Edited version of private advice

Authorisation Number: 1051932552569

Date of advice: 16 December 2021

Ruling

Subject: Assessable income

Question

Is the outstanding wage and entitlements paid to you in the relevant income year you received from your employer for work carried out in a prior income year assessable in Australia?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You are a resident of Australia for taxation purposes.

You moved to Country Z several years ago for work purposes.

You were a non-resident while working in Country Z.

In the year following your relocation the company you worked for had a dispute with a client and the site was closed.

As a result of this closure, you did not receive all of your wages and entitlements.

Your employer took the client to court and sued for monies owing.

You received the money owing to you in a later income year.

Relevant legislative provisions

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

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

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).

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).

The wage and entitlement payment you received in the relevant income year for work carried out in Country Z is assessable income in Australia as you are a resident of Australia and the payment is assessable when received by you.

This income must be declared in your Australian tax return in the relevant income year.