Hundreds of Australian public servants working overseas on aid programs have lost their tax-free wages after their new bosses in Foreign Affairs axed one of the bureaucracy's most treasured perks.
And DFAT has warned it is working with the Australian Taxation Office to go after the tax-free perks of officials from all other Australian Public Service departments working overseas.
Saying "public servants should pay income tax", DFAT's boss has confirmed former AusAID staff, who have all now been absorbed into Foreign Affairs, have lost their tax-free exemptions when on overseas postings.
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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 in 2013, 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 had 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 department in the early days of the merger that he was determined to bring the days of tax-free wages to an end as he sought to stop "the disparity in remuneration" between his overseas-based staff.
A spokeswoman for the department confirmed that the loophole was shut on January 1.
"The department's firm view is that all public servants should pay tax on their earnings," the spokeswoman said.
"Until recently, some DFAT officers were regarded as being eligible for a tax exemption under Section 23AG of the Income Tax Assessment Act 1936 when serving in a number of Australia's overseas missions to deliver Official Development Assistance.
"This was not consistent with public expectations that Australian Public Service employees should pay tax on their earnings.
"The department has been working with the ATO to clarify the facts, working arrangements and other circumstances surrounding DFAT public servants claiming a tax exemption under the ITAA.
"As a result of these efforts, the tax position pertaining to our officers has been clarified and as of 1 January 2015, no DFAT officer is entitled to a tax exemption under Section 23AG of the ITAA, as previously ruled by the ATO."
It is unclear how many other public servants are working tax-free overseas but DFAT says it is working to ensure that they will also start paying income tax on their wages.
"As the lead government agency responsible for delivering Australian ODA, the department is also pursuing amendments to the ITAA so that the ODA tax exemption under Section 23AG does not apply to anyone employed under the Australian Public Service Act," the DFAT spokeswoman said.
Before its abolition, AusAID had about 870 employees, including local engaged workers, on its aid projects worldwide.