Edited version of your private ruling

Authorisation Number: 1012470514860

Ruling

Subject: Income - bonus payments

Questions and answers:

Is the signing bonus payable to you in the year ended 30 June 2009 assessable in the year ended 30 June 2008, due to your contract being signed in early 2008?

No.

Is the signing bonus payable to you in the year ended 30 June 2009, assessable in the year ended 30 June 2009?

Yes.

This ruling applies for the following periods:

Year ended 30 June 2008

Year ended 30 June 2009

The scheme commenced on:

1 July 2007

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.

During the years ended 30 June 2008 and 30 June 2009 you were a resident of Australia for taxation purposes.

In early 2008 you entered into a contract with Employer Z for a term of X years beginning in 2008.

Subject to the conditions of the contract, you were to receive a signing bonus payable as follows:

Amount X payable in the year ended 30 June 2008.

Amount Y payable in the year ended 30 June 2009.

The terms of the contract, in respect of the signing bonus, stated that the bonus would be required to be repaid if certain conditions were met.

The terms of the contract also contained a salary schedule.

Relevant legislative provisions

Income Tax Assessment Act 1997 (ITAA 1997) - Subsection 6-5(4)

Income Tax Assessment Bill 1996 - Explanatory memorandum

Reasons for decision

Subsection 6-5(2) of the ITAA 1997 requires a resident of Australia to include within their assessable income, ordinary income derived directly or indirectly from all sources, both inside and outside Australia. Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) defines ordinary income as income according to ordinary concepts.

Employment income is generally considered to be 'income according to ordinary concepts' and in your circumstances you received a signing bonus when you agreed to become employed by Employer Z. Your signing bonus is assessable income for the following reasons:

The case of Reuter v FC of T (1993) 111 ALR 716 at 730 notes that where the character of a payment is a reward for services, it will be regarded as income even where the payment is made in advance of services provided.

In respect of the assessability of payments made to sportspeople, Taxation Ruling TR 1999/17 'Income Tax: Sportspeople - receipts and other benefits obtained from involvement in sport' states the following at paragraph [21]:

Payments which are assessable income include salary, wages, bonuses, allowances, sign-on fees, inducement or retention payments for continuance of service, termination payments, cash prizes and cash awards.

Further, the assessability of 'sign-on' fees for sportspeople is considered in Taxation Ruling IT 2307 'Income Tax: assessability of lump sum payment made under a contract to play football: covenant in contract that taxpayer not engage in competitive footrunning during term of contract', where, at paragraph [7], the following is stated:

Lump sum payments to sportsmen under 'sign-on' agreements are considered, in the absence of evidence to the contrary, to constitute assessable income in the hands of sportsmen and should be treated as such.

As your signing bonus is assessable income, the issue of when income is derived must now be considered. Taxation Ruling TR 98/1 'Income Tax: determination of income; receipts versus earnings' provides guidance on the issue of timing of payments and the derivation of income. Within TR 98/1 the methods identified for determining the derivation of income in terms of timing of payments, include the 'receipts' method and the 'earnings' method.

The 'receipts' method

Subsection 6-5(4) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that you are taken to have received an amount of income as soon as it is applied or dealt with in any way on your behalf or as you direct. The Explanatory Memorandum to section 6-5 of the ITAA 1997, as contained in the Income Tax Assessment Bill 1996, states that the meaning of this is that 'an amount is treated as received as soon as the taxpayer gets the benefit from it'.

The 'earnings' method

Under the 'earnings' method, income is derived when it is earned; that is, when the taxpayer can receive the money as the result of performance of a task. TR 98/1 states, at paragraph [20], that, in most cases, the 'earnings' method is appropriate for business income derived from trading or manufacturing businesses.

Income from employment

In a determination of income using the 'receipts' versus 'earnings' methods, TR 98/1 states the following at paragraph [42]:

Income from employment would normally be assessable on a receipts basis. Salary, wages, or other employment remuneration are assessable on receipt even though they relate to a past or future income period.

Derivation of income through the exercise of a skill

At paragraph [43], TR 98/1 states the following in respect of non-business income from the provision of knowledge or the exercise of a skill:

Income of this type would result from a single or isolated contract primarily involving the use of a taxpayer's particular skill or knowledge. Where the provision of knowledge or exercise of skill possessed by a taxpayer does not amount to the carrying on of a business, the income is assessable on a receipts basis.

Application to your circumstances

You signed a contract with employer Z, wherein you would derive income through the exercise of a particular skill.

Subject to the specified conditions in the contract, you were to receive a signing bonus, payable as follows:

· Amount X payable in the year ended 30 June 2008.

· Amount Y payable in the year ended 30 June 2009.

This signing bonus, payable in two separate amounts, and on different dates, was an incentive payment for you to render your services and skills to Employer Z for a period of X years. This is confirmed in a letter you received with the payment of amount X of your bonus. This incentive payment was therefore received as a consequence of your ongoing employment relationship.

Further, as your signing bonus was specifically stated to be payable in separate amounts, and was subject to specified conditions within your contract, the Commissioner considers that you would only get the benefit of the payments when you received them.

Therefore, the signing bonus amounts are derived in the income years in which they are received, and are therefore assessable in those years.

· Amount X payable in the year ended 30 June 2008.

· Amount Y payable in the year ended 30 June 2009.