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Ruling

Subject: Foreign income

Question and answer

Are the bonus payments you received for your work carried out overseas assessable income in Australia?

Yes.

This ruling applies for the following period:

Year ended 30 June 2012

The scheme commenced on:

1 July 2011

Relevant facts and circumstances

You worked overseas and you were a resident of that country for a number of years.

You were transferred by your employer back to Australia a number of years ago.

You have been a resident of Australia for taxation purposes from the time you returned from overseas.

As part of your overseas remuneration package, you are entitled to a share of profit (bonus).

The profit share allocations are conditional on certain requirements, including the requirement that you remain employed with your employer up to and including the relevant crystallisation date and/or vesting dates. The share of profit is usually paid in a specified month every year.

You have been paid the bonus payments since returning to Australia.

The bonus payments you received while working overseas for your employer were received by you after you had returned to Australia and became a resident for taxation purposes.

The bonus payments are paid into an overseas bank account and the account has not been drawn upon.

These amounts have been taxed overseas and are also subject to withholding tax

Relevant legislative provisions:

Income tax Assessment Act 1997 Section 6-5

Reasons for decision

Section 6-5 of the Income Tax Assessment Act 1997 (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. The payments were simply a financial incentive to remain in employment with Macquarie.

Therefore the bonus payments are ordinary income and are assessable at the time they are received by you.

Income such as director's fees and bonuses are derived for tax purposes at the time such income is paid notwithstanding that the services giving rise to the income may have been performed in a previous income year (Taxation Ruling IT 2534 Income tax: taxation of directors fees, bonuses etc.).

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 payments were received by you after you had returned to Australia and resumed your residency status for taxation purposes.

As a resident of Australia for taxation purposes you are required to declare all your income both in and outside Australia in your Australian tax return.

The bonus payments are required to be declared in your Australian tax return in the year you received them.

"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. The overseas Agreement is listed in section 5 of the Agreements Act.

The overseas agreement is located on the Austlii website (www.austlii.edu.au) in the Australian Treaties Series database. The overseas agreement operates to avoid the double taxation of income received by residents of Australia and overseas.

Article 14 of the overseas agreement advises that salaries, wages and other similar remuneration derived by a resident of Australia shall be taxable only in Australia unless the employment is exercised in overseas. If the employment is exercised in overseas then the income may also be taxed in overseas."

Article 14 does not prevent Australia from taxing the bonus payments.

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