 23AG of the ITAA 1936 are nevertheless taken into account in calculating the Australian tax on other assessable income derived by the employee (subsection 23AG(3) of the ITAA 1936).

Tax on other assessable income will be calculated by applying to the non-exempt income (for example, Australian salary, investment income), the notional average rate of tax payable on the sum of exempt income and non-exempt income.

In calculating these amounts, any deductions that relate to the exempt income are allowed as if the exempt income was assessable income. That is, expenses which relate directly to earning income in Jordan are deductible from exempt income.

The following is a detailed contents list for this Ruling: Paragraph What this Class Ruling is about 1 Relevant taxation provision(s) 2 Class of entities 3 Qualifications 8 Date of effect 12 Scheme 13 Ruling 35 Example 37 Appendix 1 - Explanation 38 Resident of Australia 45 Engaged in foreign service 47 For a continuous period of not less than 91 days 51 Temporary absences forming part of a period of foreign service 54 Temporary absences not breaking the period of foreign service: the one-sixth administrative test 65 Temporary absences not breaking the period of foreign service: the legislative rules 67 Continuity of the period of foreign service: 1/6 legislative rule 68 Foreign earnings 71 From that foreign service 76 Certain foreign earnings not exempt 82 Exemption with progression 88 Appendix 2 - Detailed contents list 91