1 Is the discretionary cash bonus received in Australia by the Taxpayer, who was a non-resident of Australia at the time of payment, assessable income for Australian tax purposes under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?
Yes. Question 2 Is the discretionary equity bonus (vesting shares, unrestricted on vesting) received in Australia by the Taxpayer, who was a non-resident of Australia at the time of vesting, assessable income for Australian tax purposes under Division 83A of the ITAA 1997? Answer Yes. This ruling applies for the following period: 1 July 20XX to 30 June 20XX
Residency and Employment 1. The Taxpayer was an Australian tax resident until Month 20XX, at which point they permanently departed Australia and became a foreign resident for Australian tax purposes. 2. From Month 20XX to Month 20XX, the Taxpayer was employed by an overseas subsidiary of his former Australian employer, under an overseas employment contract. During this period, the Taxpayer was a tax resident eligible for and subject to Country A's ruling. 3. The Taxpayer returned to Australia and resumed Australian tax residency in Month 20XX. He ceased his employment with the overseas entity and did not return to employment with the Australian entity. Cash Bonus 4. In Month 20XX, the Taxpayer received a discretionary, non-contractual cash bonus from their former Australian employer paid through the Australian payroll system. 5. The bonus was at real risk of forfeiture, conditional on continued employment at the time of payment, and not referable to any guaranteed entitlement or contractual obligation and was not metricated to performance. There was no obligation on the employer to pay any bonus.
6. The cash bonus was paid on a discretionary basis and could have been forfeited had the Taxpayer ceased his employment at any time up to the payment date. Until the day (Month 20XX) that the Taxpayer was advised of the amount to be received, they had no prior knowledge of the amount to be received as any amounts were non-contractual in nature. It was received while the Taxpayer was an overseas tax resident and employee of a foreign legal entity. The bonus did not relate to any services performed for the Australian entity during the period of non-residency and was not taxed in Country A. 7. The bonus was processed through an automated Australian payroll system and as such, tax was automatically withheld by the employer. This withholding does not determine liability under Australian tax law. Equity Bonus (vesting shares) 8. The Taxpayer was granted restricted shares (referred to as rights while vesting) in each Month of 20XX, 20XX, and 20XX while employed in Australia under an Employee Share Scheme (ESS) subject to Division 83A of the ITAA 1997.
9. A portion of these shares from each of 20XX, 20XX and 20XX vested in Month 20XX. While the amounts to vest were known to the Taxpayer, these shares were subject to a real risk of forfeiture, were not indeterminate rights and were contingent on continued employment and subject to the rules applying to cash bonuses. 10. At the vesting point (Month 20XX) of the rights granted in Month 20XX and Month 20XX, the Taxpayer was a non-resident and no longer employed by the Australian entity. Neither the granting of the rights nor the vesting of the shares related to any services performed for the Australian entity during the period of non-residency and were not taxed in Country A. 11. The shares became fully unrestricted upon vesting. 12. An ESS statement was issued by the Australian employer for the 20XX-XX income year, but this was generated by the employer's large automated system without consideration of any individual's residency status.
Income Tax Assessment Act 1997 , section 6-5 Income Tax Assessment Act 1997, section 6-10 Income Tax Assessment Act 1997, section 15-2. Income Tax Assessment Act 1997, Division 83A Taxation Ruling 2023/1 Income tax: residency tests for individuals Taxation Ruling 98/1 Income tax: determination of incomes; receipts versus earnings
1. Assessable income includes both ordinary income and statutory income according to sections 6-5 and 6-10 of the ITAA 1997. Ordinary income is income according to ordinary concepts. [1] Statutory income is income that is not ordinary income but is included in assessable income because of a specific provision of the ITAA 1997 or the Income Tax Assessment Act 1936 ( ITAA 1936 ). 2. As Chief Justice Jordan noted in Scott v Commissioner of Taxation (1935) 35 SR (NSW) 215 at 219: The word "income" is not a term of art, and what forms of receipts are comprehended within it, and what principles are to be applied to ascertain how much of those receipts ought to be treated as income must be determined in accordance with the ordinary concepts and usages of mankind, except in so far as the statute states or indicates an intention that receipts which are not income in ordinary parlance are to be treated as income, or that special rules are to be applied for arriving at the taxable amount of receipts. Ordinary income
3. Subsection 6-5(1) of the ITAA 1997 provides that assessable income includes income according to ordinary concepts, which is called 'ordinary income'. Ordinary income has generally been held to include three categories: income from rendering personal services, income from property, and income from carrying on a business. 4. Relevant factors to determine whether an amount is ordinary income include: • whether the payment is the product of any employment, services rendered, or any business; • the quality or character of the payment in the hands of the recipient; • the form of the receipt, that is, whether it is received as a lump sum or periodically; and • the motive of the person making the payment. Motive, however, is rarely decisive as in many cases a mixture of motives may exist. 5. We note the observation of Chief Justice Bowen in FC of T v Harris (1980) 43 FLR 36(at FLR 40) where he said that:
A generally decisive consideration is whether the receipt is the product in a real sense of any employment of, or services rendered by the recipient, or of any business, or, indeed, any revenue producing activity carried on by him. 6. Subsection 6-5(3) provides that the assessable income of a foreign resident includes the ordinary income they derived directly or indirectly from all Australian sources during the income year, and other ordinary income that a provision includes in their assessable income for the income year on some basis other than having an Australian source. Remuneration for services provided as an employee, such as salary and wages, is ordinary income for the purposes of subsection 6-5(3) of the ITAA 1997. 7. In working out whether the Taxpayer derived an amount of ordinary income, and (if so) when they derived it, the Taxpayer is taken to have derived the amount as soon it is applied or dealt with in any way on their behalf or as they direct. [2] 8. Taxation Ruling TR 98/1 Income tax: determination of incomes; 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. 9. These two methods are commonly used in tax accounting for items of income [3] and can be differentiated in the following ways: (a) Under the 'receipts' (or cash received) method, income is derived when it is received, either actually or constructively, and is taken to be derived by a person although it is not actually paid over, but is dealt with on his/her behalf or as he/she directs. [4] (b) 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. [5] In most cases, the earnings method is the appropriate way to determine business income derived from a trading or manufacturing business. [6]
10. 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). 11. In addition, paragraph 42 is relevant here and explains that income from employment is normally assessable on a receipts basis. [7] Salary, wages or other employment remuneration are assessable on receipt even though they relate to a past or future income period. [8] Therefore, the Taxpayer derives the cash bonus payment when it is received.
