Edited version of your written advice

Authorisation Number: 1012933690114

Date of advice: 7 January 2016

Ruling

Subject: Assessability of unused annual leave payment

Question and answer

Is the payment for unused annual leave you received from a foreign employer assessable in Australia?

No.

This ruling applies for the following period:

Year ended 30 June 2015

The scheme commences on:

1 July 2014

Relevant facts and circumstances

You are a citizen of country X.

You arrived in Australia with your country X partner under a temporary visa.

You arrived in Australia with the intention of living here and became an Australian resident for tax purposes on arrival.

Before arriving in Australia, you were employed in country X by a company of country X and after arriving in Australia, you continued to be employed and paid by the company for several more months.

You resigned from the country X company and received a final payment from the company which included a payment for unused annual leave which accumulated prior to your arrival in Australia.

You have received advice from the country X tax authorities that you became a foreign resident for country X tax purposes from when you arrived in Australia.

You have also received advice from the country X tax authorities that the wages you earned from the country X company while working in Australia would not be taxable in country X. However, the payment you received for unused annual leave would be taxable in country X as it related to the employment duties you carried out in country X prior to your arrival in Australia.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

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

Income Tax Assessment Act 1997 Subdivision 768-R

Income Tax Assessment Act 1997 Subsection 768-910(1)

Reasons for decision

Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that where you are a resident of Australia for taxation purposes, your assessable income includes income gained from all sources, whether in or out of Australia. 

Subsection 6-5(4) of the ITAA 1997 specifies that you are taken to have derived or received an amount of ordinary income as soon as it is applied or dealt with in any way on your behalf or as you direct.

Case law has established that the source of a taxpayer's income is the place where the services are performed (French v. FC of T (1957) 98 CLR 398).

In your case, you commenced work in Australia for your existing foreign employer and the wages you derived from this employment were assessable in Australia.

The payment for unused annual leave you received on resignation related to the employment services you performed in country X prior to your arrival in Australia. Therefore, the source of the unused annual leave payment was country X.

While the source of the income was country X, it was derived while you were an Australian resident and may be assessable in Australia.

However, you are a 'temporary resident' of Australia and the rules contained in Subdivision 768-R of the ITAA 1997 will operate to make the unused annual leave payment not assessable in Australia.

Generally, an individual is a temporary resident if they hold a temporary visa and are not an Australian citizen or the holder of a permanent resident visa, and are not the spouse of an Australian citizen or the holder of a permanent resident visa.

Subsection 768-910(1) of the ITAA 1997 provides that the ordinary income you derive directly or indirectly from a source other than an Australian source is non-assessable income if you are a temporary resident when you derive it.

While there is an exception for income from employment undertaken while you are a temporary resident, the unused annual leave accrued from employment undertaken before you became a temporary resident and is not excluded from the exemption.

Therefore, as you were a temporary resident when you received the unused annual leave payment, which had a foreign source, the amount is not assessable in Australia under the temporary resident rules.