Assessability of a lump-sum payment received by a non-resident upon commencing employment in Australia

Is the lump-sum payment received by a non-resident taxpayer upon commencing employment in Australia assessable income under subsection 6-5(3) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes. The lump-sum payment received by a non-resident taxpayer upon commencing employment in Australia is assessable income under subsection 6-5(3) of the ITAA 1997.

The taxpayer is a resident of the United Kingdom (UK).

The taxpayer is employed by an Australian resident entity (the employer) and performs duties as an employee in Australia.

The contract of employment was executed by the taxpayer in the UK.

Under the contract of employment the taxpayer received a lump-sum payment from the employer upon the taxpayer's commencement of employment.

The taxpayer commenced performing duties in Australia for the employer one week after the commencement of employment and receipt of the lump-sum.

In the event that the taxpayer terminates their employment prior to the completion of a specified period of service, the taxpayer is required to repay a portion of the lump-sum to the employer.

The taxpayer remained in Australia for a period greater than 183 days during the Australian income year.

Subsection 6-5(3) of the ITAA 1997 provides that the assessable income of a non-resident taxpayer includes ordinary income derived directly or indirectly from all Australian sources during the income year.

A lump sum payment received upon commencing employment in Australia is ordinary income for the purposes of subsection 6-5(3) of the ITAA 1997.

The source of remuneration received in the capacity of an employee will depend on the facts of each case. However, the source is generally the place where the services of the employee are performed (see Federal Commissioner of Taxation v. French (1957) 98 CLR 398; (1957) 11 ATD 288; (1957) 7 AITR 76) where Williams J stated at CLR 414; ATD 296; AITR 85 that: ...the locality of the source of income derived from personal exertion in the capacity of employee or in relation to any services rendered surely must be where such personal exertion took place, and the locality of the source of the proceeds of any business where the activities of the business are carried on.

However, other factors may apply in cases where special skills or creative talents are being rendered ( Federal Commissioner of Taxation v. Mitchum (1965) 113 CLR 401; (1965) 13 ATD 497; (1965) 9 AITR 559). In such cases, factors such as the place of negotiation and execution of the contract may be relatively more important.

Under the terms of the taxpayer's employment contract, the taxpayer received a lump-sum payment on commencement with the employer. In the event that the taxpayer terminates their employment prior to the completion of a specified period of service, the taxpayer is required to repay a portion of the lump-sum to the employer. Although, the payment was received before any services were rendered, the lump sum payment is income derived, under an employment contract, in the taxpayer's capacity as an employee. Therefore, the source of this income is the place where the taxpayer will render the services in their capacity as an employee. Given that these services will be rendered in Australia, the lump sum payment received on commencement of the taxpayer's employment will have an Australian source.

In determining the liability to tax on any Australian sourced income, 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 (Agreements Act).

Section 4 of the Agreements Act incorporates that Act with the ITAA 1997 so that the two Acts are read as one.

Schedule 1 of the Agreements Act contains the tax treaty between Australia and the United Kingdom of Great Britain and Northern Ireland and Notes to the agreement (the 2003 UK Convention). The 2003 UK Convention operates to avoid the double taxation of income received by Australian and UK residents.

Article 14 of the 2003 UK Convention deals with income from employment. Under Article 14(1) of the 2003 UK Convention salaries, wages and other similar remuneration derived by a resident of the UK in respect of employment exercised in Australia may be taxed in Australia. Under Article 21 of the 2003 UK Convention income or gains derived by a resident of the UK that may be taxed in Australia under Article 14 are deemed to have an Australian source.

The term 'other similar remuneration' in Article 14(1) of the 2003 UK Convention is not defined in the 2003 UK Convention. Article 3(3) of the 2003 UK Convention provides that any term not otherwise defined shall, unless the context otherwise requires, have the meaning which it has under the domestic laws of each country.

Taxation Ruling TR 2001/13 Income tax: Interpreting Australia's double tax agreements, discusses the Commissioner's views about interpreting tax treaties. At paragraph 104, TR 2001/13 provides that the OECD Model Tax Convention and Commentary (the Commentary) may be considered in interpreting tax treaties.

Paragraph 2.1 of the Commentary states that 'member countries have generally understood the term "salaries, wages and other similar remuneration" to include benefits in kind received in respect of an employment'.

The lump sum payment received by the taxpayer on commencement with the employer is a benefit received in respect of their employment with that employer. For the purposes of Article 14(1) of the 2003 UK Convention this payment will constitute 'other similar remuneration' received in respect of the taxpayer's employment with the employer and may be taxed in Australia.

However, Article 14(2) of the 2003 UK Convention provides that a lump-sum payment will be exempt from tax in Australia if: • the taxpayer is present in Australia for a period or periods not exceeding in the aggregate 183 days in the Australian year of income, and • the remuneration is paid by or on behalf of an employer who is not a resident of Australia, and • the remuneration is not deductible in determining the profits of a permanent establishment which the employer has in Australia.

The taxpayer was present in Australia for a period of greater than 183 days and the taxpayer's employer is a resident of Australia. Therefore the exemption under Article 14(2) of the 2003 UK Convention will not apply.

Accordingly, the lump sum payment made under the taxpayer's contract of employment may be taxed in Australia under Article 14(1) of the 2003 UK Convention and will be deemed to have an Australian source under Article 21 of that Convention. Therefore, the lump sum payment received by the taxpayer upon commencing employment in Australia is assessable income under subsection 6-5(3) of the ITAA 1997. Note: A foreign tax credit may be allowed in the UK for Australian tax paid (Article 22 of the UK Convention).