Private ruling: Assessable income
Date of advice: 5 August 2025
Published: 7 October 2025
Ruling period: Year ended 30 June 20YY
Date scheme commenced: 1 July 20YY

Ruling: Q1: Is the amount paid to you by Employer Z for breach of an employment contract assessable income under Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes. | Q2: Is the amount paid to you by Employer Z for breach of an employment contract exempted from taxation in Australia through the operation of section 768-910 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A2: No. | Q3: Is Australia afforded the sole taxing rights over the payment Employer Z paid you for breach of an employment contract under the Double Tax Agreement (the Convention)? | A3: Yes.

Relevant facts and circumstances: You are currently a temporary resident of Australia for taxation purposes. A couple of years ago, Employer Z, a multinational firm approached you and then shortly after sent you an offer to join their office. The agreed start date was a number of months after making the offer subject to obtaining appropriate work authorisation to work in Australia. You signed an Employment Contract with Employer Z. The terms and conditions of the contract stated that the contract was governed by the laws of the relevant Australian State and other relevant Federal legislation. You obtained the appropriate work authorisation via a visa to come to Australia. After obtaining the visa Employer Z informed you that they were cancelling their employment offer. You did not take up the position and begin your employment before Employer Z cancelled their offer, therefore you did not undertake any work, nor render any employment services, for Employer Z. Employer Z's terms & conditions of employment document contains the following clause with respect to termination: 6. Termination (a) Termination by Employer Z Employer Z may terminate your employment: • immediately and without notice, should you commit an act of serious misconduct, including but not limited to, dishonesty, serious misbehaviour, and/or not complying with the lawful instructions of Employer Z, or • immediately, where you cease to hold Australian residency or an appropriate work visa approved by the Australian authorities; or • by providing you with the minimum notice required by the [ Fair Work Act 2009] (or payment in lieu), where your • performance is not satisfactory; or • by giving you at least several months' notice (or payment in lieu) in all other circumstances. You requested that Employer Z pay you the equivalent of several-month salary as compensation for breach of contract, to which they agreed. You did not take any legal proceedings to secure the payment from Employer Z. You received another offer of employment from an unrelated Australian company which you accepted and are still employed with. You commenced being a temporary resident of Australia for taxation purposes in the year after you accepted the other offer. You commenced being a resident of Australia for taxation purposes on the date you arrived in Australia. Prior to the date you became a resident of Australia, you were a resident of Country Z for taxation purposes. You entered Australia on a Temporary visa: with conditions to - maintain health insurance, approved work only and is valid for a number of years. You are not a resident of Australia within the meaning of the Social Security Act 1991 . Your spouse is not a resident of Australia within the meaning of the Social Security Act 1991 . You commenced residing in Australia at the same time you became a resident. You provided Employer Z with your bank details and sent several emails in the following weeks to remind them to make payment. You received by email a letter from Employer Z stating: This is a follow-up to bring closure to the change in our position regarding you returning to Employer Z in Australia as discussed. Employer Z will provide you with an additional payment. By accepting this payment, you also agree that we have no outstanding issues regarding any aspect of your relationship with Employer Z. After a year of delay Employer Z paid you. All negotiations for the job, including accepting and signing the contract as well as negotiating the breach of contract payment were carried out while you were in Country Z except for a short period when you were in Country Y.

