Edited version of your written advice

Authorisation Number: 1051361168833

Date of advice: 13 April 2018

Ruling

Subject: Foreign source income

Questions and answers

1. Were the instalments of foreign tax paid to the foreign tax authority by your employer whilst you were a non-resident for taxation purposes derived by you as income at the time of payment?

Yes.

2. Are the instalments of foreign tax paid to the foreign tax authority whilst you were a non-resident for taxation purposes non-assessable non-exempt income as you were a foreign resident at the time?

Yes.

3. Was the last instalment of foreign tax paid to the foreign tax authority by your employer in when you were an Australian resident for taxation purposes derived by you as income at the time of payment?

Yes.

4. Is the last instalment of foreign tax paid to the foreign tax authority in the year when you were an Australian resident for taxation purposes included in your assessable income for that income year?

Yes.

5. Were the net salary amounts derived at the time the foreign tax was paid to the foreign tax authority in respect of each amount?

No.

6. Was amount that you received in respect of the net salary amounts derived by you on the date of receipt?

Yes.

7. Is the amount you received in respect of the net salary amounts included in your assessable income for the income year ended 30 June 2018?

Yes.

8. Are you entitled to a foreign income tax offset for the income year ended 30 June 2017 in respect of the final instalment of foreign tax included in your assessable income, calculated on a proportionate basis?

Yes.

9. Are you entitled to a foreign income tax offset for the income year ended 30 June 2018 in respect of the amount included in your assessable income, taking into account the instalments of foreign tax and calculated on a proportionate basis?

Yes.

This ruling applies for the following periods:

Year ended 30 June 2016

Year ended 30 June 2017

Year ending 30 June 2018

The scheme commences on:

1 July 2015

Relevant facts and circumstances

You were a non-resident for taxation purposes working overseas.

Your employer paid part of your overseas taxation obligations whilst you were a non-resident for taxation purposes working overseas.

Your employer paid part of your overseas taxation obligations whilst you were a resident of Australia for taxation purposes.

Your employer did not pay your salary and wages whilst you were a non-resident overseas but in a later income year when you were a resident of Australia.

Relevant legislative provisions

Income Tax Assessment Act 1997 subsection 6-5(2)

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

Income Tax Assessment Act 1997 section 770-10

Income Tax Assessment Act 1997 section 770-75

Reasons for decision

Derivation of income

Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources during the income year.

An entity derives an amount of ordinary income as soon as it is applied or dealt with in any way on the entity's behalf or as directed by it (subsection 6-5(4) of the ITAA 1997).

Taxation Ruling TR 98/1 Income tax: determination of income; receipts versus earnings (TR 98/1) sets out the Commissioner's view on when income is derived and explains that income can be derived either on the basis of the ‘receipts’ method or the ‘earnings’ method.

Under the earnings (or accruals) method, income is derived when it is earned and the point of derivation occurs when a recoverable debt is created. In most cases, the earnings method is the appropriate way to determine business income derived from a trading or manufacturing business (paragraph 20 of TR 98/1).

Under the receipts method, income is derived when it is received, either actually or constructively, and is taken to be derived by a person although it may not actually be paid over, but is dealt with on his/her behalf or as he/she directs.

Paragraph 18 of TR 98/1 states that the receipts method is likely to be appropriate to determine:

● income derived by an employee;

● non-business income derived from the provision of knowledge or the exercise of skill possessed by the taxpayer; and

● business income where the income is derived from the provision of knowledge or the exercise of skill possessed by the taxpayer in the provision of services (subject to certain qualifications).

Consequently, income from employment is normally 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 (paragraph 42 of TR 98/1).

In your case,

● you provided services under a contract of employment in a foreign country;

● you were to be paid a signing on fee, net of tax;

● you were also to be paid fixed salary payments, net of tax, at the last day of each month;

● your employer was required to pay the appropriate amount of tax on your salary payments to the foreign tax authority;

● you were not required to complete an income tax return in the foreign country;

● the a number of your tax instalments were paid in the year ended 30 June 2016 when you were a foreign resident and the final instalment was paid in the year ended 30 June 2017 when you were a tax resident of Australia;

● the signing on fee and net salary payments were ultimately paid to you in the year ending 30 June 2018 when you were a tax resident of Australia.

Payments of foreign tax

The payments of foreign tax made up part of your gross (before tax) salary and are therefore, ordinary income from a foreign source. The five instalments were physically paid to the foreign tax authority at the times mentioned above.

Consequently, you derived income in the form of the foreign tax payments on the dates the amounts were applied or dealt with on your behalf as per subsection 6-5(4) of the ITAA 1997.

Therefore, tax installments made when you were a foreign resident are non-assessable non-exempt income.

However, the final tax instalment made when you were a tax resident of Australia in the year ended 30 June 2017 is assessable in Australia.

Payment of salary

As stated above, you only received the contracted net salary payments in the year ending 30 June 2018.

You believe that the reason for the delay in payment to you was caused by your employer having difficulty in being able to pay you in a foreign currency instead of the local currency as you had requested. This is evidenced in part by your employer paying tax on your salary to the local tax authority in a relatively prompt manner; accordingly, you contend that your salary was put aside by your employer for your benefit at the end of each month.

However, even though there were some unusual circumstances surrounding your payment arrangements, you were still an employee who derived income from the exercise of a skill. Consequently, your circumstances can be differentiated from those of an entity that derives income from a trading or manufacturing business, for example.

Therefore, the receipts method is the appropriate method to use in determining when your net salary payments were derived.

Consequently, you did not derive the net salary payments when they were payable under the contract. Instead, you derived the net salary payments at the time of actual receipt in the year ending 30 June 2018 and this amount is included in your assessable income for the income year ending 30 June 2018.

Foreign income tax offset

Section 770-10 of the ITAA 1997 provides that a foreign income tax offset can be claimed for foreign income tax paid by a taxpayer in respect of an amount that is included in their assessable income. The offset is available even if the foreign tax was paid in a past income year.

If the foreign income tax has been paid on an amount that is part non-assessable non-exempt income and part assessable income for a taxpayer for the income year, only a proportionate share of the foreign income tax (the share that corresponds to the part that is assessable income) will count towards the tax offset (Note 2 to subsection 770-10(1) of the ITAA 1997).

If a taxpayer is claiming a foreign income tax offset of more than $1,000, they will have to work out their foreign income tax offset limit. This may result in the tax offset being reduced to the limit. Any foreign income tax paid in excess of the limit is not available to be carried forward to a later income year and cannot be refunded to the taxpayer (section 770-75 of the ITAA 1997).

When claiming an offset, the taxpayer is required to gross up their income for the foreign tax paid in respect of that income.

In your case, your foreign employment contract provided you with a signing on fee and a specified net salary amount each month with your employer paying the required amount of foreign income tax to the local tax authority on your behalf.

Therefore, you are entitled to claim a foreign income tax offset for the amounts included in your assessable income in the income years ending 30 June 2017 and 30 June 2018.

As some of the instalments of foreign tax that made up part of your gross income under the employment contract are non-assessable non-exempt income, only a proportionate share of the foreign income tax will count towards the offset.

Calculation

In your case, the calculations required are complicated by the fact that the payments of foreign tax were made in different tax years to when the net salary amounts were received.

Therefore, the relevant offset will have to be calculated by adding together the amount of the signing on fee/ monthly payments as specified in the contract with the amount of tax that was paid in regard to each amount, converted to Australian dollars. The resulting gross or before-tax amount is then used to work out the percentage of foreign tax that was effectively levied on each salary payment.