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Ruling

Subject: Retention bonus

Question

Is the retention bonus you received while deployed to Country X exempt from income tax in Australia under subsection 23AG(1) of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

No.

This ruling applies for the following period

Year ended 30 June 2011

The scheme commenced 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 are employed by a government department.

You were deployed to Country X for a period of not less than 91 days.

The foreign employment income you earned during your deployment was exempt from income tax in Australia under subsection 23AG(1) of ITAA 1936.

You were paid a retention bonus while deployed overseas.

The bonus was paid for serving an additional three years, which you agreed to in 20YY.

The Department withheld tax from the retention bonus.

Relevant legislative provisions

Subsection 23AG(1) of the Income Tax Assessment Act 1936

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

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

Section 11-15 of the Income Tax Assessment Act 1997

Subsection 23AG(7) of the Income Tax Assessment Act 1936

Section 23AG of the Income Tax Assessment Act 1936

Reasons for decision

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

A retention bonus comes within the meaning of ordinary income under subsection 6-5(2) of the ITAA 1997. A retention bonus 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).

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 an Australian resident for tax purposes is engaged in foreign service for a continuous period of not less than 91 days, any foreign earnings derived by the taxpayer from that foreign service will be exempt from tax in Australia.

'Foreign service' includes service in a foreign country in the capacity as an employee and 'foreign earnings' include income consisting of earnings, salary, wages, commission, bonuses and allowances (subsection 23AG(7) of the ITAA 1936).

For the purposes of section 23AG of the ITAA 1936, there must be a direct connection between the entitlement to the foreign earnings and the foreign service for the payment to be considered as derived 'from that foreign service'. The retention bonus is not considered to be a payment 'from that foreign service' as it was paid to remain as a member of the government department.

Therefore, the retention bonus is not exempt from tax in Australia under subsection 23AG(1) of the ITAA 1936.

Accordingly, the retention bonus you received early 2011 as a member of the government department while deployed to Country X is assessable income under subsection 6-5(2) of the ITAA 1997.

Note:

Subsection 23AD(1) of the ITAA 1936 provides that the pay and allowances earned by a person serving as a member of the government department are exempt from tax if they are earned while there is in force a certificate in writing issued by the Chief of the government department to the effect that the person is on eligible duty with a specified organisation in a specified area outside Australia.

A retention benefit falls within the term 'pay and allowances' for the purposes of section 23AD of the ITAA 1936 and is derived at the time it is received.

While it will usually be the case that section 23AD of the ITAA 1936 will apply to the pay and allowances earned by a government department member from eligible duty, there is no requirement in section 23AD of the ITAA 1936 that the pay and allowances be connected to that eligible duty.

Rather, section 23AD of the ITAA 1936 only requires that the pay and allowances are earned by an government department member while there is a certificate in place declaring that the member is on eligible duty.

Therefore, a retention benefit received by a taxpayer while serving overseas on eligible duty is exempt under section 23AD of the ITAA 1936 and is not assessable in Australia under subsection 6-5(2) of the ITAA 1997.