Private ruling: Foreign income source
Date of advice: 11 December 2018
Published: April 2019
Ruling period: Year ended 30 June 2018
Date scheme commenced: 1 July 2017

Ruling: Q1: Are the retention benefits paid to you exempt foreign income and exempt income under section 23AG of the Income Tax Assessment Act 1936 (ITAA 1936)? | A1: No

Relevant facts and circumstances: You are an Australian resident for income tax purposes. You were posted overseas for a continuous period of not less than 91 days. The salary and wages you earned are exempt under section 23AG of the ITAA 1936 . Your employer offered you a retention benefit (RB) as you were nearing X years of service. This RB is a bonus to remain with the employer. You accepted this RB and once taken you are required to work for an additional Y years. You received your retention benefit in the income year ended 30 June 2018. The employer also offered you another bonus based on your rank and skills and not a period of service. The employer identified a critical shortage of employees with your particular experience. You accepted this bonus and once undertaken you are required to work for additional period of Z years. You were deemed to have completed the Z years effective service and you were paid this bonus in the income year ended 30 June 2018.

Relevant legislative provisions: Income Tax Assessment Act 1936 section 23AG | Income Tax Assessment Act 1997 Subsection 6-5 | Income Tax Assessment Act 1997 Section 11-15

Reasons for decision: Summary: Subsection 6-5(2) of the Income Tax Assessment Act 1997 (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. The retention benefit comes within the meaning of ordinary income under subsection 6-5(2) of the ITAA 1997. The retention benefit is an additional reward payment derived by the taxpayer in the capacity as an employee ( Dean & Anor v. Federal Commissioner of Taxation (1997) 78 FCR 140; (1997) 37 ATR 52; 97 ATC 4762). Subsection 6-15(2) of the ITAA 1997 provides that if an amount is exempt income then it is not assessable income. Section 11-15 of the ITAA 1997 lists those provisions dealing with income which may be exempt. Included in this list is section 23AG of the ITAA 1936 which deals with overseas employment income. Subsection 23AG(1) of the ITAA 1936 provides that where a resident taxpayer is engaged in foreign service for a continuous period of not less than 91 days, any foreign earnings derived by the taxpayer from that foreign service will be exempt from tax in Australia. 'Foreign service' includes service in a foreign country in the capacity as an employee and 'foreign earnings' include income consisting of earnings, salary, wages, commission, bonuses and allowances (subsection 23AG(7) of the ITAA 1936). For the purposes of section 23AG of the ITAA 1936, there must be a direct connection between the entitlement to the foreign earnings and the foreign service for the payment to be considered as derived 'from that foreign service'. The retention benefit is not a payment 'from that foreign service' as it was paid to remain with the employer. Therefore, the retention bonus is not exempt from tax in Australia under subsection 23AG(1) of the ITAA 1936. The same principle applies to the bonus paid to you regarding your experience. Accordingly, the retention payments while working overseas are assessable income under subsection 6-5(2) of the ITAA 1997.