Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon Scott Morrison MP)Chapter 4 Tax exemption for payments made under the Defence Force Ombudsman Scheme
Outline of chapter
4.1 Schedule 4 to this Bill amends the ITAA 1997 to exempt from income tax payments made by the Commonwealth, on the recommendation of the Defence Ombudsman, as reparation for abuse by Australian Defence Force personnel.
Context of amendments
The Defence Abuse Response Taskforce
4.2 The Defence Abuse Response Taskforce was established on 10 April 2011 to assess and respond to individual cases of sexual and other abuse in the Australian Defence Force.
4.3 The Defence Abuse Response Taskforce administered reparation payments through the Defence Abuse Reparation Scheme of up to $50,000 to complainants who likely suffered abuse in the Australian Defence Force.
4.4 Reparation payments were not paid as compensation for loss or damage for any asserted, perceived, or possible legal liability on behalf of the Commonwealth, or for any injury, disease or impairment. The payments did not affect complainants' statutory, common law or other legal rights.
Taxable status of reparation payments
4.5 Whether a payment is subject to income tax is determined by its character in the hands of the recipient. A payment that has the character of income according to ordinary concepts is assessable income unless a statutory exemption applies. One-off payments will generally have the character of ordinary income if they are received as a product of, or in relation to, employment, services rendered or the carrying on of a business.
4.6 As payments made by the Defence Abuse Response Taskforce arose out of an employment relationship with the Department of Defence or the Australian Defence Force, they could also be characterised as statutory income under section 15-2 of the ITAA 1997, which applies to allowances and other things provided in respect of employment.
4.7 However, section 51-5 of the ITAA 1997 operates to ensure that reparation payments made under the Defence Abuse Reparation Scheme are exempt from income tax.
The Defence Force Ombudsman
4.8 The Defence Abuse Response Taskforce concluded on 31 August 2016. The administration of reparation payments is now performed by the Defence Force Ombudsman.
4.9 The Ombudsman Act 1976 establishes the office of the Commonwealth Ombudsman to investigate complaints made under the Ombudsman Act 1976 and to perform other specialised functions.
4.10 The Ombudsman Regulations 2017 establish the office of the Defence Force Ombudsman and confer 'the function of taking appropriate action to respond to a complaint of abuse made by a complainant about abuse engaged in by a member of Defence'.
4.11 Appropriate action may include facilitating counselling or a restorative engagement conference for the complainant, or making recommendations to the Department of Defence that they make a reparation payment to the complainant in certain circumstances.
4.12 The payments are not intended to be compensation and complainants will not be required to release the Commonwealth from liability.
4.13 The Defence Force Ombudsman may also make a recommendation for an additional payment in connection with the reparation payment for failure of the Department of Defence to respond appropriately to the abuse.
Summary of new law
4.14 This measure amends the ITAA 1997 to exempt from income tax, payments made in accordance with a recommendation of the Defence Force Ombudsman in relation to abuse by Australian Defence Force personnel.
Comparison of key features of new law and current law
| New law | Current law |
| Payments made to a recipient from the Commonwealth in relation to a recommendation by the Defence Force Ombudsman in relation to abuse by Australian Defence Force personnel are exempt from income tax. | Payments made to a recipient under the Defence Abuse Reparation Scheme are exempt from income tax.
Payments made to a recipient from the Commonwealth in relation to a recommendation by the Defence Force Ombudsman in relation to abuse by Defence personnel may be subject to income tax depending on the particular circumstances of the recipient. |
Detailed explanation of new law
4.15 The Defence Force Ombudsman may recommend that the Department of Defence make a payment to a member or prior member of the Australian Defence Force as reparation for abuse.
4.16 This measure updates the references to the administration of reparation payments to ensure that reparation payments made under the new Defence Force Ombudsman mechanism are exempt from income tax.
4.17 This outcome is achieved by exempting from income tax, payments from the Commonwealth in relation to a recommendation by the Defence Force Ombudsman performing a function conferred by section 14 or 14B of the Ombudsman Regulations 2017 . [Schedule 4, item 3, item 1.7 in table in section 51-5]
4.18 The Ombudsman Regulations 2017 confer on the Defence Force Ombudsman the functions of taking appropriate action to respond to both new and old complaints of abuse. Appropriate action includes making recommendations to the Defence Secretary to make a reparation payment to the complainant.
4.19 This Schedule applies to ensure that reparation payments will not be assessable income, so that those who receive such a payment will receive the full benefit of the payment.
4.20 Section 11-15 of the ITAA 1997 lists income which is exempt from income tax. Schedule 4 makes a consequential amendment to this list to include payments made in relation to a Defence Force Ombudsman recommendation as a category of exempt income. [Schedule 4, item 2]
4.21 This measure also repeals the exemption from income tax for the now concluded Defence Abuse Reparation Scheme. No reparation payments will be affected by this repeal as no new payments are being made under the Scheme. [Schedule 4, item 1]
Application and transitional provisions
4.22 These amendments will apply to the 2017-18 income year and later income years. [Schedule 4, item 4]