Relevant legislative provisions: Income Tax Assessment Act 1936 subsection 25(1) | Income Tax Assessment Act 1997 section 6-5 | Income Tax Assessment Act 1997 section 6-10 | Income Tax Assessment Act 1997 section 6-15 | Income Tax Assessment Act 1997 section 10-5 | Income Tax Assessment Act 1997 section 768-910 | Income Tax Assessment Act 1997 section 995-1 | International Tax Agreements Act 1953 section 4 | International Tax Agreements Act 1953 section 5

Reasons for decision: Summary: Assessable income Subsection 6-5(1) of the ITAA 1997 includes in a taxpayer's assessable income all income according to ordinary concepts. Subsection 6-5(2) of the ITAA 1997 further states that the assessable income of an Australian resident taxpayer includes the ordinary income derived directly or indirectly from all sources, whether in or out of Australia, during the financial year. If an amount is not ordinary income, the amount may still be included in the taxpayer's assessable income by virtue of section 6-10 of the ITAA 1997, other assessable income (statutory income). Particular types of other assessable income are listed in section 10-5 of the ITAA 1997. This section of the act lists certain amounts to include in your assessable income that are: • not ordinary income; and • are included in assessable income by a specific provision of either the ITAA 1997 or ITAA 1936. If an amount is not ordinary income and is not statutory income, it is not assessable income (subsection 6-15(1) of the ITAA 1997). Compensation payments for breach of contract The Taxation Ruling TR 95/ 35 Income tax: capital gains: treatment of compensation receipts (TR 95/35) provides the Commissioner's view with respect to the characterisation of compensation payments. Paragraph 70 confirms that a "look-through" approach should be used to correctly identify the relevant asset: 70. In determining which is the most relevant asset, it is often appropriate to adopt a 'look-through' approach to the transaction or arrangement which generates the compensation receipt. We regard this concept as the most appropriate basis on which to determine whether any capital gain arises on the disposal of any asset of the taxpayer. Paragraph 71 proceeds to apply the "look-through" approach to ascertaining the underlying asset gave rise to a compensation payment for repudiation of contract: 71. Warner J in Zim Properties v. Procter (Inspector of Taxes) [1985] STC 90; 58 TC 371 applied this look-through approach indetermining from which asset the settlement sum was derived. HisHonour considered that the choice of which was the most relevantasset depended on the 'reality of the matter'. There, the taxpayer hadcontracted to sell certain property. However, the buyer was able torepudiate the contract because the taxpayer could not show good titleto the property. The taxpayer then sued its solicitors for negligence and was awarded an amount of compensation for that negligence. Paragraph 74 confirms that compensation payments for repudiation of contract can be assessable income: 74. In Case Z21 92 ATC 218; Case 7870 (1992) 23 ATR 1162, the Administrative Appeals Tribunal (P W Johnston, Deputy President) accepted that $165,000, received on the termination of a management agreement, was compensation for loss of future earnings, and therefore assessable income. The amount was received as compensation for the repudiation of the agreement and was paid to avoid paying damages arising as a result of the termination of the agreement. The Tribunal found that the receipt stood in the place of damages to compensate for the loss of future profits, and not for the loss or destruction of the facility or business asset which the company would have exploited to earn those management fees. Taxation Determination TD 93/58 Income tax: under what circumstances is the receipt of a lump sum compensation/settlement payment assessable? builds upon the principles set out in TR 95/35 to further elucidate the Commissioner's view regarding the revenue vs capital characterisation of lump sum receipts: 1) It is assessable income under subsection 25(1) of the Income Tax Assessment Act 1936 (ITAA): a) if the payment is compensation for loss of income only e.g. past year profits, and/or interest (even when the basis of the calculation of the lump sum cannot be determined); or b) to the extent that a portion of the lump sum payment is identifiable and quantifiable as income. This will be possible where the parties either expressly or impliedly agree that a certain portion of the payment relates to a loss of an income nature [cf. Mc Laurin v. FC of T (1961) 104 CLR 381; (1961) 8 AITR 180 and Allsop v. FC of T (1965) 113 CLR 341; (1965) 9 AITR 724]. The characterisation of a lump sum payment will therefore take the character of that which it is intended to replace, which in the case of a compensation payment to replace lost income due to a breach of contract, will be ordinary income and assessable under section 6-5 of the ITAA 1997. Timing of derivation