House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)

Chapter 7 - Overseas forces tax offsets

Outline of chapter

7.1 Schedule 8 to this bill amends the overseas forces tax offset provisions of the ITAA 1936 to exclude periods of service for which an income tax exemption for foreign employment income is available.

Context of amendments

7.2 Under the overseas forces tax offset provisions, periods of service that entitle a taxpayer to either the overseas defence force tax offset or the UN armed forces tax offset exclude any period of service for which an income tax exemption applies for periods of 'warlike service' under section 23AC or 23AD of the ITAA 1936, or for service with the UN in Cambodia under section 23ADA of the ITAA 1936.

7.3 However, periods of service that entitle a taxpayer to either the overseas defence force tax offset or the UN armed forces tax offset do not exclude a period of service for which an income tax exemption for foreign employment income is available under section 23AG of the ITAA 1936.

7.4 The amendments rectify this inconsistency and provide equitable treatment to taxpayers entitled to an exemption under section 23AG of the ITAA 1936 and to taxpayers entitled to an exemption under sections 23AC, 23AD or 23ADA.

Summary of new law

7.5 The amendments ensure that a period of service that entitles a taxpayer to either the overseas defence force tax offset or the UN armed forces tax offset excludes a period of service for which an income tax exemption for foreign employment income is available under section 23AG of the ITAA 1936.

Detailed explanation of new law

7.6 Schedule 8 removes the entitlement to the UN armed forces tax offset for a period of service where an income tax exemption for foreign employment income is available under section 23AG of the ITAA 1936 for the same period of service. [Schedule 8, item 1, subsection 23AB(8A)]

7.7 For example, a taxpayer may qualify for an exemption under section 23AG of the ITAA 1936 for a period of service in East Timor. Currently, this period of service may also qualify as service for the purposes of the UN armed forces tax offset under section 23AB of the ITAA 1936. The amendment ensures that the taxpayer cannot claim both the tax offset and the tax exemption for the same period of service.

7.8 Schedule 8 also removes the entitlement to the overseas defence force tax offset for a period of service where an income tax exemption for foreign employment income is available under section 23AG of the ITAA 1936 for the same period of service. [Schedule 8, item 2, subsection 79B(3A)]

7.9 For example, an ADF member serving overseas in a declared locality in a 'non-warlike' situation may qualify for an exemption under section 23AG of the ITAA 1936. Currently, this period of service may also qualify for the overseas defence force tax offset under section 79B of the ITAA 1936. The amendment ensures that the ADF member cannot claim both the tax offset and the tax exemption for the same period of service.

Application provisions

7.10 The amendments apply from 1 July 2001 as announced in former Assistant Treasurer's Press Release No. 28 on 28 June 2001.

7.11 The amendments were first announced by the Government on 22 May 2001 in the 2001-2002 Federal Budget. The Government's proposal to rectify the inconsistency in the tax law was announced before the former Assistant Treasurer announced the prospective application date. The amendments are to apply from 1 July 2001 to ensure that taxpayers do not seek to take advantage of the inconsistency in the tax law contrary to the Government's announced measure.