PZTL and Commissioner of Taxation (Taxation)

[2018] AATA 461

PZTL and Commissioner of Taxation (Taxation) [2018] AATA 461 (23 February 2018)

Division:TAXATION & COMMERCIAL DIVISION

File Number:  2017/3792

Re:PZTL

APPLICANT

AndCommissioner of Taxation

RESPONDENT

DECISION

Tribunal:Senior Member Theodore Tavoularis

Date:23 February 2018

Date of written reasons:        9 March 2018

Place:Brisbane

The decision under review is affirmed.

...................[sgd].....................................................

Senior Member Theodore Tavoularis

CATCHWORDS

TAXATION – whether Applicant’s employment outside Australia was ‘by’ the Commonwealth or a Commonwealth agency – where Applicant was employed by an external government contractor – whether circumstances of deployment were sufficient to say it was ‘by the Commonwealth’ – decision under review affirmed

LEGISLATION

Income Tax Assessment Act 1936 (Cth), ss 23AG
Tax Laws Amendment (2009 Budget Measures No. 1) Bill 2009

Explanatory Memorandum

Tax Laws Amendment (2009 Budget Measures No. 1) Bill 2009

Second Reading Speech

CASES

Taxation Ruling 2013/7

REASONS FOR DECISION

Senior Member Theodore Tavoularis

9 March 2018

1. The issue before the Tribunal is one of short compass: whether or not the Applicant’s continuous period of foreign service is directly attributable to his deployment by the Commonwealth or an authority of the Commonwealth.

   SOME BACKGROUND FACTS

2. The Applicant formed an intention to serve overseas as part of the Australian Defence Force (“ADF”) initiative in the wars in the Middle East.

3. This intention was manifested by him not, to use a common phrase, “signing up” for the Army or ADF. Rather, it manifested in his recruitment via an independent contracting entity (“the employer”). He was given a specific role – that of a Field Service Representative (“FSR”), and commenced as an FSR from mid-November 2015. He performed the duties given to him by his employer for a certain period comprising 1 March 2016 to 30 June 2016 in the Middle East.

4. As did every other then-taxpayer, the Applicant had an obligation to file a usual and necessary tax return for the income he derived in the 2015-2016 financial year. But first, he decided (with his tax agent) to obtain a private binding ruling from the Respondent as to whether this income was exempt income pursuant to s 23AG of the Income Tax Assessment Act 1936 (Cth) (“the 1936 Act”).

5. The Applicant was not successful in the private ruling. The Respondent said the income the Applicant derived during the period March-June 2016 from his employment with the employer was not exempt from Australian income tax.

6. The essential ingredient of the Respondent’s decision in this regard was that the Applicant was not a “member of a disciplined force” for the purposes of s 23AG(1AA)(d) of the 1936 Act. The Applicant, as is his right, further challenged the Respondent’s ruling about the status of his subject income.

7. On 1 May 2017, this further challenge by the Applicant was decided against him. It is this decision which is the reviewable decision now before the Tribunal, via the Applicant’s activation of this jurisdiction arising from the filing of his application for review on 26 June 2017.

   CONCESSIONS

8. Two concessions have been made by the Respondent. The first of those is that the Applicant is a “member of a disciplined force” pursuant to s 23AG(1AA)(d) of the 1936 Act. Secondly, that the ADF represents the Commonwealth or an authority of the Commonwealth pursuant to s 23AG(1AA)(d)(i)-(ii).

9. The primary resulting contention of the Respondent is that the Applicant’s period of continuous foreign service was not directly attributable to his deployment outside Australia as a member of a disciplined force or an authority thereof. The directly resulting further contention of the Respondent is that, if he was deployed by anyone, as contemplated by this section, it was his abovementioned employer.

   THE CIRCUMSTANCES OF THE APPLICANT’S EMPLOYMENT

10. The terms and basis of the Respondent’s employment are not extraordinary and are not controversial. They are adequately set out in Exhibit 2, from paragraphs 6-21. There can be no doubt that the Applicant was employed by – and initially primarily answerable to – the employer. The Commonwealth of Australia had an arrangement with the employer for the provision of certain adjunct services, augmenting the ADF’s effort in the relevant Middle Eastern region. In other words, it was the employer who procured or sourced the Applicant and who then made the Applicant available to the ADF as a kind of support facility or auxillary to the ADF’s mission in this region.

11. During the hearing, there was considerable discussion around the terms of the Applicant’s employment with the employer. It is clear from the Applicant’s contract of employment with the employer that it is minimally, if at all, inconsistent with an ordinary civilian contract of employment.