Subsection 6-5(4) of the ITAA 1997 provides that you derive an amount of ordinary income as soon as it is applied or dealt with in any way on your behalf, or as you direct. That is, income is derived when it 'comes home' to the taxpayer in a realised or immediately realisable form (Commissioner of Taxes (SA) v. Executor Trustee and Agency Co of South Australia Ltd (1938) 63 CLR 108; [1938] HCA 69). In Federal Commissioner of Taxation v. Clarke (1927) 40 CLR 246 AT 261; [1927] HCA 49 , Issacs J said that: 'derived' simply means 'obtained' or 'got' or 'acquired' and that 'all income is derived from something and by someone'. Issacs J also added in Federal Commissioner of Taxation v. Thorogood (1927) 40 CLR 454 at 458; [1927] HCA 36 that 'derived' does not necessarily mean actually received, although receipt is the ordinary mode of derivation. Paragraphs 40 and 41 of the Taxation Ruling TR 98/1 Income tax: determination of income; receipts versus earnings summarise the Courts' view with respect to non-trading income: 40. In relation to non-trading income, the general rule is that there must be a receipt; '... there must be something "coming in"; that is, for income tax purposes, receivability without receipt is nothing' (from Law of Income Tax , Sir Houldsworth Shaw and Mr Baker, quoted by Dixon J in Carden's case,16 and by Rich ACJ in Permanent Trustee Co (NSW) v. FC of T 17). 41. Generally, for non-trading income, it is when amounts are received that they have, applying the words of Dixon J,18 'come home to the taxpayer in a realized or immediately realizable form'. Therefore, the timing of derivation for compensation and settlement payments is when the recipient has either received the payment or realised the benefit of the payment in having it applied at the recipient's direction or for their benefit. | Detailed Reasoning - Application to your circumstances: Character of the payment for revocation of employment offer You signed a contract of employment with Employer Z to work in their Sydney office, however prior to taking up the position Employer Z revoked their offer of employment without providing the contractually agreed notice as per your employment terms and conditions. The agreement provides that Employer Z may provide you with an amount in lieu of notice of termination, which you renegotiated to receive a payment representing several months of your salary. As per the principles set out in TR 95/35 and TD 93/58, your compensation payment takes on the character of that which it is intended to replace, which is ordinary income. As such, the payment will be assessable as ordinary income under section 6-5 of the ITAA 1997. Timing of derivation Subsection 6-5(4) provides that the timing you derived the payment for revocation of your employment contract is as soon as it is received by you or is applied on your behalf or at your direction. As a non-trading income receipt the principle contained paragraphs 40 and 41 of in TR 98/1 holds to cement the timing you can be regarded as receiving the payment as when Employer Z transferred the payment to you. | Detailed Reasoning - Question 2: Foreign sourced income earned by a temporary resident The foreign source income exemption for temporary residents, contained in Subdivision 768-R of the ITAA 1997, provide that from 1 July 2006 most foreign income derived by residents of Australia for tax purposes who qualify as temporary residents of Australia is classified as non-assessable non-exempt income. Non-assessable non-exempt income is: a) the ordinary income derived directly or indirectly from a source by you, other than in Australia if you derive it b) the statutory income (other than a net capital gain) from a source by you, other than in Australia if you derive it Section 768-910 of the ITAA 1997 provides that ordinary income derived from a foreign source, excluding employment related income, is exempt from income tax in Australia when derived by a temporary resident of Australia. However, income from a foreign source that you earn while you are a temporary resident of Australia and is remuneration for employment or services provided is prevented from being classified as non-assessable non-exempt income by subsection 768-910(3) of the ITAA 1997: 768-910(3) However, the following are not non-assessable non-exempt (NANE) income under subsection (1): a) the ordinary income you derive directly or indirectly from a source other than an Australian source to the extent that it is remuneration, for employment undertaken, or services provided, while you are a temporary resident; b) ; your statutory income (other than a net capital gain) from a source other than an Australian source to the extent that it relates to employment undertaken, or services provided, while you are a temporary resident; A temporary resident is defined in subsection 995-1(1) of the ITAA 1997 as a person who neither them or their spouse are a resident of Australia under the Social Security Act 1991 , and they hold a temporary visa granted under the