Edited version of private advice

Authorisation Number: 1051881020607

Date of advice: 26 August 2021

Ruling

Subject: Compensation payment

Question

Are the Payments assessable in Australia?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You commenced work for the foreign company in the 20XX income year.

During your employment with the company you were entitled to bonus payments that accrued before you became a resident of Australia.

You received these payments after becoming a resident of Australia for taxation purposes.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 83-235

Reasons for decision

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).

The Commissioner has considered section 83-235 of the Income Tax Assessment Act 1997 and if this section will apply to the Direct Drive Compensation payments.

In order for payments to be exempt from tax in Australia under this section all of the following must apply:

•         received by you in consequence of the termination of your employment in a foreign country

•         the payments are not a superannuation benefit

•         the payments are not a pension or annuity and the payments relate to a period of time when you were not an Australian resident.

The payments were not received by you due to the termination of your employment in a foreign country.

The payments were a plan offered to you by your employer and were a bonus based on performance in a given year.

Therefore this section does not exempt the payments from tax in Australia.

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.

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).

The payments were received by you after establishing your residency status for taxation purposes in Australia and are therefore assessable income in Australia and must be included in your Australian tax return.