The case of the taxpayer who was paid too late

What a difference timing makes. A recent case before the Administrative Appeals Tribunal (AAT) is a reminder about the tax impact of the timing of employment income. 

In this case, the taxpayer was a non-resident working in Kuwait. As part of his work, he was entitled to a ‘milestone bonus’ but, the employer was not in a position to pay the bonus at the time.

When the job ended, the taxpayer moved to Australia and became a resident. Once in Australia, the former employer honoured the performance bonus and paid it as a series of instalments.

The dispute between the ATO and the taxpayer started when the Commissioner issued amended assessments taxing the bonus payments received.

The dispute focused on when the bonus was derived. Had the bonus been derived while the taxpayer was still a non-resident then it would not have been taxed in Australia. This is because non-residents are normally only taxed in Australia on Australian sourced income. Employment income is typically sourced in the place where the work is performed (although there can be exceptions to this).

Australian tax case law says that employment income is normally derived on receipt. In the taxpayer’s case, this was when he received the payments from his former employer, not when he became entitled to the bonus. Because the taxpayer received the bonus when he was a tax resident of Australia, the bonus was subject to tax.

The difference for the taxpayer was quite dramatic. Had he been paid the bonus when it was due, he would have paid no tax as Kuwait does not impose income tax.