12. Further, the terms of this contract of employment clearly delineate between how the Applicant was engaged to participate in this overseas mission, compared to regular members of the ADF. Here are some examples:

    (a)His remuneration was governed by a particular award – the Manufacturing and Associated Industries and Occupations Award 2010 – which, of course, is not the assessment mechanism for the remuneration of regular members of the ADF.

    (b)His remuneration package involved certain one-off payments plus an obligation that the salary must be kept confidential is, again, in a different paradigm to how regular members of the ADF are remunerated.

    (c)As well, his expenses incurred in the course of his work were not reimbursed by the ADF or any other part of the Commonwealth, but rather by the employer.

    (d)Similarly, incidental items such as a laptop, mobile phone, reimbursed travel and accommodation costs – were all paid by the employer.

    (e)It also seems quite clear from Schedule 1 to the employment contract that it was the employer who governed specific aspects of the Applicant’s employment, including, but not limited to, rotations he had to undertake, plus any variation or change in the nature of those rotations.

    (f)Schedule 2 of the employment contract set out the specific nature and parameters of his tasks and the location at which those tasks were to be performed.

    THE DEPLOYMENT ORDER

13. At today’s hearing, the Applicant tendered a document that was marked Exhibit 5 in these proceedings called CJOPS Directive 67/16. That document, on its second page, refers to concepts such as a “deployment order” and a “movement order”. The contention from the Applicant seemed to be that, because these types of operational directives were issued by the ADF, he somehow thus came under the ADF’s umbrella in terms of how the income he derived via his external employment should be regarded.

14. For reasons I will outline below, I am of the view that, while a person in a proceeding like this acting on his own may have inadvertently become convinced of this view, such a conviction is, for the purposes of the law, misplaced.

15. The basis of this misplaced thinking on the part of the Applicant derives from his mistaken interpretation of how he was deployed to the relevant zone of operations in the Middle East. In his mind, the deployment occurred via the ADF because it issued the notice of deployment. On this basis, the Applicant says that the relevant income he derived from March-June 2016 is exempt income.

16. The critical misapprehension of the Applicant relates to the identity of who was responsible for his deployment for the single continuous period of foreign service. The terms of the employment contract make it clear that it was not, and can never have been, the ADF or any other arm or branch of the Commonwealth. The only entity that, on these facts, can possibly be responsible for the Applicant’s deployment is, of course, his employer.

17. If today’s contest can be reduced to one question, it is this: whether the fact of the Applicant’s physical transport from Australia to the zone of operations (in this case, by the ADF, a Commonwealth authority) satisfies s 23AG(1AA)(d) of the 1936 Act.

    ANALYSIS AND DECISION

18. For the sake of clarity, it is beneficial for me to read the relevant provisions in full:

    Exemption of income earned in overseas employment

    (1)  Where a resident, being a natural person, has been engaged in foreign service for a continuous period of not less than 91 days, any foreign earnings derived by the person from that foreign service are exempt from tax.

    (1AA)  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:

    (a)the delivery of Australian official development assistance by the person's employer (except if that employer is an Australian government agency (within the meaning of the Income Tax Assessment Act 1997));

    (b)activities of the person's employer in operating a public fund that:

    (i)     is covered by item 9.1.1 or 9.1.2 of the table in subsection 30-80(1) of the Income Tax Assessment Act 1997 (international affairs deductible gift recipients); and

    (ii)    meets the special conditions mentioned in that item;

    (c)the activities of the person's employer, if the employer is exempt from income tax because of paragraph 50-50(1)(c) or (d) of the Income Tax Assessment Act 1997 (prescribed institutions located or pursuing objectives outside Australia);

    (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;

    (e)an activity of a kind specified in the regulations.

19. As helpfully outlined by counsel for the Respondent, resolution of this issue depends on the proper interpretation of this provision. It is necessary to properly construe the provisions of that section. This is done not just be looking at the language of the provision, but also to the scope and object of the statute read as a whole.

20. It is necessary to construe this provision by having regard to its context, general purpose, policy and its consistency and fairness.

21. As mentioned earlier, and at the risk of repeating myself, the Applicant bases his contentions on an assumption that his deployment to the zone of operations occurred via the ADF or the Commonwealth. 

22. The section under consideration (d) is one of five categories under which income can be classified as exempt pursuant to s 23AG(1) of the 1936 Act.

23. For the Applicant to succeed in this application, he must satisfy the provisions of one of those categories. If he does not meet any one of those categories, his income is taxable.

