Private ruling: Assessable income - bonus foreign payment
Published: 8 July 2024
Ruling period: Year ending DD MM 20XX
Date scheme commenced: DD MM 20XX

Ruling: Q1: Is the bonus payment received for the sale of units received as part of an incentive program by the employer located in Country B assessable under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997). | A1: Yes.

Relevant facts and circumstances: In MM 20XX you commenced employment with a Country B employer (Employer) while you were a resident of that same country. As part of your remuneration package with your employer you were issued incentive units (IU). These IU's are stated in the employee incentive plan to have no intrinsic market value but are used to determine an entitlement to certain bonus payments if and when a condition is met. The sale of the Employer is one of the conditions which may give rise to a bonus payment. On DD MM 20XX and each year onward, you were issued a certain number of IU's based on calculation criteria set by the board of the Employer. You received XX units for the periods between DD MM 20XX to DD MM 20XX. You received the following units from the period of 20XX to 20XX: • DD MM 20XX - XX units • DD MM 20XX - XX units • DD MM 20XX - XX units • DD MM 20XX - XX units. On DD MM 20XX, you became an Australian resident for tax purposes and your employment with your employer was terminated. You continued to offer work as a contract service to the Employer after you terminated your fulltime employment and became an Australian resident for tax purposes. As a contractor, you were entitled to continue receiving units. In MM 20XX, your employer was sold which triggered your entitlement to a bonus payment under the plan in accordance with your IU percentage. All IU's you held were redeemed for a lump sum and you received the following: • Gross payment $XX • Country B Tax withheld $XX • Other amounts withheld from Country B $XX.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5 | Income Tax Assessment Act 1997 Section 6-10 | International Tax Agreements Act 1953 Section 4 | International Tax Agreements Act 1953 Section 5

Reasons for decision: Detailed Reasoning - Bonus Payment: Section 6-5 of the ITAA 1997 advises that where you are an Australian resident for taxation purposes, your assessable income includes income gained from all sources, whether in or out of Australia. However, where you are a non-resident of Australia for taxation purposes, your assessable income includes only income from an Australian source. An amount received as a bonus or incentive payment, in relation to services rendered or to be rendered, is treated as salary and wages for tax purposes under section 6-5 of the ITAA 1997. This is because it is received as a consequence of an employment relationship and is therefore assessable in full in the year of receipt. The receipts (bonus payments) were derived from employment and constituted income under ordinary concepts. They were incidental to your continuing income-earning activity as an employee. Therefore, the bonus payment is ordinary income and is assessable at the time it is received by you in MM 20XX. In Federal Commissioner of Taxation v Thorogood (1927) 40 CLR 454 it was stated that "derived is not necessarily actually received, but ordinarily that is the mode of derivation". From that statement there has emerged over the years a principle, applied by Boards of Review on a number of occasions, that an employee is properly assessable upon any amount that is actually received by him in a particular year of income even though some part of it could be said to relate to an earlier year or to a later year of income. The bonus payment you received while working in Country B for your then employer was received by you after you had come to Australia and after you became an Australian resident for taxation purposes. The bonus payment is required to be declared in your Australian tax return in the income year you received it. | Detailed Reasoning - Double tax agreement: In determining your liability to pay tax in Australia it is also necessary to consider not only the domestic income tax laws but also any applicable double taxation 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 from Country B, we need to consider Country B's DTA (DTA) which is listed in section 5 of the Agreements Act. Country B's DTA operates to avoid the double taxation income received by residents of Australia and Country B. Article X of the DTA 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 B. If the employment is exercised in Country B, such remuneration as is derived from that exercise may be taxed in Country B. In your case you are being paid by an employer who is not a resident of Australia. You were a resident of Australia after DD MM 20XX. You received a bonus payment for services rendered during the period ending MM 20XX. While providing your service, the bonus was awarded for work performed in Country B as a non-resident of Australia. A bonus is employment income and is therefore derived when it is paid or dealt with on your behalf. Article XX of the DTA means the bonus may also be taxed in Country B. 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 less 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.