Migration Act 1958 . | Detailed Reasoning - Application to your circumstances: You are a temporary resident. Ordinary income, other than employment related income, you derived from a foreign source is therefore exempt from income tax in Australia under section 768-910 of the ITAA 1997 from the time when you became a temporary resident. However, subsection 768-910(3) provides that from the time you became a temporary resident of Australia any employment related income from a foreign source is assessable in Australia While the payment represents lost income and is taxable as ordinary income under section 6-5 of the ITAA 1997, the amount you received from Employer Z for breach of the employment contract is not remuneration for employment undertaken, or services provided, while you are a temporary resident, as you did not undertake employment or provide any services for Employer Z. Therefore, the payment would be NANE income under section 768-910 of the ITAA 1997 if it were found to be foreign sourced income. However, the contract for employment between yourself and Employer Z was constructed and executed under Australian domestic law and was effected to provide you and Employer Z with legal recourse in the undertaking of your employment in Australia. As previously established, you did not undertake any employment duties for Employer Z, therefore the payment cannot have been provided in respect of services rendered when you were living in Country Z. Furthermore, you were a resident of Australia when you received this Australian-sourced payment (as confirmed previously). The payment therefore has an Australian source. As the payment is Australian-sourced ordinary income the exemption provisions in subdivision 768-R will not apply to make the payment NANE income. Therefore, the payment will remain assessable as ordinary income under section 6-5 of the ITAA 1997. | Detailed Reasoning - Question 3: In determining an employee's liability to pay tax in Australia, it is necessary to consider not only the domestic income tax laws but also any applicable tax treaty contained in the International Tax Agreements Act 1953 (the Agreements Act). Sections 4 and 5 of the Agreements Act incorporate that Act with the ITAA 1936 and the ITAA 1997 and provide that the provisions of a double tax agreement have the force of law. Double Tax Agreements (DTAs) are tax treaties between Australia and other countries which are designed to alleviate international double taxation and prevent tax avoidance. The DTAs allocate taxing rights to income derived by residents of either country in accordance with specified articles. Taxation Ruling TR 2001/13 Income tax: Interpreting Australia's Double Tax Agreements discusses the Commissioner's views about interpreting double tax agreements. Paragraph 104 provides that the OECD Model Tax Convention and Commentary will often need to be considered in interpreting double tax agreements. The Double Tax Agreement sets out the taxation rights of income derived in respect of an employment between Australia and Country Z. 1) Subject to the provisions of Articles 15 (Directors' Fees), 17 (Pensions), 18 (Government Service) and 19 (Professors, Teachers, and Researchers), salaries, wages and other similar remuneration derived by a resident of a Contracting State in respect of an employment shall be taxable only in that State unless the employment is exercised in the other Contracting State. If the employment is so exercised, such remuneration as is derived therefrom may be taxed in that other State. 2) Notwithstanding the provisions of paragraph 1, remuneration derived by a resident of a Contracting State in respect of an employment exercised in the other Contracting State shall be taxable only in the first-mentioned State if: a) the recipient is present in the other State for a period or periods not exceeding in the aggregate 183 days in any twelve month period commencing or ending in the fiscal year concerned; and b) the remuneration is paid by, or on behalf of, an employer who is not a resident of the other State; and c) the remuneration is not borne by a permanent establishment which the employer has in the other State. 3) Notwithstanding the preceding provisions of this Article and Article 1 (Persons Covered), remuneration derived by an individual, whether a resident of a Contracting State or not, in respect of an employment, as a member of the regular complement of a ship or aircraft, that is exercised aboard a ship or aircraft operated in international traffic may be taxed in the Contracting State of which the enterprise operating the ship or aircraft is a resident. 