24. As stated above, the only category potentially relevant to the Applicant is found in sub-section 23AG(1AA)(d). Owing to the concessions of the Respondent, the question I am left to answer is thus: was the Applicant deployed outside Australia by the ADF or any other authority of the Commonwealth or a State?

25. To answer that question, I must identify the entity responsible for the Applicant’s deployment. The Applicant says it is the ADF because the ADF transported him and caused him to arrive at a particular point in the overseas zone of operations, to be accommodated there, and, at the end of that period of service, to depart from that zone. 

26. I think this presumption is incorrect. I am of the view that the entity responsible for the Applicant’s employment is the entity that controls or determines his requirement to undertake the foreign service, the length of that service, and its overall conditions, including manner of remuneration, how that remuneration is determined and further including incidental components of that remuneration. For the purposes of this sub-section (d), it is the employer that causes the relevant deployment to happen for the purposes of this sub-section.

27. Put another way, it can only be the employer because if the employer is taken out of the present factual matrix, there could not possibly be a “continuous period of foreign service” for the purposes of this provision.

28. The mere transportation of the Applicant by the Commonwealth to the zone of operations is not a determinative factor in the application of s 23AG(1AA) to determine the question of whether the Applicant’s income is exempt.

29. Put another way, the Applicant’s continuous period of foreign service is directly attributable to his undertaking his employment with the employer, not to a deployment by the ADF or another agency of the Commonwealth – as the legislation requires. The section is exclusively concerned with whether or not the Applicant’s continuous foreign service was a direct result of his deployment by the Commonwealth. Transport and administrative arrangements, even if they have been provided by the Commonwealth, is not enough to satisfy this provision where other relevant facts point elsewhere.

    SOME ADDITIONAL OBSERVATIONS

30. It is clear, then, that the employer has been engaged by the Commonwealth to provide certain supportive or ancillary services to the ADF’s mission in the relevant zone of operations. Further assistance in the determination of the Applicant’s status can be found in paragraph 149 of Taxation Ruling number 2013/7:

    The Department of Defence may also engage a contractor to provide support services to the ADF on overseas missions. Employees of that contractor may then accompany the members of the ADF and, as with APS appointees, may have the status of ‘defence civilians’ subject to Defence Force discipline. However, they are not employees of the Department of Defence and may not be appointees of any Commonwealth or State agency. Such employees are not therefore, being deployed ‘by’ the Commonwealth, State or Territory or an authority thereof.

31. A certain explanatory memorandum that was read at the time of the legislative introduction of s 23AG(1AA)(d) is also instructive. It provides that “Subject to 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: … A specified government employee deployed overseas as a member of a disciplined force”.[1]

    [1] Tax Laws Amendment (2009 Budget Measures No. 1) Bill 2009 Explanatory Memorandum.

32. These words are unequivocal, in the sense that these words are specifically meant to apply to government employees. Further assistance can be found from the second reading speech to certain tax law amending legislation in 2009, where the then-treasurer, in referring to exempted income by a government employee, said this: “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…”.[2] This reference to defence or police deployment is clearly consistent with the bracketed part of (d), which refers to the “Australian Defence Force or Australian Federal Police”. It seems clear, then, that sub-section (d) is confined to government employees who are members of a disciplined force directly operated by the Commonwealth or a State or a Territory (or an authority of any of those).

    [2] Tax Laws Amendment (2009 Budget Measures No. 1) Bill 2009 Second Reading Speech.

33. Here, it is clear the Applicant is employed by a completely separate entity. I therefore find that the Applicant was not deployed “by” an entity that meets the requirements of s 23AG(1AA)(d).

    CONCLUSION

34. I therefore find that the Applicant’s continuous foreign service  did not arise from his being deployed by the Commonwealth or a Commonwealth, State or Territory authority. As mentioned earlier, the responsible entity in this regard was the Applicant’s employer.

35. As was sought to be made clear to the Applicant today, the onus of proof is on the Applicant to meet one of the five categories of exempted income. There is no onus on the Respondent to identify the correct entity responsible for the subject deployment.

36. Accordingly, the decision under review dated 1 May 2017 is affirmed.

I certify that the preceding 36 (thirty -six) paragraphs are a true copy of the reasons for the decision herein of Senior Member Theodore Tavoularis

.........................[sgd]...............................................

Associate

Dated: 9 March 2018

Date of hearing:	23 February 2018
Applicant:	In person
Counsel for the Respondent:	Mr Vincent Brennan
Solicitors for the Respondent:	Commissioner of Taxation