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Edited version of private ruling
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Ruling
Subject: Exempt income
Question 1
Is a retention benefit paid to Employee X exempt from tax under section 23AG of the Income Tax Assessment Act 1936 (ITAA 1936)?
Answer:
No.
This ruling applies for the following period:
Year ended 30 June 2010
The scheme commences on:
The scheme has commenced
Relevant facts and circumstances
Employee X is an Australian resident for income tax purposes.
Employee X was assigned to an overseas location for a period of not less than 91 days.
Employee X accepted a retention benefit which was paid to Employee X whilst Employee X was working overseas.
The retention benefit is paid to eligible employees for agreeing to extend their period of employment for a further specified time.
Relevant legislative provisions
Income Tax Assessment Act 1936 23AG,
Income Tax Assessment Act 1997 6-5.
Detailed reasoning
Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of an Australian resident includes ordinary income derived from all sources whether in or out of Australia during the income year.
A retention bonus is an additional reward payment derived by a 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). The retention benefit paid to Employee X is therefore ordinary income for the purposes of subsection 6-5(2) of the ITAA 1997.
However 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 the list is section 23AG of the Income Tax Assessment Act 1936 (ITAA 1936).which deals with overseas employment income.
Subsection 23AG(1) of 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 from the foreign service will be exempt from tax in Australia.
The term 'foreign service' means service in a foreign country as the holder of an office or in the capacity of an employee and the term 'foreign earnings' includes income consisting of salary and wages and allowances (subsection 23AG(7) of ITAA 1936).
Therefore, for earnings to be exempt under section 23AG of ITAA 1936, there is a requirement that the earnings be connected to the overseas employment.
Further, under subsection 23AG(2), the exemption in subsection 23AG(1) will not apply where the foreign earnings are exempt from income tax in the foreign country only because of any of the conditions set out in subsection 23AG(2).
The retention benefit was paid to Employee X in return for Employee X agreeing to extend employment for a further specified time. As such, the retention benefit has the character of an incentive payment.
A retention bonus is derived at the time it is received ((1958) 9 TBRD Case J20; 7 CTBR (NS) Case 130; and (1958) 9 TBRD Case J60; 8 CTBR (NS) Case 50 ). The fact that the receipt may have to be repaid if certain events subsequently occur does not affect the character of the receipt (Case A59 69 ATC 334; 15 CTBR (NS) Case 34).
Therefore, the retention benefit is earned by Employee X at the time it is received.
In these circumstances Employee X received the retention benefit as payment for agreeing to remain employed for a further specified time. Therefore, the retention benefit had no connection to the overseas service notwithstanding that Employee X received the payment during Employee X's overseas service.
Accordingly, the retention benefit is assessable income under subsection 6-5(2) of ITAA 1997.
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