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Edited version of your written advice
Authorisation Number: 1012690661137
Ruling
Subject: Assessability of foreign income
Question and answer
Is the entire bonus payment you received for your work overseas assessable in Australia?
Yes.
This ruling applies for the following periods:
Year ended 30 June 2014
The scheme commenced on:
1 July 2013
Relevant facts and circumstances
You have been a resident of Australia for taxation purposes since XXXX.
You worked overseas for a company and then were transferred back to Australia.
You received a bonus payment for work carried out in the previous year.
You received this payment in the following financial year.
Relevant legislative provisions:
Income Tax Assessment Act 1997 Section 6-5.
Reasons for decision
Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) advises that where you are an Australian resident for taxation purposes, your assessable income includes income gained from all sources, whether in or out of Australia. However, where you are a non-resident of Australia for taxation purposes, your assessable income includes only income from an Australian source.
An amount received as a bonus or incentive payment, in relation to services rendered or to be rendered, is treated as salary and wages for tax purposes under section 6-5 of the ITAA 1997. This is because it is received as a consequence of an employment relationship and is therefore assessable in full in the year of receipt.
The receipts (bonus payments) were derived from employment and constituted income under ordinary concepts. They were incidental to your continuing income-earning activity as an employee with the overseas employer.
Therefore the bonus payments are ordinary income and are assessable at the time they are received by you.
Income such as director's fees and bonuses are derived for tax purposes at the time such income is paid notwithstanding that the services giving rise to the income may have been performed in a previous income year (Taxation Ruling IT 2534 Income tax: taxation of directors fees, bonuses etc.).
In Federal Commissioner of Taxation v Thorogood (1927) 40 CLR 454 it was stated that "derived is not necessarily actually received, but ordinarily that is the mode of derivation". From that statement there has emerged over the years a principle, applied by Boards of Review on a number of occasions, that an employee is properly assessable upon any amount that is actually received by him in a particular year of income even though some part of it could be said to relate to an earlier year or to a later year of income.
The bonus payment you received while working overseas were received by you after you had returned to Australia and became a resident for taxation purposes.
As a resident of Australia for taxation purposes you are required to declare all your income both in and outside Australia in your Australian tax return.
The bonus payment is required to be declared in your Australian tax return in the year you received it.
"In determining your liability to pay tax in Australia it is necessary to consider not only the domestic income tax laws but also any applicable double tax agreements.
Section 4 of the International Tax Agreements Act 1953 (Agreements Act) incorporates that Act with the ITAA 1936 and the ITAA 1997 so that all three Acts are read as one. The Agreements Act overrides both the ITAA 1936 and ITAA 1997 where there are inconsistent provisions (except in some limited situations).
Section 5 of the Agreements Act states that, subject to the provisions of the Agreements Act, any provision in an Agreement listed in section 5 has the force of law. The Country Y Agreement is listed in section 5 of the Agreements Act.
The Country Y agreement operates to avoid the double taxation of income received by residents of Australia and Country Y.
Article XX of the Country Y agreement advises that remuneration or other income derived by a resident of Australia for personal services including professional services shall be taxable only in Australia unless the employment is performed or exercised in Country Y. If the services are performed or exercised in country y then the income may also be taxed in Country Y."
Article XX does not prevent Australia from taxing the bonus payments.