Edited version of your written advice

Authorisation Number: 1013123323838

Date of advice: 21 November 2016

Ruling

Subject: Bonus payment

Questions and Answers

1. Did you receive your bonus prior to becoming an Australian tax resident?

Yes.

2. Did the transfer of the properties to you after you became an Australian tax resident give rise to any income tax issues for you at the time of transfer?

No.

This ruling applies for the following period(s)

Year ended 30 June 2015

Year ended 30 June 2016

Year ended 30 June 2017

Year ended 30 June 2018

Year ended 30 June 2019

The scheme commences on

1 July 2014

Relevant facts and circumstances

You were a resident for tax purposes of Country A.

Whilst residing in Country A, you were employed in a senior position by Company P located in Country A.

Company P was (and still is) in the business of developing commercial and residential buildings.

You have provided a copy of a letter of employment containing the terms of your employment, including your entitlement to salary, discretionary bonuses and other benefits. The terms included that the board of directors will at its sole discretion award you discretionary bonuses and other benefits from time to time.

During your employment with Company P, you were involved in the development of buildings in Country A.

You were sent a letter stating Company P had approved a discretionary bonus payment for you for a period which was equivalent to m months’ pay for those years.

At around the same time, you indicated that you wished to acquire 2 properties from Company Q (a separate entity to Company P) when the buildings were completed.

You entered into an offset arrangement under which you became liable to pay for the 2 properties (ie Company P was to pay Company Q at your direction).

You were offered another bonus. Senior management decided the bonuses would be dealt with via offset arrangements against the purchase price of the properties.

You resigned from Company P.

In your official resignation letter, you sought to ensure that the ‘bonus for purchase price’ offset arrangement was to be put in place:

You paid for the two properties (partially with your bonus payments and other entitlements) and subsequently left Country A to fly to Australia.

You became an Australian resident on date D.

The two properties were transferred to you after you became an Australian resident.

Relevant legislative provisions

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

Income Tax Assessment Act 1997 subsection 6-5(3)

Income Tax Assessment Act 1997 subsection 6-5(4)

Income Tax Assessment Act 1997 subsection 995-1(1)

Reasons for decision

Non-residents and source

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 directly or indirectly from all sources, whether in or out of Australia, during the income year. Non-residents are assessable on ordinary income derived from an Australian source (sub-section 6-5(3) of the ITAA 1997).

A bonus payment is ordinary income for the purposes of section 6-5 of the ITAA 1997 and ordinary income is included in assessable income when it is derived.

Derived

In Federal Commissioner of Taxation v. Clarke (1927) 40 CLR 246 at 261; [1927] HCA 49, Isaacs J said that ‘derived’ simply means ‘obtained’ or ‘got’ or ‘acquired’ and that ‘all income is derived from something and by someone’. Isaacs J also added in Federal Commissioner of Taxation v. Thorogood (1927) 40 CLR 454 at 458; [1927] HCA 36 that ‘derived’ does not necessarily mean actually received, although receipt is the ordinary mode of derivation.

Essentially, income is derived when it ‘comes in’ or ‘comes home’, in whatever sense is most appropriate in the particular circumstances: Commissioner of Taxes (SA) v. Executor Trustee and Agency Co of South Australia Ltd (1938) 63 CLR 108; [1938] HCA 69.

The time at which an amount of ordinary income is ‘derived’ depends on the tax accounting method used by the taxpayer to report the amount as income, i.e. whether the amount should be reported as income on a cash basis (receipts) or an accruals (earnings) basis.

Cash v Accruals

A taxpayer must adopt the method that, in the circumstances of the case, is the most appropriate. A method of accounting is appropriate if it ‘gives a substantially correct reflex of income’: paragraph 17 of Taxation Ruling TR 98/1 Income tax: determination of income; receipts versus earnings. However, the receipts method is likely to be appropriate to determine income derived by an employee whereas the earnings method is, in most cases, appropriate to determine business income derived from a trading or manufacturing business: paragraphs 18 and 20 of TR 98/1.

The cash basis of accounting is the method used by most individuals. Under this method, income is returned in the year when it is actually or constructively received, either in the form of cash or its equivalent, or other property.

Paragraph 42 of TR 98/1 states that income from employment would normally be assessable on a receipts basis. Salary, wages or other employment remuneration are assessable on receipt even though they relate to a past or future income period.

On this basis, you are assessable on your bonus and other employee entitlements when you actually receive them.

This is the case even if the service to which the salary relates was performed before the taxpayer became an Australian resident: Re Clement Kam Man Tong and Commissioner of Taxation [2007] AATA 1234; 2007 ATC 2139; (2007) 66 ATR 412.

Constructive Receipt

The definition of ‘derive’ in subsection 995-1(1) of the ITAA 1997 refers to the meaning affected by subsection 6-5(4) of the ITAA 1997. Accordingly, ‘derive’ has its ordinary meaning, but it may be extended by the constructive receipt rule in subsection 6-5(4) of the ITAA 1997 which means that income can be derived even if an item of income is not paid over to the taxpayer.

The explanatory memorandum to the Bill introducing subsection 6-5(4) of the ITAA 1997 states that the rule applies to income accounted for on a receipts basis because this subsection does not actually deem an amount to be derived; rather it deems receipt. Unless the taxpayer is on the cash receipts basis of returning income, the rule of constructive receipt does not apply.

If the cash method applies, ordinary income is taken to be received as soon as it is applied or dealt with in any way on the taxpayer’s behalf or as the taxpayer directs (subsection 6-5(4) of the ITAA 1997). The income does not need to be received as money, it is sufficient if it is received in the form of money’s worth.

Paragraph 4 of Taxation Ruling IT 2534 Income Tax: Taxation treatment of directors fees, bonuses, etc. provides 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 relates to duties that were performed in a previous income year.

The principle of constructive receipt involves the notion of control of, or the capacity to control, an amount that is receivable or otherwise held in a manner satisfying the concept of derivation. If an amount is credited to an employee in the books of his employer and can be drawn by the employee at any time, then it is derived at the time it was so credited and made available to the employee: paragraph 4 of Taxation determination TD 93/242 Income tax: what is the income tax treatment of a deferred salary payment agreement? However, merely crediting an amount in an account or record does not necessarily mean that the amount has been received.

Your situation

You were a resident for tax purposes of Country A.

You were owed a bonus and other entitlements by Company P prior to you leaving Country A. You had a liability to pay Company Q for the acquisition of two properties prior to you leaving Country A

Your bonus and other entitlements were applied by both Company P and yourself in discharging your liability to pay Company Q for your two properties:

Subsection 6-5(4) of the ITAA 1997 applies to deem you to have constructively received your bonus and other entitlements when your entitlements were, on your instructions, paid by Company P to meet your liability to pay Company Q for the purchase of your properties:

You left Country A and arrived in Australian on date D when you became an Australian resident for tax purposes. The bonus and other entitlements were applied by you against your liability to Company Q before you left Country A. As you derived your bonus and other entitlements (before date D) whilst you were a non-resident, they are not assessable in Australia.

Transfer of properties to you

You became an Australian resident for tax purposes on date D. The two properties were transferred to you after you became an Australian resident. There are no income tax issues for you at the time of transfer as you paid for the two properties (partially using the bonus you received) before you became an Australian resident.

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