In a recent legal precedent, the Administrative Appeals Tribunal (AAT) made a momentous ruling concerning the taxation of delayed bonus payments. This ruling brings to light the intricate timing intricacies that dictate the taxability of such payments, especially when a taxpayer's residency status undergoes a shift between entitlement and reception. In this blog post, we will delve into the particulars of the case, examine the arguments put forth, and elucidate the outcome of the AAT's verdict.
Backdrop of the Case
The heart of the matter revolves around an individual who had been employed in Kuwait and was entitled to a "milestone bonus" in February 2017. During this period, however, he did not hold Australian residency. Owing to undisclosed reasons, his employer faced delays in disbursing the bonus, extending its arrival. Ultimately, the bonus found its way to the recipient through a series of three installments on January 23, 2018, July 2, 2018, and July 3, 2018. Intriguingly, by the time the bonus reached him, he had transitioned into an Australian resident.
Controversy over Taxation
At the core of the dispute lay the question of how the delayed bonus payment should be taxed. The Australian Taxation Office (ATO) issued revised assessments, deeming the initial installment taxable income for the fiscal year 2017-18, and the subsequent payments for the fiscal year 2018-19. The taxpayer contested these assessments and sought a reconsideration of the ATO's decision to reject his objections.
The crux of the matter centered around determining the precise moment at which the taxpayer "derived" the bonus payments for taxation purposes. The taxpayer's contention was rooted in the notion that the bonus ought to be considered "derived" either when it was earned or, at the very least, when he became eligible to reclaim it. This would imply that the payment should be exempt from Australian income tax, as he was not an Australian resident during that particular timeframe. To substantiate his stance, the taxpayer cited specific sections of the Income Tax Assessment Act (ITAA) 1997.
Verdict of the AAT
The AAT upheld the original decision and confirmed that the bonus payments were indeed subject to taxation upon their reception. The tribunal emphasized a pivotal query: had the gains "come home" to the taxpayer during the relevant period in a realized or immediately realizable form? According to the AAT, it could not be affirmed that the bonus had "come home" to the taxpayer when he finished his work or when the bonus matured for payment in early 2017. The reason being, he hadn't received the bonus and its benefits, nor had it been allocated for his advantage during that period.
In response to the taxpayer's allusions to ITAA 1997, the AAT provided clarity that the taxation treatment of the bonus payments should be ascertained under section 6-5(2) of the act. The key factor here was the timing of when the payments were actually "derived." The AAT also addressed the taxpayer's reference to section 83-235 of ITAA 1997, asserting that it did not bolster the taxpayer's case.
This case underscores the intricate interplay between entitlement, reception, and residency status in the realm of delayed bonus payments and taxation. The AAT's decision reinforces the principle that, for taxation purposes, income is generally considered "derived" when it is received, rather than when it's due or when it's earned. The ruling emphasizes the necessity of comprehending the legal nuances encompassing taxation to ensure conformity and well-informed decision-making. It serves as a poignant reminder that individuals should seek professional counsel and remain informed about the taxation regulations that are pertinent to their financial circumstances.
Source: Tawfik v FC of T 2023 ATC ¶10-682;  AATA 2541, 10 August 2023.
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