Income - derivation of salary and wages over two years of income

Is a taxpayer required to include salary and wages earned in one year of income but not paid until the following year of income in the assessable income of the first income year under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

No. Salary and wage income is not derived until it is paid or applied or dealt with on the taxpayer's behalf and is therefore included in the taxpayer's assessable income under section 6-5 of the ITAA 1997 in the year that the taxpayer receives it.

The taxpayer was employed and began working in June.

The first payment of salary and wages was for work undertaken in June but not paid to the taxpayer until July.

Subsection 6-5(2) of the 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.

However, subsection 6-5(4) of the ITAA 1997 provides that in working out whether a taxpayer has derived an amount of ordinary income and when it was derived, the taxpayer is taken to have received the amount when it is applied or dealt with in any way on the taxpayer's behalf or as the taxpayer directs.

In determining the basis of derivation of income, paragraph 42 of Taxation Ruling 98/1 states that: 'Income from employment would normally be 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.'

The taxpayer did not receive payment of salary and wages until a later income year. The amount of salary and wages are included in the taxpayer's assessable income under section 6-5 of the ITAA 1997 in the year that the amount was received.