Issue
Is a bonus received by an Australian resident taxpayer from employment performed in Singapore and in Australia assessable income under subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997)?
Decision
The proportion of the bonus payment received by the Australian resident taxpayer that relates to service performed in Singapore is not assessable income under subsection 6-5(2) of the ITAA 1997 as it is exempt from tax under subsection 23AG(1) of the Income Tax Assessment Act 1936 (ITAA 1936). However, the proportion of the bonus payment that relates to service performed in Australia is assessable income under subsection 6-5(2) of the ITAA 1997.
Facts
The taxpayer is a resident of Australia for income tax purposes.
During the 2002-03 income year, the taxpayer worked in Singapore and Australia for the same employer, a resident of Singapore.
The taxpayer was present in Singapore for a continuous period of not less than 91 days, but not exceeding 183 days in the year of assessment.
The taxpayer received a bonus in the 2003-04 income year.
The bonus received by the taxpayer was based on the taxpayer's contribution to the business results of the Singapore entity during the 2002-03 income year.
Reasons for Decision
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.
A bonus payment is ordinary income for the purposes of subsection 6-5(2) of the ITAA 1997.
Subsection 6-15(2) of the ITAA 1997 provides that if an amount is exempt income then it is not assessable income.
Section 11-15 of the ITAA 1997 lists those provisions dealing with income which may be exempt. Included in this list is section 23AG of the ITAA 1936 which deals with overseas employment income.
Subsection 23AG(1) of the ITAA 1936 provides that where a resident taxpayer is engaged in foreign service for a continuous period of not less than 91 days, any foreign earnings derived will be exempt from tax.
Subsection 23AG(7) of the ITAA 1936 defines 'foreign service' as service in a foreign country in the capacity of an employee and 'foreign earnings' as income consisting of earnings, salary, wages, commission, bonuses or allowances.
Subsection 23AG(2) of the ITAA 1936 provides that the exemption under subsection 23AG(1) of the ITAA 1936 will not apply where the income is exempt from income tax in the foreign country because of any of the reasons listed. One of the listed reasons is where the income earned by the resident in the foreign country is made exempt by the operation of a double tax agreement (paragraph 23AG(2)(b) of the ITAA 1936).
Therefore, it is necessary to consider not only the income tax laws but also any applicable double tax agreement contained in the International Tax Agreements Act 1953 (Agreements Act).
Section 4 of the Agreements Act incorporates that Act with the ITAA 1936 and the ITAA 1997 so that those Acts read as one.
Schedule 5 to the Agreements Act contains the double tax agreement between Australia and Republic of Singapore (Singapore Agreement). Schedule 5A to the Agreements Act contains the protocol amending the Singapore Agreement (Singapore Protocol). The Singapore Agreement and the Singapore Protocol operate to avoid the double taxation of income received by Australian and Singapore residents.
Article 11(1) of the Singapore Agreement provides that remuneration or other income derived by an individual who is a resident of Australia in respect of personal services shall be subject to tax only in Australia unless the services are performed or exercised in Singapore. If the services are performed or exercised in Singapore such remuneration or income derived shall be deemed to have a source in Singapore and may be taxed in Singapore.
Article 12(1) of the Singapore Agreement provides that remuneration or other income derived by an individual who is a resident of Australia in respect of personal services performed or exercised in Singapore shall be exempt in Singapore if: (a) the recipient is present in Singapore for a period or periods not exceeding in the aggregate 183 days in the year of assessment (b) the services are performed or exercised for or on behalf of a person who is a resident of Australia, and (c) the remuneration or other income is not deductible in determining the profits for tax purposes of a permanent establishment in Singapore.
As the taxpayer worked for, and the bonus was paid by, an entity that is a resident of Singapore, Article 12(1) of the Singapore Agreement will not apply. Accordingly, the bonus may be taxed in Australia and in Singapore under Article 11(1) of the Singapore Agreement. Paragraph 23AG(2)(b) of the ITAA 1936 will, therefore, not apply.
Paragraph 4 of Taxation Ruling IT 2534 provides 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 even where the bonus may have been paid with regard to duties that were performed in a previous year of income.
As the taxpayer is a resident of Australia and was engaged in a continuous period of foreign service of not less than 91 days, the proportion of the bonus that relates to the taxpayer's service in Singapore qualifies as foreign earnings from foreign service and will be exempt from tax under subsection 23AG(1) of the ITAA 1936.
The proportion of the bonus that relates to service performed by the taxpayer in Australia is not derived from that foreign service and will form part of the assessable income under subsection 6-5(2) of the ITAA 1997.