Hundreds of Australian public servants working overseas on aid programs will lose their tax-free wages as their new bosses in the Department of Foreign Affairs move to end one of the bureaucracy's most treasured perks.

Saying ''public servants should pay income tax'', the department's boss says former AusAID staff will lose the tax-free exemptions when posted overseas.

Tax laws in place for decades have allowed some AusAID workers to pay no income tax while on postings, using an exemption, also open to non-public servants, for Australian workers engaged in aid projects.

Before the aid agency was swallowed up by DFAT last year, an overseas posting was long considered a financial boon to AusAIDers with the potential for tax-free wages as well as lucrative allowance payments.

But the tax entitlement has been a source of some annoyance for public servants from other departments sent abroad on diplomatic or other duties and has been one of many flashpoints in the unhappy early days of the forced marriage between DFAT and AusAID.

DFAT secretary Peter Varghese told his merged department last week that the days of tax-free wages were coming to an end as he seeks to stop ''the disparity in remuneration'' between his overseas-based staff.

''As a general principle, public servants should pay income tax,'' Mr Varghese wrote to his workers.

''There is no reason why this principle should not apply to public servants working to deliver the aid program.''

The departmental secretary said he would pursue changes to the Income Tax Assessment Act 1936 so that public servants would be excluded from using the act to claim tax-free wages. ''This proposal for legislative change is being pursued in consultation with relevant departments,'' Mr Varghese wrote.

But while the potentially lengthy process of legal reform was under way, Mr Varghese flagged changes to the lucrative system of allowances for overseas postings in an effort to even up the playing field.

''In the interim, the department is also considering what options might be available to address the disparity in remuneration between DFAT staff arising from the tax exemption,'' Mr Varghese wrote.

''This could have implications for the allowances paid to officers who are currently exempt from paying income tax.''

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The departmental boss warned his workers to get their affairs in order before the changes got under way.

''It is important that all staff are aware that this process is under way, and that they take this into account in planning their personal financial circumstances,'' he wrote.

Before its abolition, AusAID had about 870 employees, including local engaged workers, on its aid projects around the world.