Edited version of private advice

Authorisation Number: 1052076973412

Date of advice: 12 January 2023

Ruling

Subject: Foreign employment income

Question 1

Are you required to include the payments of final salary and holiday pay you received from your foreign employer after you became a resident of Australia for taxation purposes in your Australian tax return?

Answer

Yes.

Question 2

Are you required to include the performance bonus payment you received after you became a resident of Australia for taxation purposes in your Australian tax return?

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 worked for Company Z in Australia.

You were seconded to another company and worked in Country Y.

You were not a tax resident of Australia during this period.

The employment was for a specified period, but the contract could end earlier if the work was finished earlier.

Your employment in Country Y finished prior to the end date.

You became a resident of Australia for taxation purposes after your employment ended.

You received payments of final salary, holiday pay and a performance bonus from your former employer after you became a resident of Australia for taxation purposes.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 82-130

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 ITAA 1997 and whether this section applies to the final salary, holiday pay and performance bonus payments you received.

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

•         the payments were 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 phrase 'in consequence of the termination of your employment' is used in section 83-235 of the ITAA 1997 and also in section 82-130 of the ITAA 1997 which specifies what an employment termination payment is.

As per taxation ruling TR 2003/13; Income tax: employment termination payments (ETP): payments made in consequence of the termination of any employment: meaning of the phrase 'in consequence of', the relevant payment must be made 'in consequence of' the employee's termination.

Paragraphs 5 and 6 of TR 2003/13 state:

5. The phrase 'in consequence of' is not defined in the ITAA 1997. However, those words appeared in the former provisions of the ITAA 1936 and have been interpreted by the courts in that context. The phrase 'in consequence of' in the former provisions conveys the same idea as in Division 82 of the ITAA 1997, and accordingly the consideration of the phrase by the courts in the context of the former provisions is also applicable to the interpretation of the phrase in Division 82 of the ITAA 1997. Whilst there are divergent views as to the correct interpretation of the phrase, the Commissioner considers that a payment is received by a taxpayer in consequence of the termination of the taxpayer's employment if the payment 'follows as an effect or result of' the termination. In other words, but for the termination of employment, the payment would not have been received by the taxpayer.

6. The phrase requires a causal connection between the termination and the payment, although the termination need not be the dominant cause of the payment. The question of whether a payment is received in consequence of the termination of employment will be determined by the relevant facts and circumstances of each case.

Further, paragraph 10 of TR 2003/13 states that common examples of ETPs include golden handshakes, contractual termination payments and payments for wrongful dismissal. However, ETPs do not include other termination payments such as unused annual or long service leave payments.

In your case, you were employed in a foreign country, your employment in that country ended, and you received payments that related to a period of time when you were not an Australian resident.

However, the payments of final salary, holiday pay and performance bonus you received after becoming a resident of Australia for taxation purposes do not meet the criteria of being foreign termination payments as you would have received the payments regardless of whether there was or was not a termination of your employment. There is no evidence that any of these payments were additional contractual payments made under your employment contract that specifically related to the termination of your employment.

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 once you had become a resident for taxation purposes.

These payments are therefore assessable income in Australia and must be included in your Australian tax return.