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Ruling

Subject: Bonus payments

Question

Are the payments of the residual profit-share bonuses assessable income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) in the year of receipt?

Answer

Yes.

This ruling applies for the following period

Year ended 30 June 2012

Year ended 30 June 2013

Year ended 30 June 2014

Year ended 30 June 2015

The scheme commenced on

1 July 2011

Relevant facts and circumstances

You became a non-resident of Australia several years ago. From 2002 you were employed by company X as their director of the country A office and from 2002 you were a resident in that country.

You became a shareholder of company X on in 2006 and earned bonuses under the shareholder profit-share scheme for the period from 1 July 2006 to 30 June 2010. During the 2006-07 to 2009-10 financial years you were paid a portion of these bonuses with the remaining amounts retained by company X to support their working capital. The amount of the 2010-11 financial year bonus is to be finalised in November 2011.

The bonuses were earned while you were a non-resident of Australia and a resident of country A. The payment of the retained shareholder profit-share scheme bonuses has been delayed due to the global financial crisis which had a significant impact on company X. The ongoing payment of the shareholder profit-share scheme bonuses will be made after you become an Australian resident in July 2011.

You were re-employed by the Australian entity of company X from July 2011. You became an Australian resident from July 2011 and you remain a director and shareholder of the company.

Relevant legislative provisions

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

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

Reason for decision

Summary

The payment of the residual profit-share bonuses will be assessable in Australia as it is taken to have been derived for income tax purposes at the time it is paid or otherwise made available to you.

Detailed reasoning

Subsection 6-5(2) of the 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.

A bonus payment is ordinary income for the purposes of subsection 6-5(2) of the ITAA 1997.

Section 6-5(4) of the ITAA 1997 indicates that in working out whether you have derived an amount of ordinary income you are taken to have received the amount as soon as it is applied or dealt with in any way on your behalf or as you direct.

Paragraph 4 of Taxation Ruling IT 2534 rules 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 may have been with regard to duties performed in a previous year of income.

You will be a resident of Australia when you derive (receive) the bonus payments and the payments will be ordinary income. Section 6-5 of the ITAA 1997 will apply to include these payments as assessable income. If you are a resident, the source of the payment is irrelevant as section 6-5 includes assessable income, ordinary income from any source.