Private ruling: Bonus payment
Date of advice: 2 October 2015
Published: November 2015
Ruling period: Year ended 30 June 2015
Date scheme commenced: 1 July 2014

Ruling: Questions and answers | Is your bonus from work done in Country A, but not paid until you lived in Australia exempt from tax in Australia? | No


Relevant legislative provisions: Income Tax Assessment Act 1997 Subsection 6-5(2). | Income Tax Assessment Act 1997 Subsection 6-5(4). | Income Tax Assessment Act 1997 Section 6-15. | Income Tax Assessment Act 1997 Section 11-15.

Reasons for decision: Detailed Reasoning - Payment received while a resident of Australia: 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. Salary and wages are ordinary income for the purposes of subsection 6-5(2) of the ITAA 1997. Section 6-5(4) indicates that in working out whether you have derived an amount of ordinary income you are taken to have received the amount as soon as it is applied or dealt with in any way on your behalf or as you direct. 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. You were a resident when you derived (received) the bonus payment and the payment was ordinary income. Section 6-5 would normally therefore apply to include it as assessable income. If you are a resident, the source of the payment is irrelevant as the section includes as assessable income, ordinary income from any source. | 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 Country A 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. Article 11(1) of the Country A Agreement 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. In your case you are being paid by an employer who is not a resident of Australia. You are a resident of Australia on dd/mm/20XX. You have received a bonus payment for services rendered during the period ending dd/mm/2013. While the service the bonus was awarded for was work performed in Country A while a non-resident of Australia, a bonus is employment income and is therefore derived when paid or dealt with on your behalf. When paid, you were an Australian resident and therefore assessable on your worldwide income. Article 11 of the Country A agreement means the bonus may also be taxed in Country A. Consequently, the bonus 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: Division 770 of the ITAA 1997 provides that where the assessable income of a resident contains foreign sourced income, and foreign tax has been paid by the taxpayer on that income, a foreign income tax offset tax will be allowed subject to the provisions of International tax agreements. The foreign income tax offset allowed against Australian income tax is the lesser of: • The amount of that foreign tax paid, reduced in accordance with any relief available to the taxpayer under the law relating to that tax; or • The amount of Australian tax payable in respect of the foreign income.

Relevant facts: You were a non-resident of Australia in the 20XX financial year. | You entered into an employment contract in Country A from early 20XX. | Your entitlement to a bonus is linked to your annual performance appraisal. | Your annual appraisal period is 1 January 20XX to 31 December 20XX. | You were a resident of Country A until mid 20XX | You were transferred to an Australian city mid 20XX. | At the end of the calendar year, your Country A employer determined the performance bonuses for you in line with ordinary company policy. | The performance bonus was granted to you in respect of the results generated during your time in Country A. | All bonuses were intended to be paid in early 20YY however this did not happen until late 20YY. | Tax was withheld in Country A on the bonus paid. | You did not perform any other service for the Country A entity after your departure on mid 20XX. | The performance on which the bonus is assessed was solely while you were a non-resident of Australia.