ATO ID 2007/25: Assessability of a benefit in kind paid by a former United Kingdom employer to an Australian resident
Date of decision: 18 January 2007
Year of income: Year ended 30 June 2006
Business line: Public Groups and International

Issue
Is a benefit in kind received by a resident of Australia from a former United Kingdom (UK) employer in respect of past employment exercised in the UK assessable income under subsection 6-5(2) or 6-10(4) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision
Yes. A benefit in kind received by a resident of Australia from a former UK employer in respect of past employment exercised in the UK is assessable income under subsection 6-5(2) or 6-10(4) of the ITAA 1997.

Facts
The taxpayer is a resident of Australia for tax purposes. The taxpayer was previously employed in the UK by a UK employer. In accordance with the taxpayer's former employment agreement, the former employer is required to pay for certain benefits in kind to the taxpayer. From April 2006 the taxpayer is required to pay 'Benefit in Kind' tax in the UK on the employer contribution toward the benefits in kind. The 'Benefit in Kind' tax falls within the general UK income tax regime.

Reasons for decision
Summary: Subsections 6-5(2) and 6-10(4) of the ITAA 1997 provide that the assessable income of a resident taxpayer includes ordinary or statutory income derived directly or indirectly from all sources, whether in or out of Australia, during the income year. Salary and wages and similar remuneration, including a benefit in kind which are paid in an employment context, are either ordinary or statutory income for the purposes of subsection 6-5(2) or 6-10(4) of the ITAA 1997, unless the benefit is not assessable and not exempt income as listed in section 11-55 of the ITAA 1997. In determining liability to Australian tax on foreign sourced income, it is necessary to consider not only the income tax laws but also any applicable tax treaty contained in the International Tax Agreements Act 1953 (Agreements Act). Section 4 of the Agreements Act incorporates that Act with the ITAA 1997 so those Acts are read as one. Schedule 1 to the Agreements Act contains the tax treaty between Australia and the Government of the UK of Great Britain and Northern Ireland (2003 UK Convention). Article 15 of the 2003 UK Convention provides that where a fringe benefit is taxable in both Australia and the UK, the benefit will be taxable only in the Contracting State which would have the primary taxing right over that benefit if the value of the benefit were paid to the employee as ordinary employment income. Article 15(2)(a) of the 2003 UK Convention provides that 'fringe benefit' has the meaning it has under the Fringe Benefits Assessment Act 1986 (FBTAA). There is a fundamental requirement under that Act that to be a fringe benefit the benefit must have been provided in respect of the employment of the employee. The term employee is a defined term in subsection 136(1) of the FBTAA and it includes a current, former and future employee. A former and future employee is one who has been or will become a current employee respectively. To be a current employee the person must be in receipt of salary and wages. This term is defined in subsection 136(1) of the FBTAA. It states in part: it means a payment from which an amount must be withheld (even if the amount is not withheld) under a provision in Schedule 1 to the Taxation Administration Act 1953 listed in the table, to the extent that the payment is assessable income............. In this case there has been no withholding payment that is covered by the table referred to in the definition of salary and wages in subsection 136(1) of the FBTAA as the taxpayer was not in receipt of assessable income while employed by their former UK employer. Therefore the person is not considered to be an employee for the purposes of the FBTAA. The benefit in kind paid by the former UK employer is not considered to be a fringe benefit for the purposes of the FBTAA. Accordingly, Article 15 of the 2003 UK Convention does not apply. Article 14(1) of the 2003 UK Convention provides that salaries, wages and other similar remuneration derived by a resident of Australia in respect of an employment shall be taxable only in Australia unless the employment is exercised in the UK. If the employment is exercised in the UK, such remuneration may be taxed in the UK. The benefit in kind is paid in respect of 'an employment' as it is paid by a previous employer for past employment services exercised in the UK. In accordance with Article 14(1) of the 2003 UK Convention both the UK and Australia may tax the income. Accordingly, the benefit in kind will be assessable under either subsections 6-5(2) or 6-10(4) of the ITAA 1997. As the UK may also tax the benefit in kind under Article 14(1) of the 2003 UK Convention, a credit will be allowed for the UK income tax paid on the benefit in kind (Article 22 of the 2003 UK Convention). For income years starting on or after 1 July 2008, relief from double taxation for taxpayers deriving foreign assessable income is provided by the foreign income tax offset provisions in Division 770 of the Income Tax Assessment Act 1997 . The new rules replace the former foreign tax credit rules.

Legislative references: Income Tax Assessment Act 1997 subsection 6-5(2)
Subject references: Fringe benefits International tax Salary and wages income United Kingdom