4) A severance payment derived by a resident of a Contracting State in consideration of past employment shall be taxable only in that State unless all or part of the employment is exercised in the other Contracting State. If the employment is so exercised, the part of the severance payment that accords to the period of employment exercised in that other State may be taxed in that other State. In Thiel v Commissioner of Taxation [1990] HCA 37 , the High Court judges all accepted that the OECD Model Tax Convention on Income and on Capital 2017 (OECD MTC) official Commentaries may be relevant to the interpretation of Double Tax Treaties (DTAs). The Commentary to Article 15 of the OECD MTC provides: 2.8 An individual whose employment is terminated may have legal grounds to claim that the employment was terminated in violation of the contract of employment, the law or a collective agreement; there may also be other legal grounds for claiming damages depending on the circumstances of the termination. This individual may receive a judicial award or settlement as damages for breach of the relevant contractual or legal obligations. The tax treaty treatment will depend on what the damage the award seeks to compensate. For instance, damages granted because an insufficient period of notice was given or because a severance payment required by law or contract was not made should be treated like the remuneration that these damages replace [emphasis added] . Punitive damages or damages awarded on grounds such as discriminatory treatment or injury to one's reputation should, however, be treated differently; these payments would typically fall under Article 21. Paragraph 2.6 follows: 2.6 In some cases, the employer is required (by law or by contract) to provide an employee with a period of notice before terminating employment. If the employee is told not to work during the notice period and is simply paid the remuneration for that period, such remuneration is clearly received by virtue of the employment and therefore constitutes remuneration "derived therefrom" for the purposes of paragraph 1. The remuneration received in such a case should be considered to be derived from the State where it is reasonable to assume that the employee would have worked during the period of notice (emphasis added). The determination of where it is reasonable to assume that the employee would have worked during the period of notice should be based on all facts and circumstances. In most cases it will be the last location where the employee worked for a substantial period of time before the employment was terminated; also, it would clearly be inappropriate to take account of a prospective employment period in a State where the employee might have been expected to work but did not, in fact, perform his employment for a substantial period of time. Paragraph 8.4 of the commentary explains the role of domestic law in assessing whether services are rendered in respect of an employment: 'Subject to the limit described in paragraph 8.11 and unless the context of a particular convention requires otherwise, it is a matter of domestic law of the State of source to determine whether services rendered by an individual in that State are provided in an employment relationship and that determination will govern how that State applies the convention.' Paragraph 8.11 provides the caveats mentioned in paragraph 8.4: ...a State could not argue that services are deemed, under its domestic law, to constitute employment services where, under the relevant facts and circumstances, it clearly appears that these services are rendered under a contract for the provision of services concluded between two separate enterprises. The relief provided under paragraph 2 of Article 15 would be rendered meaningless if States were allowed to deem services to constitute employment services in cases where there is clearly no employment relationship or to deny the quality of employer to an enterprise carried on by a non-resident where it is clear that that enterprise provides services, through its own personnel, to an enterprise carried on by a resident. And at paragraph 8.13: 'The nature of the services rendered by the individual will be an important factor since it is logical to assume that an employee provides services which are an integral part of the business activities carried on by his employer. It will therefore be important to determine whether the services rendered by the individual constitute an integral part of the business of the enterprise to which these services are provided.' Workpac Pty Ltd v Rossato - [2021] HCA 23 provides authoritative comment on the character of an employment relationship at paragraph 59: 59 In the Full Court, White J [in WorkPac Pty Ltd v Rossato (2020) 278 FCR 179] referred to the discussion of the two-tiered structure of an employment contract in Freedland's The Personal Employment Contract (2003) at 91, where it was said that: "At the first level there is an exchange of work and remuneration. At the second level there is an exchange of mutual obligations for future performance. The second level - the promises to employ and be employed - provides the arrangement with its stability and its continuity as a contract. The promises to employ and to be employed may be of short duration or may be terminable at short notice; but they still form an integral and most important part