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Authorisation Number: 1012105333128

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Ruling

Subject: Foreign performance bonus

Question 1

Is the performance bonus you received as a foreign resident for the period of employment performed in country X assessable?

Answer

No.

Question 2

Is the performance bonus you received as an Australian resident for the period of employment performed in Australia assessable?

Answer

Yes.

This ruling applies for the following period

Year ended 30 June 2011

The scheme commences on:

1 July 2010

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 to take up residence in the country X in 2008.

You were residing in country X with your spouse and were regarded for country X residency purposes as a 'resident not ordinarily resident'.

During the period that you were overseas, you were employed by a company resident in the country X.

During the period that you worked in the country X, you were a resident of the country X and not a resident of Australia.

You left country X to return permanently to Australia with your spouse in 2010 and become an Australian resident for taxation purposes.

In 2011, you were paid a 2010 calendar year performance bonus by the country X employer.

The performance bonus related to service undertaken by you during your time in the country X as well as your time in Australia covering the calendar year 2010.

For the purpose of the country X tax system, you were required to reflect the portion of your 2010 performance bonus as the country X income based on the number of days that you were in the country X.

The law of the country X provides for the imposition of income tax on employment income and does not generally exempt such income from tax.

Income tax has already been paid by you in the country X in respect of the country X portion of the performance bonus.

Relevant legislative provisions

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

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

International Tax Agreements Act 1953 Section 3AAA

International Tax Agreements Act 1956 Section 5

Reasons for decision

Subsection 6-5(3) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a foreign resident taxpayer for an income year includes the ordinary income they derived directly or indirectly from all Australian sources during that year and other ordinary income that a provision includes in their assessable income for that year on some basis other than having an Australian source.

Subsection 6-5(2) of the ITAA 1997 provides that the assessable income of an Australian resident taxpayer for an income year includes the ordinary income they derived directly or indirectly from all sources, whether in or out of Australia, during that year.

A bonus payment is ordinary income for the purposes of subsections 6-5(2) and 6-5(3) of the ITAA 1997.

Employment income is generally derived by a taxpayer when it is received even if it relates to a past or future income period (paragraph 42 of Taxation Ruling TR 98/1).

The source of employment income is generally the place where the employment services are performed.

Thus, employment income earned while carrying out duties in the country X is deemed to be sourced in the country X and employment income earned while carrying out duties in Australia is considered to be sourced in Australia.

In your case, you were paid a performance bonus by your employer in 2011. The performance bonus related to services undertaken by you during your time in the country X as well as your time in Australia covering the calendar year 2010.

Accordingly the portion of the bonus payment for the period of your service performed in the country X is considered to be sourced in the country X and the portion of the bonus payment for the period of your service performed in Australia is considered to be sourced in Australia.

Therefore, the performance bonus you received as a foreign resident for the period of employment performed in the country X is not assessable in Australia under Subsection 6-5(3) of the ITAA 1997.

Service performed overseas

In determining liability to Australian tax on foreign sourced income received by a resident, it is necessary to consider not only the income tax laws but also any applicable tax treaty contained in the International Tax Agreements Act 1953 (the Agreements Act).

Australia has a tax treaty with the country X (the country X convention) which operates to avoid the double taxation of income received by residents of Australia and the country X.

An Article of the country X Convention provides that salaries, wages and other similar remuneration derived by a resident of the country X shall be taxable only in the country X unless the employment is exercised in Australia, then the income may be taxed in Australia.

As you are a foreign resident for the period you were in employed in the country X, the performance bonus you received for the period of employment performed in the country X is not included in your assessable income in Australia under subsection 6-5(3) of the ITAA 1997.

Service performed in Australia

You returned permanently to Australia and became an Australian resident for taxation purposes. Therefore, the bonus payment for your employment period in Australia is considered as Australian source.

Accordingly, the performance bonus you received as an Australian resident for the period of employment performed in Australia is assessable under section 6-5(2) of the ITAA 1997.