Edited version of private ruling

Authorisation Number: 1011721087000

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Ruling

Subject: Bonus payments. Exemption from income tax.

Question 1

Are the bonus payments you received, that are attributable to your period of foreign service exempt from income tax in section 23AG of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

Yes.

This ruling applies for the following period(s):

1998-99 income year.

1999-2000 income year.

2000-01 income year.

2001-02 income year.

2003-04 income year.

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You left Australia in 199X and relocated to another country to take up a position for a foreign company for the purpose of establishing a business in that country. You entered an employment contract for this overseas service with a salary and bonus arrangement. You remained a non-resident of Australia until your return in 199Y and have been an Australian resident ever since.

The information you have provided states the following:

· Your ultimate employer during your time in the foreign country was a European based company.

· Your contractual arrangement with that company was informal and proceeded on the basis that they would pay you a relatively low salary but would provide you with generous bonuses.

· After gaining a resident's visa in that foreign country, you were employed by a local private company as a Chief Executive. The major shareholder was the European based company.

· You stated that your employment income was not exempt from tax in that foreign country.

After your return to Australia, you were asked to play a "mentor" role for the operation in the foreign country for a number of years to 200X. You travelled back for short visits to tidy up loose ends as well as travelling to other parts of the world during that period to assess potential opportunities for which you were separately compensated.

You received bonuses after returning to Australia which you state were in respect of, and related to, the period you were in the foreign country.

The bonus payments were made after your period of service in that country as it took some time for the benefits of that service to be realised in money terms following the sale of the European based company's share in the business in that foreign country to another company. Your final settlement was agreed during 200X and the bonus was paid later through that year upon finalisation of the European based company's accounts.

Relevant legislative provisions

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

Income Tax Assessment Act 1997 Subsection 6-15(2)

Income Tax Assessment Act 1936 Section 23AG

Income Tax Assessment Act 1936 Subsection 23AG(1)

Income Tax Assessment Act 1936 Subsection 23AG(2)

Income Tax Assessment Act 1936 Subsection 23AG(7)

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.

We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA, go to our website www.ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select: Part IVA: the general anti-avoidance rule for income tax.

Reasons for decision

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our 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. A bonus payment is ordinary income for the purposes of subsection 6-5(2) of the ITAA 1997.

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 this list is section 23AG of the ITAA 1936 which deals with overseas employment income.

Subsection 23AG(1) of the 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 will be exempt from tax. Subsection 23AG(7) of the ITAA 1936 defines 'foreign service' as service in a foreign country in the capacity of an employee and 'foreign earnings' as income consisting of earnings, salary, wages, commission, bonuses or allowances.

Paragraph 4 of Taxation Ruling IT 2534 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 even where the bonus may have been paid with regard to duties that were performed in a previous year of income. As such, you are taken to have derived the bonus payments when you received them.

To qualify for the exemption, the 'foreign earnings' must be derived from the 'foreign service'. That does not mean that the foreign earnings need to be derived at the time of engaging in foreign service. The important test is that the foreign earnings, when derived, need to be derived as a result of the undertaking of that foreign service.

In relation to bonuses paid after a person returns to Australia that relate to the period of foreign service, such bonuses are treated as foreign earnings derived from foreign service.

Subsection 23AG(2) of the ITAA 1936 provides that the exemption under subsection 23AG(1) of the ITAA 1936 will not apply where the income is exempt from income tax in the foreign country because of any of the reasons listed in that subsection.

As you are a resident of Australia and was engaged in a continuous period of foreign service of not less than 91 days whilst you were in a foreign country between 199X and 199Y, the bonus payments you received that are attributable to your service in that country, qualify as foreign earnings from foreign service and are exempt from tax under the provisions of section 23AG of the ITAA 1936.