Edited version of private advice

Authorisation Number: 1051819667829

Date of advice: 25 March 2021

Ruling

Subject: Foreign source income - derivation

Question

Are the salary/wage payments which relate to your employment with an overseas employer during the time you were not an Australian tax resident, but received by you after your return to Australia, included as assessable income in your Australian tax return?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ending 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You worked for a foreign employer in a foreign country for some years.

You were a non-resident of Australia for taxation purposes for the period you were working overseas.

In early 20XX, you were advised that your employment position was going to be terminated.

The COVID-19 pandemic escalated and you needed to secure a seat on a flight back to Australia.

You obtained a flight with a departure date earlier than you expected, and you ended up leaving your employment in the foreign country prior to your scheduled termination date.

You received outstanding salary/wage payments for annual leave accrued, in three instalments after you arrived back in Australia.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

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 during the income year.

An entity derives an amount of ordinary income as soon as it is applied or dealt with in any way on the entity's behalf or as directed by it (subsection 6-5(4) of the ITAA 1997).

Taxation Ruling TR 98/1 Income tax: determination of income; receipts versus earnings (TR 98/1) sets out the Commissioner's view on when income is derived and explains that income can be derived either on the basis of the 'receipts' method or the 'earnings' method.

Under the earnings (or accruals) method, income is derived when it is earned and the point of derivation occurs when a recoverable debt is created. In most cases, the earnings method is the appropriate way to determine business income derived from a trading or manufacturing business (paragraph 20 of TR 98/1).

Under the receipts method, income is derived when it is received, either actually or constructively, and is taken to be derived by a person although it may not actually be paid over, but is dealt with on his/her behalf or as he/she directs.

Paragraph 18 of TR 98/1 states that the receipts method is likely to be appropriate to determine:

• income derived by an employee;
• non-business income derived from the provision of knowledge or the exercise of skill possessed by the taxpayer; and
• business income where the income is derived from the provision of knowledge or the exercise of skill possessed by the taxpayer in the provision of services (subject to certain qualifications).

Consequently, income from employment is normally 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 (paragraph 42 of TR 98/1).

The payments you received from your previous employment were received once you had resumed your residency status for taxation purposes in Australia and are therefore assessable income in Australia and must be included in your Australian tax return.

The Commissioner has no discretion to permit you to return the income on the earnings/accruals method.

The Commissioner appreciates that your return to Australia was abrupt and was influenced by the pandemic, however the income was received by you after you resumed your residency status in Australia.

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