Private ruling: Assessability of incentive income
Published: December 2014
Ruling period: Year ended 30 June 2015 | Year ended 30 June 2016 | Year ended 30 June 2017 | Year ended 30 June 2018
Date scheme commenced: 1 July 2014

Ruling: Questions and Answers: | 1. Is the income arising from the incentive awards assessable in Australia? | Yes | 2. Are you entitled to a foreign income tax offset on the tax deducted in Country A on your incentive awards income? | No

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. You commenced employment with a company (Company X) in Country A several years ago. Some years later, your employment with Company X was transferred to another branch (Company Y), located in Country B. You terminated your employment with Company Y by retiring on date m in the 2013-14 income year. You became a resident of Australia for tax purposes during the 2013-14 income yea after retirement.. You are no longer a resident of Country A. During your employment, you were selected to participate in certain employee incentive plans which entitled you to periodic incentive award payments after you retired. The Country A branch of Company Y has to date been deducting tax at source from the incentive award payments. The tax is remitted to the tax authorities in Country A. You will be in Australia for more than 183 days during the income year 2014-15 and subsequent years.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5. | Income Tax Assessment Act 1997 Division 770. | Income Tax Agreements Act 1953

Reasons for decision: Detailed Reasoning - Assessability of incentive award payments: Under subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) the assessable income of an Australian resident includes income according to ordinary concepts (ordinary income). You are a resident of Australia for tax purposes. Ordinary income has generally been held to include three categories, namely, income from rendering personal services, income from property and income from carrying on a business. Other characteristics of income that have evolved from case law include receipts that: • are earned; • are expected; • are relied upon; and • have an element of periodicity, recurrence or regularity. An incentive award payment is an additional reward payment derived by a taxpayer. Such a payment comes within the meaning of ordinary income. | Detailed Reasoning - Taxation of incentive award payments: You consider the incentive award payments should not be assessable in Country A as you are now an Australian resident and no longer a Country A resident and are no longer an employee in Country A. We shall consider the assessability of the incentive award payments by examining the source of the payments and when they are derived. We shall then apply the appropriate Double tax agreement. | Detailed Reasoning - Source of incentive award payments: You commenced employment with a company (Company X) in Country A several years ago. Some years later, your employment with Company X was transferred to another branch (Company Y), located in Country B. You are receiving incentive award payments from the Country A branch of Company Y which has to date been deducting tax at source from the payments. The tax is remitted to the tax authorities in Country A. As you are receiving incentive award payments from Country A, the source of the payments is Country A. Paragraph 4 of Taxation Ruling IT 2534 rules 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 may have been with regard to duties performed in a previous year of income. This principle would also apply to incentive award payments. Therefore, for taxation purposes you are considered to have derived your incentive award payments at the time of receipt, even though they relate to duties performed in previous income years. During your employment, you were selected to participate in certain employee incentive plans which entitled you to periodic incentive award payments after you retired. The incentive award payments you receive are a direct consequence of being a former employee of Company X and Company Y. The payments you receive constitute ordinary income and are assessable in Australia. In addition, section 15-2 of the ITAA 1997 includes in the assessable income of a taxpayer the value to the taxpayer of all allowances, gratuities, compensations, benefits, bonuses and premiums provided (whether in money or any other form) to the taxpayer in respect of, or for or in relation directly or indirectly to, any employment of or services rendered by the taxpayer. The regular award incentive payments you receive are in respect of your employment and therefore are also assessable under section 15-2 of the ITAA 1997. | Detailed Reasoning - Double tax agreement: In determining your liability to pay tax in Australia it is necessary to consider not only the domestic income tax laws but also any applicable double tax agreements. Section 4 of the International Tax Agreements Act 1953 (Agreements Act) incorporates that Act with the ITAA 1936 and the ITAA 1997 so that all three Acts are read as one. The Agreements Act overrides both the ITAA 1936 and ITAA 1997 where there are inconsistent provisions (except in some limited situations). Section 5 of the Agreements Act states that, subject to the provisions of the Agreements Act, any provision in an Agreement listed in section 5 has the force of law. As the source of your payments is Country A, we need to consider the UK Agreement which is listed in section 5 of the Agreements Act. The Country A Agreement is located on the Austlii website ( www.austlii.edu.au ) in the Australian Treaties Series database. It operates to avoid the double taxation of income received by residents of Australia and Country A. An Article of the Country A Agreement (Article M) provides that salaries, wages and other similar remuneration derived by a resident of Australia in respect of employment shall be taxable only in Australia, unless the employment is exercised in Country A. If the employment is exercised in Country A, such remuneration as is derived from that exercise may be taxed in Country A. The same Article in the Country A Agreement provides that the income will be exempt from tax in Australia if: • the taxpayer is present in Australia for a period or periods not exceeding in the aggregate 183 days in the Australia year of income, and • the remuneration is paid by or on behalf of an employer who is not a resident of Australia, and • the remuneration is not deductible in determining the profits of a permanent establishment or a fixed base which the employer has in Australia. In your case your employer was not a resident of Australia. You are a resident of Australia for tax purposes as of 1 September 2014. Since that date you have received and will continue to receive your regular incentive payments. These payments are paid as a result of you being an employee rather than as a result of service being exercised as there was no, and there will be, no actual service exercised. As you will be in Australia for more than 183 days during the income year 2014-15 and subsequent years, your income is exempt from tax in Country A. Consequently, the incentive award payment income is assessable in Australia and is included in your assessable income under subsection 6-5(2) of the ITAA 1997. | Detailed Reasoning - Foreign income tax offset: The foreign income tax offset (FITO) rules are designed to protect a taxpayer from the double taxation that may arise where the taxpayer pays foreign tax on income that is also taxable in Australia. This is achieved by allowing a taxpayer to claim a tax offset where they have paid foreign tax on amounts included in their assessable income. The FITO rules are contained in Division 770 of the ITAA 1997. Under Article M of the Country A Agreement, Australia has the sole taxing right on your award incentive payments which you receive from Country A. Furthermore, Article N of the Country A Agreement provides that income derived by an Australian resident under Article M of the Country A Agreement, where Australia has the taxing right to the income, will be deemed to arise from sources in Australia and not foreign income. As a result no FITO is allowed for tax deducted in Country A on your incentive payments.