The Taxpayer’s Delayed Payment and Tax Consequences
Timing can indeed be a game-changer. A recent case that came before the Administrative Appeals Tribunal (AAT) serves as an important reminder of how the timing of employment income can significantly impact one’s tax obligations.
In this particular case, the taxpayer was a non-resident employed in Kuwait. As part of his employment terms, he was entitled to receive a ‘milestone bonus,’ but circumstances prevented his employer from disbursing this bonus as scheduled.
When the taxpayer’s tenure in Kuwait concluded, he relocated to Australia and transitioned into a tax resident there. It was during his Australian residency that his former employer finally fulfilled the commitment, paying the bonus in a series of installments.
The discord between the Australian Taxation Office (ATO) and the taxpayer commenced when the Commissioner issued revised assessments, subjecting the bonus payments to taxation.
The crux of the dispute revolved around when the bonus should be considered as having been derived. If it could be established that the bonus had been derived while the taxpayer still held non-resident status, it would not have been subject to Australian taxation. This is because non-residents are typically only liable for tax on income derived within Australia. Employment income is generally deemed to have originated in the location where the work is performed, with certain exceptions applying.
Australian tax jurisprudence stipulates that employment income is typically deemed to have been derived upon receipt. In the taxpayer’s case, this moment was when he actually received the bonus payments from his former employer, not when he initially became entitled to the bonus. Since the taxpayer received the bonus while he was a tax resident of Australia, it became subject to taxation.
The repercussions for the taxpayer were substantial. Had he received the bonus as originally scheduled, he would have incurred no tax liability, as Kuwait does not impose income tax.