Edited version of private ruling

Authorisation Number: 1011768005735

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Ruling

Subject: Assessability of employment related payment

Questions and answers:

1) Are the payments from your employer for continuing your employment assessable in the year in which the arrangement was entered into between you and your employer?

No

2) Are the payments assessable in the year of receipt?

Yes

3) Is the payment which you received when you were a non-resident of Australia assessable in Australia?

No

4) Are the payments which you received after becoming a resident of Australia assessable in Australia?

Yes

This ruling applies for the following periods:

Year ended 30 June 2010

Year ended 30 June 2011

Year ended 30 June 2012

The scheme commences on:

1 July 2009

Relevant facts and circumstances

You worked as a director of a company in Country X for several years until date A in the 2010-11 financial year when you returned to Australia and became an Australian resident for tax purposes.

When living in Country X you were a non-resident of Australia for tax purposes.

You received a letter dated date B from your employer which stated you would receive an amount in three instalments, payable on date C in the 2009-10 income year, date D in the 2010-11 income year and date E in the 2011-12 income year.

The payment was conditional upon you remaining employed with the company or one of its subsidiaries for a certain number of years.

In the event of you terminating your employment within the stipulated period, you would be required to repay all the payments.

You were a non-resident for tax purposes when your received your first payment (date C).

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 6-5(2).
Income Tax Assessment Act 1997 Section 104-35
Income Tax Assessment Act 1997 Section 118-20

Reasons for Decision

Assessability of payments

Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the income of an Australian resident includes ordinary income derived from all sources, whether in or out of Australia, during the year of income. 

You entered into an arrangement on date B with your employer in which you agreed to continue your employment for a set number of years. You were to receive a payment from your employer to be paid in three payments on date C, date D and date E.

The three payments are retention payments as they are paid as an incentive to continue your employment with the same employer. In the event of you terminating your employment before the end of the stipulated period, you are required to repay any of the retention payments you have received.

A retention payment 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). A retention payment is also considered ordinary income for the purposes of subsection 6-5(2) of the ITAA 1997. It is designed to reward and encourage employees to continue to work with the same employer.

In your case we are dealing with payments which are derived as a result of your income earning activity and to encourage you to stay with your employer for a certain number of years. The payments are made wholly and principally for your services to your employer to be provided over a period of time and bear the character of additional remuneration to you as an employee. Consequently, the payments are included in your assessable income as ordinary income under section 6-5 of the ITAA 1997, subject to your residency status.

When are the payments assessable?

A retention payment 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).

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

As you are an employee, your income is deemed to be derived when received. Consequently the payments are derived on date C, date D and date E.

In your situation, after becoming an Australian resident, you received one retention payment on date D. This is assessable in the year of income in which you received it which is in the 2010-11 income year. You are due to receive another payment on date E and again this will be assessable at the time of receipt in the 2011-12 income year.

Payment received as a non-resident of Australia

You became a resident for tax purposes on date A when you returned to Australia with your family. The payment which you received on date C is not assessable in Australia as you were a non-resident at the time of receipt.