Edited version of private ruling

Authorisation Number: 1011562790520

This edited version of your ruling will be published in the public Register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns.

Ruling

Subject: Foreign Lump Sum Payment in Arrears

Question:

Is the lump sum payment in arrears you derived in the 2009-10 income year for foreign employment you undertook in Country A, exempt income in Australia?

Answer:

No.

This ruling applies for the following period/s:

Year ended 30 June 2010.

The scheme commenced on:

1 July 2009.

Relevant facts and circumstances

You were an Australian resident for income tax purposes in the 2008-09 and 2009-10 income years.

Prior to becoming in Australian resident for income tax purposes, you worked in Country A for your previous employer who was a Country A resident employer.

Some time in the 2000-10 income year, you received a lump sum payment in arrears from your previous Country A employer. The payment was a salary revision for work you did in Country A back dating to prior years.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 6-5(2)

Income Tax Assessment Act 1997 Section 11-1

Income Tax Assessment Act 1997 Section 11-15

Income Tax Assessment Act 1936 Section 23AG

Income Tax Assessment Act 1936 Section 23AG(1)

Income Tax Assessment Act 1936 Section 23AG(1AA)

Income Tax Assessment Act 1936 Section 159ZRA

Reasons for decision

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.

Salary and wages are ordinary income for the purpose of subsection 6-5(2) of the ITAA 1997.

Taxation Ruling TR 96/15 states that while it is a requirement that the foreign earnings be derived whilst you are a resident, it is not also a requirement that the relevant foreign service be performed whilst you are a resident.

Taxation Ruling TR 98/1 states that lump sum in arrears income is assessable on a receipt basis, even though it may relate to a past income period. Therefore, the fact that you were a foreign resident for income tax purposes does not exclude the consideration of your lump sum payment being taxed in Australia.

Section 11-15 of the ITAA 1997 lists those provisions dealing with income that may be exempt. Included in this list is section 23AG of the Income Tax Assessment Act 1936 (ITAA 1936), which deals with overseas employment income.

Subsection 23AG(1) of the ITAA 1936 provides that where Australian resident individuals are engaged in foreign service for a continuous period of not less than 91 days, foreign earnings derived from that foreign service are exempt from tax in Australia. However, new subsection 23AG(1AA) of the ITAA 1936, which took effect from 1 July 2009, provides that those foreign earnings will not be exempt under section 23AG of the ITAA 1936 unless the continuous period of foreign service is directly attributable to any of the following:

- delivery of Australian official development assistance by your employer.

- activities of your employer in operating a public fund declared by the Treasurer to be a developing country relief fund, or a public fund established and maintained to provide monetary relief to people in a developing foreign country that has experienced a disaster (a public disaster relief fund).

- activities of your employer as a prescribed charitable or religious institution exempt from Australian income tax because it is located outside Australia or the institution is pursuing objectives outside Australia.

- deployment outside Australia by an Australian government (or an authority thereof) as a member of a disciplined force.

In your case, your foreign service in Country A is not attributable to any one of the conditions for exemption under subsection 23AG(1AA) of the ITAA 1936. Therefore, the lump sum payment you received is not exempt income in Australia under section 23AG of the ITAA 1936.

In determining the liability to Australian tax on foreign sourced income received by a resident taxpayer it is necessary to consider not only the income tax laws but also any tax treaty contained in the International Tax Agreements Act 1953 (Agreements Act).

A Schedule to the Agreements Act contains the tax treaty between Australia and Country A (the Country A Agreement).

An Article of the Country A Agreement provides that salary and wages derived by an Australian resident in respect of an employment will be taxable only in Australia unless the employment is exercised in Country A. If the employment is exercised in Country A, the salary and wages may be taxed in Country A.

However, another Article of the Country A Agreement provides that remuneration derived by an Australian resident in respect of an employment exercised in Country A will be taxable only in Australia if:

- you are present in Country A for a period or periods not exceeding in the aggregate 183 days in the Country A year of income;

- the remuneration is paid by, or on behalf of, an employer who is not a resident of Country A; and

- the remuneration is not deductible in determining the taxable profits of a permanent establishment or a fixed base that the employer has in Country A.

In your case, you don't satisfy the above conditions. Therefore, your lump sum payment will be assessable in Australia under subsection 6-5(2) of the ITAA 1997. However, the lump sum payment may also be taxed in Country A according to an Article of the Country A Agreement.

Note: Lump sum payment in arrears tax offset

Individual taxpayers, who receive certain assessable lump sum payments containing an amount that accrued in earlier income years, may be entitled to a lump sum in arrears tax offset under section 159ZRA of the ITAA 1936. The tax offset is intended to overcome the problem of the lump sum attracting more tax in the year of receipt than would have been payable if the payment had been taxed in each of the years in which it accrued.

The Tax Office will calculate the amount of the tax offset on the issue of your 2009-10 income tax assessment. For more information, please refer to the Tax Pack 2010 Supplement, page 32.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).