In PZTL and Commissioner of Taxation (Taxation) [2018] AATA 461 the AAT held that the income by an Australian Defence Force (ADF) subcontractor was not exempt under section 23AG of the 1936 Act as foreign service income.

Under this section, where a resident 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.

The AAT held that the entity responsible for the Applicant’s employment, and therefore the entity he was deployed by, is the entity that controls or determines his requirement to undertake the foreign service, the length of that service, and his overall conditions of employment. These conditions include the Taxpayer’s manner of remuneration, how that remuneration is determined and incidental components of that remuneration.

The AAT held that the Taxpayer was deployed by the contractor that employed him, not the ADF. The AAT, therefore, ruled that the Taxpayer’s foreign service income was not tax exempt as he had not been deployed ‘by’ the Commonwealth or a Commonwealth authority for the purposes of section 23AG(1AA)(d) of the ITAA 1936.