of the structure of the contract. They are the mutual undertakings to maintain the employment relationship in being which are inherent in any contract of employment properly so called." (emphasis in original) Kiefel CJ, Keane J, and Edelman J in CFMMEU v Personnel Contracting [2022] HCA 1 provide an extended analysis of the factors determining whether the actions of an individual were undertaken in their role as an employee: 36 The value of the "own business/employer's business" dichotomy in determining whether a person engaged to undertake work for another is an employee of that other has long been recognised. In an opinion written a century ago, expressed in the language of the time, by Andrews J for a strong New York Court of Appeals in Braxton v Mendelson (1922) 233 NY 122 at 124, his Honour said: "Ordinarily no one fact is decisive. The payment of wages; the right to hire or discharge; the right to direct the servant where to go, and what to do; the custody or ownership of the tools and appliances he may use in his work; the business in which the master is engaged or that of him said to be a special employer; none of these things give us an infallible test. At times any or all of them may be considered. The question remains: In whose business was the servant engaged at the time?" 37 In Marshall v Whittaker's Building Supply Co (1963) 109 CLR 210 at 217, Windeyer J said that the distinction between an employee and an independent contractor is: "rooted fundamentally in the difference between a person who serves his employer in his, the employer's, business, and a person who carries on a trade or business of his own." 39 While the "central question" as framed in Tattsbet Ltd v Morrow (2015) 233 FCR 46 at [61] is always whether or not a person is an employee, and while the "own business/employer's business" dichotomy may not be perfect so as to be of universal application for the reason that not all contractors are entrepreneurs, the dichotomy usefully focusses attention upon those aspects of the relationship generally defined by the contract (Construction, Forestry , Maritime,Mining and Energy Union v Personnel Contracting Pty Ltd (2020) 279 FCR 631) which bear more directly upon whether the putative employee's work was so subordinate to the employer's business that it can be seen to have been performed as an employee of that business rather than as part of an independent enterprise. In this way, one may discern a more cogent and coherent basis for the time-honoured distinction between a contract of service and a contract for services ( Ready Mixed Concrete (South East) Ltd v Minister of Pensions and National Insurance [1968] 2 QB 497 at 515; Market Investigations Ltd v Minister of Social Security [1969] 2 QB 173 at 184-185) than merely forming an impressionistic and subjective judgment or engaging in the mechanistic counting of ticks on a multifactorial checklist. | Detailed Reasoning - Application to your circumstances: By the domestic case law definitions, it is clear that you were not undertaking duties in respect of the employment which had been contractually agreed upon your prospective employer. You were not directed in 'where to go or what to do' by the employer, nor were your actions subordinate to the employer, serving in their business, nor were you paid wages for the signing of the contract or negotiations for the payment for breach of contract. As there were no employment duties undertaken, the payment you received was not in consequence of termination of your employment, instead representing damages to replace lost income. In addition to that, you have stated that you did not undertake any employment duties for Employer Z prior to their revocation of your employment offer. Paragraph 2.6 of Article XX of the OECD MTC provides that the payment provided in respect of a period of notice for termination of an employment should be considered to be from the state in which it is reasonable to assume that you would have worked during the period of notice. Your employment contract did not provide for you to undertake any work in Country Z, therefore it is impossible that your period of notice can be properly referable to time you would have worked in Country Z. Your contract of employment required you to be in Australia working in the office of the company, therefore the only available conclusion is that the State in which it is reasonable to assume you would have worked during a period of notice for termination of employment is Australia. Furthermore, while the payment is provided in compensation for X months lost income, it was not provided in the consequence of termination of your employment, but for revocation of your employment contract. Paragraph 2.8 of Article XX of the OECD MTC confirms that a payment of damages granted for a contract which was not made should be treated like the remuneration that these damages replace. Therefore, the damages representing X months lost income will be assessable as income under section 6-5 of the ITAA 1997.