Edited version of private advice

Authorisation Number: 1052355195807

Date of advice: 30 January 2025

Ruling

Subject: Assessable income

Question 1

Is the bonus payment you received under your employment contract in the 20XX income year subject to tax in Australia in that income year?

Answer 1

Yes

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ended 30 June 20XX

The scheme commenced on:

XX XXXX 20XX

Relevant facts and circumstances

Prior to XX XXXX 20XX, you had been working in Country A for around XX years and were currently employed by the Country A office in Company A.

On XX XXXX 20XX, you signed a contract with your employer Company A to be transferred from the Country A office to the Australian office.

On XX XXXX 20XX, you signed a commission and bonus scheme (scheme) with Country A office.

The scheme required you to remain in Company A employ until 30 June 20XX to be eligible for payment of the balance of the bonus.

The scheme operated for the financial year ended XX XXXX 20XX.

Under the scheme, the bonus was not able to be paid to you until the end of the 20XX financial year.

In XXXX 20XX, you closed you Country A bank accounts in preparation for your move to Australia.

On XX XXXX 20XX, you moved to Australia and started employment with Company A office in Australia.

On XX XXXX 20XX, you became an Australian tax resident.

At the end of the 20XX financial year, you were informed you earned a bonus under the scheme, during the period working for Country A office in Company A.

On XX XXXX 20XX, you received payment of the bonus.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

International Tax Agreements Act 1953

Reasons for decision

Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of an Australian taxpayer includes the ordinary income derived directly or indirectly from all sources, whether in or out of Australia during the income year.

Salary and wages are ordinary income under subsection 6-5(2) of the ITAA 1997.

An amount received as a bonus or incentive payment, in relation to services rendered or to be rendered, is treated as salary and wages for tax purposes under section 6-5 of the ITAA 1997. This is because it is received as a consequence of an employment relationship and is therefore assessable in full in the year of receipt.

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 determining an employee's liability to pay tax in Australia, it is necessary to consider not only the income tax laws but also any applicable tax treaty contained in the International Tax Agreements Act 1953 (the Agreements Act).

Sections 4 and 5 of the Agreements Act incorporate that Act with the Income Tax Assessment Act 1936 (ITAA 1936) and the ITAA 1997 and provide that the provisions of a double tax agreement have the force of law.

Double Tax Agreements (DTAs) are tax treaties between Australia and other countries which are designed to alleviate international double taxation and prevent tax avoidance. The DTAs allocate taxing rights to income derived by residents of either country in accordance with specified articles.

Australia does not have a DTA with the Country A.

Application to your circumstances

You received payment of the bonus after you had become an Australian resident for taxation purposes. As you received payment of the bonus while an Australian tax resident, you are assessed on all ordinary income derived directly or indirectly from all sources, whether in or out of Australia during the income year. As there is no double tax agreement between Australia and Country A, there is no tax relief.