Assessability of bonus payment - as a result of employment in India

Is a bonus payment the taxpayer received as a result of employment in India assessable in Australia under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes. A bonus payment the taxpayer received as a result of employment in India is assessable in Australia under section 6-5 of the ITAA 1997.

The taxpayer is resident of Australia for taxation purposes.

They were previously a resident of India and during that time they worked for a subsidiary of an Australia company in India.

The taxpayer ceased employment with the subsidiary and moved to Australia where they commenced employment with the Australian company.

After commencing employment with the Australian company the taxpayer received a bonus payment from that company. The bonus payment related to the duties they performed in India. The bonus received did not include any payment in relation to termination of employment.

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, whether in or out of Australia, during the income year.

Paragraph 26(e) of the Income Tax Assessment Act 1936 (ITAA 1936) provides that the assessable income of a taxpayer includes any bonuses given in respect of any employment (subject to certain exclusions that are not relevant here). Taxation Ruling IT 2534 provides, at paragraph 4, that a bonus is taken to have been derived for income tax purposes at the time it is paid or otherwise made available to the employee. This is so even where the bonus may have been with regard to duties that were performed in a previous year of income.

Therefore the taxpayer is taken to have derived the bonus income when they received it. Accordingly the taxpayer received the bonus at a time when they were a resident of Australia for taxation purposes.

Employment income ordinarily has its source in the place where the services were performed ( Federal Commissioner of Taxation v. French (1957) 98 CLR 398; (1957) 7 AITR 76; (1957) 11ATD 288).

The taxpayer performed the employment duties that gave rise to the bonus payment while in India. The bonus payment is therefore considered to have a source in India.

In determining liability to Australian tax on foreign sourced income it is necessary to consider any applicable double tax agreement contained in the International Tax Agreement Act 1953 (the Agreements Act).

Section 4 of the Agreements Act incorporates that Act with the ITAA 1936 and ITAA 1997 so that those Acts are read as one. The Agreements Act effectively overrides the ITAA 1936 and ITAA 1997 where there are inconsistent provisions (except for some limited provisions).

Schedule 35 to the Agreements Act contains the double tax agreement between Australia and India (the Indian Agreement). The Indian Agreement operates to avoid double taxation of income received by Australian and Indian residents.

Article 15 of the Indian Agreement deals with dependant personal services. Paragraph (1) of Article 15 of the Indian Agreement provides that employment income derived by a resident of Australia shall be taxable only in Australia unless the employment is exercised in India. If the employment is exercised in India then the income may also be taxed in India (subject to paragraph (2) of Article 15 of the Indian Agreement).

The taxpayer is therefore assessable under section 6-5 of the ITAA 1997 on the bonus payment received in respect of their employment in India. Note: if the income is also taxed in India a credit may be allowable against the Australian tax payable (Article 24 of the Indian Agreement).