Edited version of private advice

Authorisation Number: 1052182086593

Date of advice: 18 October 2023

Ruling

Subject: Assessable income

Question 1

Does the repayment of part of the bonuses previously received by the Taxpayer in the 20XX income year represent a reduction in the taxpayer's assessable income for the 20XX income year?

Answer

Yes.

The amounts of prior year income you are required to repay will be classified as non-assessable non-exempt income in the year they were received.

Question 2

Will the Commissioner allow the amendment of the Taxpayer's 20XX income tax return in view of the reduction in the Taxpayer's assessable income for the 20XX income year?

Answer

Yes.

Where a taxpayer must repay previously assessable income and satisfies the requirements of the provision the taxpayer is able to amend the income tax assessment for the year in which the amount was paid.

This ruling applies for the following period:

Year ended 30 June 2021

The scheme commenced on:

1 July 2020

Relevant facts and circumstances

You are a senior executive working within the financial services sector.

On XX XX 20XX you commended employment with XX XX.

You received a 'Replacement Cash' payment in the 20XX income year of $XX.

You reported this amount in your 20XX income tax return as assessable income. You have paid tax on this amount.

You received a XX in the 20XX income year of $XX.

You reported this amount in your 20XX income tax return. You have paid tax on this amount.

Both the Replacement Cash and Retention Bonus payments were subject to Pay As You Go withholding.

Your employment agreement states that if you resign your position or if it is terminated you are required to pay a relevant percentage of the gross Replacement Cash payment and Retention Bonus payment.

You resigned your position on XX XX 20XX.

You were required to repay the amount of $XX of the Replacement Cash payment to XX XX.

You were required to repay the amount of $XX of the Retention Bonus payment to XX XX.

You repaid the full amount of $XX on XX XX 20XX by a bank transfer to XX XX nominated bank account.

You commenced employment with XXXX on XX XX 20XX.

You were not carrying on a business at any time.

You were not a trustee or beneficiary of a trust at any time.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 59-30

Income Tax Assessment Act 1936 section 170

Taxation Laws Amendment Bill (No. 2) 2003

Reasons for decision

Under section 6-5 of the ITAA 1997 'assessable income' includes income according to ordinary concepts. You are taken to receive the amount of ordinary income as soon as it is applied or dealt with in any way on your behalf or as you direct pursuant to subsection 6-5(4) of the ITAA 1997.

Salary, wages or other employment remuneration are assessable on receipt even if they relate to a past or future income period.

You are required to report employment income you receive in an income year in that year's income tax return.

Section 59-30 of the ITAA 1997 operates to exclude an amount of your assessable income for an income year if you have repaid it in a later income year and you cannot deduct the payment in any income year.

Subsection 59-30(1) states:

An amount you receive is not assessable income and is not exempt income, for an income year if:

(a)  you must repay it; and

(b)  you repay int in a later income year; and

(c)   you cannot deduct the repayment for any income year.

The amounts of prior year income you are required to repay will be classified as non-assessable non-exempt income in the year they were received.

Where income derived during an income year is repaid in a later income year, the taxpayer is permitted to amend the earlier year's income tax assessment to exclude previously assessable income. The taxpayer will then receive a refund of the tax paid.

This will apply even if the amount which must be repaid is only a part of the amount which was initially received.

The provision does not apply where a taxpayer can claim a deduction in respect of the repayment of previously assessable income. This occurs when the taxpayer is carrying on a business and the repayment occurs as part of carrying on that business.

The provision also does not apply where a taxpayer has received instalments of workers compensation or sickness allowance and is required to repay them after receiving a lump sum payment of compensation or damages for a wrong or injury suffered in their occupation.

The assessment for the earlier income year may be amended, irrespective of whether the normal time for amendment of assessments has expired (ITAA 1936, 170(10AA), item 22). It is irrelevant whether the amount repaid had originally been received as part of a larger amount, or whether the obligation to repay arose before or after the amount was received.