ATO ID 2007/26: Assessability of bonus received by an Australian resident working in Saudi Arabia
Date of decision: 18 January 2007
Year of income: Year ended 30 June 2007
Business line: Small Business/Individual Taxpayers

Issue
Is a bonus received by an Australian individual resident taxpayer in relation to employment performed in Saudi Arabia assessable under subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision
No. The bonus payment received by an Australian individual resident taxpayer in relation to service performed in Saudi Arabia is not assessable under subsection 6-5(2) of the ITAA 1997 as it is exempt under section 23AF of the Income Tax Assessment Act 1936 (ITAA 1936).

Facts
The taxpayer is a resident of Australia for income tax purposes. The taxpayer was employed in Saudi Arabia on a project approved by the Minister for Trade. The taxpayer was employed on this project for a continuous period of more than 91 days. The taxpayer's employer for the approved project is an Australian resident company. After completing work on the project, returning to Australia and recommencing employment with their employer's parent company in Australia, the taxpayer received a bonus in relation to work performed in Saudi Arabia.

Reasons for decision
Summary: Subsection 6-5(2) of the ITAA 1997 provides that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources, whether in or out of Australia, during the income year. A bonus payment is ordinary income for the purposes of subsection 6-5(2) of the ITAA 1997. Subsection 6-15(2) of the ITAA 1997 provides that if an amount is exempt income it is not included in assessable income. Subsection 23AF(1) of the ITAA 1936 provides that where a taxpayer is engaged on qualifying service on a particular approved project for a continuous period of not less than 91 days, any eligible foreign remuneration derived that is attributable to that service will be exempt from tax. As the project on which the taxpayer was engaged was approved by the Minister for Trade under subsection 23AF(11) of the ITAA 1936, it is an 'approved project' (subsection 23AF(18) of the ITAA 1936). The taxpayer's service is 'qualifying service' as the taxpayer was engaged in the performance of personal services outside Australia in connection with the approved project (subsection 23AF(3) of the ITAA 1936). The taxpayer was engaged in this service for a continuous period of not less than 91 days. Bonus payments are included within the definition of 'eligible foreign remuneration' under subsection 23AF(18) of the ITAA 1936 provided the bonus is: Paragraph 4 of Taxation Ruling IT 2534 provides that a bonus is taken to have been derived for income tax purposes at the time it is paid or otherwise made available to the employee. This is so even where the bonus is with regard to duties that were performed in a previous year of income. Therefore, the taxpayer is taken to have derived the bonus when the taxpayer received it. An eligible contractor means 'a resident of Australia' as defined in subsection 23AF(18) of the ITAA 1936. The taxpayer was a resident of Australia at the time of receiving the bonus, and it was paid to them in their capacity as an employee of an eligible contractor. Although the bonus was received after the taxpayer's period of service on the approved project had ended and after the taxpayer had returned to Australia, it was paid in relation to the taxpayer's service performed in Saudi Arabia and therefore is attributable to that service. As all the elements of subsection 23AF(1) of the ITAA 1936 are met, the bonus will be exempt from tax under subsection 23AF(1) of the ITAA 1936.

Legislative references: Income Tax Assessment Act 1936 subsection 23AF(1) subsection 23AF(3) subsection 23AF(11) subsection 23AF(18)
Related public rulings and determinations: Taxation Ruling IT 2534
Subject references: Derived Employee bonuses Exempt income Foreign source income International tax Saudi Arabia