Edited version of your written advice

Authorisation Number: 1012823095187

Ruling

Subject: Foreign income - salary and unused annual leave

Question and answer

Will foreign income including a lump sum payment of unused annual leave be taxable in Australia?

No.

This ruling applies for the following periods:

Year ending 30 June 2015

The scheme commences on:

1 July 2014

Relevant facts and circumstances

You are a citizen of Country A

You were granted an Australian permanent visa in 201X while still residing in Country A.

Your employment in Country A legally ended prior to your arrival in Australia.

You arrived in Australia in 201X and became an Australian resident for tax purposes.

You received a final payment from Country A employer (including a lump sum payment for unused annual leave) while you were an Australia resident for tax purposes.

Relevant legislative provisions

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

Income Tax Assessment Act 1997 Section 6-10(5)

Income Tax Assessment Act 1997 Section 83-10

Income Tax Assessment Act 1997 Section 83-70

International Tax Agreements Act 1953

Reasons for decision

Subsection 6-5(3) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that ordinary income derived by a foreign resident directly or indirectly from Australian sources, as well as other ordinary income included by a provision on a basis other than having an Australian source, is assessable.  Statutory income from all Australian sources, or included by a provision on a basis other than having an Australian source, is also included in a foreign resident's assessable income under subsection 6-10(5) of the ITAA 1997.

Sections 83-10 and 83-70 of the TAA 1997 provide that any amount paid to a taxpayer in lump sum in consequence of termination of employment, being an amount that is paid in respect of accrued unused annual leave (section 83-10 of the ITAA 1997) and accrued unused long service leave (section 83-70 of the ITAA 1997), are to be included in their assessable income.

Generally, Australian courts have held that the source of employment income is where the employee performs their duties. Thus, employment income earned while carrying out duties in Australia is considered to be sourced in Australia.  Employment income earned while being carried out overseas is considered to be sourced in that overseas country.

However, in determining the liability to tax on income received by a foreign 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.

Australia has a tax treaty with the Country A which operates to avoid the double taxation of income received by Australian and Country A residents.

An article in the tax treaty with Country A provides that salaries, wages and other similar remuneration derived by an individual who is a resident of Country A in respect of an employment shall be taxable only in Country A unless the employment is exercised in Australia. If the employment is so exercised, such remuneration as is derived from that exercise may be taxed in Australia.

You became an Australia resident for tax purposes in 201X. You received a final payment of salary and unused annual leave from your Country A employer after you became an Australian resident for tax purposes for work completed in Country A while you were a resident of Country A for tax purposes. Therefore, under the relevant article in the tax treaty with Country A, the unused annual leave and salary accrued whilst you were in Country A is taxable only in Country A.

Accordingly, the lump sum payment for annual leave and final salary accrued while you were a non-resident of Australia and working in Country A, is not assessable in Australia under subsection 6-5(3) of the ITAA 1997.

Income tax return

The payment you received is not assessable in Australia and therefore does not need to be included in your tax return.