12. At the time the Taxpayer derived the discretionary cash bonus in Month 20XX, they were a non-resident of Australia and were living in Country A. The payment was made in consequence of the Taxpayer's provision of personal services in Australia to their former employer and, consequently, we think it is employment income with an Australian source and is assessable under section 6-5 of the ITAA 1997. 13. For completeness, we observe that even if we are wrong and the discretionary cash bonus is not properly characterised as assessable income under section 6-5 of the ITAA 1997, we think it would still be assessable under sections 15-2 and 6-10 of the ITAA 1997 as statutory income, given it was a bonus paid to the Taxpayer in respect of, or in relation to, their earlier employment. Statutory income 14. Section 6-10 of the ITAA 1997 provides that amounts that are not ordinary income, but are included in a taxpayer's assessable income by provisions about assessable income, are called 'statutory income'. [9]
A summary list of statutory income provisions is contained in section 10-5 of the ITAA 1997. Included in this list and of relevance to the Taxpayer's circumstances is section 15-2 of the ITAA 1997. 15. Section 15-2 of the ITAA 1997 includes as statutory income, the value of allowances, gratuities, compensation, benefits, bonuses and premiums provided to a taxpayer in respect of, or directly or indirectly in relation to, the taxpayer's employment, or services rendered by the taxpayer. 16. Subsection 15-2(3) of the ITAA 1997 provides that an amount is only assessable under section 15-2 of the ITAA 1997 if it is not assessable as ordinary income under section 6-5 of the ITAA 1997.
17. The main issue to consider with respect to subsection 15-2(1) is whether the discretionary cash bonus was provided to the Taxpayer in respect of any employment or services rendered. Taking into account the circumstances surrounding the payment, we consider the receipt of the discretionary cash bonus to be a product of the Taxpayer's former Australian employment and from an Australian source. Consequently, the discretionary cash bonus would be assessable as statutory income under section 15-2 of the ITAA 1997, if it was not assessable as ordinary income under section 6-5 of the ITAA 1997. Discretionary equity bonus under the Employee Share Scheme ( ESS ) 18. The ESS provisions are contained in Division 83A of the ITAA 1997.
19. Subsection 83A-10(2) of the ITAA 1997 defines an 'employee share scheme' as a scheme under which ESS interests in a company are provided to employees, or associates of employees (including past or prospective employees) in relation to the employee's employment. Subsection 83A-110(1) of the ITAA 1997 states that your assessable income for the income year in which the ESS deferred taxing point for the ESS interest occurs includes the market value of the interest at the ESS deferred taxing point, reduced by the cost base of the interest. 20. Here, the discretionary equity bonus is brought to tax under subsection 83A-110 of the ITAA 1997 and is from an Australian source, as it relates entirely to the Taxpayer's employment in Australia. The amount brought to tax under subsection 83A-110 is therefore included in the Taxpayer's assessable income, as subsection 6-10(5) of the ITAA 1997 states that the assessable income of a foreign resident includes their statutory income from all Australian sources. > [1] The expression 'income according to ordinary concepts'
is not a defined term. However, case law has identified certain factors which may assist in determining whether a receipt is properly characterised as income according to ordinary concepts. [2] Income Tax Assessment Act 1997 , section 6-5(4). [3] Taxation Ruling TR 98/1 Income tax: determination of incomes; receipts versus earnings, paragraph 16. [4] Taxation Ruling TR 98/1 Income tax: determination of incomes; receipts versus earnings, paragraph 8. See also section 6-5(4) of the Income Tax Assessment Act 1997 . [5] Taxation Ruling TR 98/1 Income tax: determination of incomes; receipts versus earnings, paragraph 9. [6] Taxation Ruling TR 98/1 Income tax: determination of incomes; receipts versus earnings, paragraph 20. [7] Taxation Ruling TR 98/1 Income tax: determination of incomes; receipts versus earnings, paragraph 42. [8] Ibid. [9] Income Tax Assessment Act 1997, section 6-10(2). See also section 6-10(1) of the Income Tax Assessment Act 1997 .