ADF members who serve overseas during the tax year will, in most cases, remain tax residents of Australia. As a tax resident you remain subject to Australian tax on your worldwide income.
If you are seconded overseas for a significant length of time (i.e. 2 years or more) and you are not a member of a Commonwealth superannuation fund, then you may need to discuss your tax residency position with a PwC tax professional in more detail.
For ADF members who remain Australian tax residents whilst performing overseas service, part of your income may still be exempt from Australian income tax.
Please refer to your PAYG payment summary to determine the classification of your overseas service income and whether it falls into one of the exemption categories below.
Section 23AD Exemption
Section 23AD provides a specific legislative exemption from Australian income tax for income earned overseas in particular circumstances.
A section 23AD exemption applies where the Chief of the Defence Force (CDF) has determined that you have performed eligible duty in a specifically identified area. Under this exemption, your income earned and allowances received whilst on deployment overseas are exempt from Australian taxes.
Section 23AD income does not appear on your PAYG payment summary and does not need to be reported in your income tax return. If queried by the ATO, you can rely on your deployment orders to substantiate the fact that this income has been excluded.
Section 23AG Exemption
Even if you are not eligible for a 23AD exemption, you may still be entitled to an exemption under section 23AG of the Income Tax Assessment Act (1936), where you have worked overseas continuously for a period of 91 days or more. This exemption continues to apply to members of a disciplined force who are deployed outside of Australia by the Australian government.
In contrast to 23AD income, 23AG exempt income will be reported on your PAYG payment summary (under Exempt Foreign Employment Income) and will need to be disclosed in your Australian income tax return. 23AG income is also taken into account in calculating your effective rate of tax as well as your liability to Medicare or the Medicare Levy Surcharge (if applicable).
Your PAYG payment summary will include a note disclosing the number of days you are eligible for the 23AG exemption.
How will I know if I am eligible for a tax exemption?
If the ADF has determined that you are eligible for the section 23AD or 23AG income tax exemption, this will be noted on your PAYG payment summary.
What do I need to do to ensure I receive the exemption I am entitled to?
The income that is exempt will be excluded from the taxable income component of your year-end payment summary. The number of days to which this exemption applies will be noted at the bottom of the summary. You do not need to take any action to receive this exemption.
If I do not qualify for a section 23AD or 23AG exemption, will I be eligible for an exemption under section 23AF?
Australian Defence Force projects or deployments are not generally approved by Austrade. Therefore, it is unlikely that a 23AF income tax exemption will apply to you as a member of the ADF.
If my overseas deployment does not meet the requirements for 23AG or 23AF exemption, is there any other relief available?
Where you are not eligible for 23AD or 23AG income tax exemptions, you may be entitled to an overseas forces tax offset. Please refer to the help article on rebates and offsets for further detail.
Can you provide an example of how these overseas income exemptions apply?
Corporal A was paid $50,000 during the 2017 Australian tax year. He was deployed overseas for half of the year. He received tax free pay under section 23AD. This detail is recorded on Corporal A’s PAYG Payment Summary.
Under section 23AD, the half of his income that relates to services performed on a specified operation in a specified area deployment ($25,000), is exempt from tax and is not included in Corporal A’s taxable income. The other half is included as taxable income to be taxed at his marginal tax rate. The amount of tax paid on this income ($25,000) will be $1,292.
Able Seaman B was paid $50,000 during the 2017 Australian tax year. She was deployed overseas for a total of 6 months of the year. She received pay relating to service in a specified area subject to a 23AG tax exemption. This detail is recorded on her PAYG Payment Summary.
Under Section 23AG, the half of her income that relates to services performed in a 23AG specified area ($25,000), is exempt from tax. However, the full amount of income ($50,000) must be included in Able Seaman B’s income tax return. Able Seaman B’s taxable income is $25,000 but is subject to tax at an effective rate that is calculated based on a notional taxable income of $50,000. For the purposes of this example, Able Seaman’s amount of tax to be paid on this income will be close to $7,797 .