Australia is asserting its taxation rights over foreign employment income whilst the taxpayer was a foreign tax resident.  

A recent decision by the Australian Federal Court has provided a stark reminder to taxpayers that they need to understand how they could be taxed in Australia whilst generating income as a foreign tax resident. 

Earning income as a foreign tax resident

The taxpayer worked around the world for a major natural resources commodity company for approximately 16 years and had become a tax resident of Australia during the last four years. When he left his employer, he had accumulated $US 160m worth of rights under his employer’s profit participation plans.

Previously, it had been treated as dividends in Switzerland, however, the ATO took a different view.  The ATO had determined that his income was assessable as cash, not rights,thus as ordinary income from employment and that because he derived his income on a receipts basis, he was assessed on the entire amount.

On taking his case to the Federal Court, the taxpayer was stunned by the majority judgement concurring with the assessment. 

The Central issue: How Income Is Characterised

The central issue of the case is the proper characterisation of the income. For example:

• Is the amount the taxpayer received a dividend? 
• Is the assessable item the right to receive profit distribution? 
• If yes, what is the treatment of the receipt when the right to receipt is collected? Or
• Is the assessable item the cash he received? 

The answers to these questions determine the character of the income and also the timing of the derivation. 

The Federal Court’s view was that the taxpayer’s income was assessable on the cash, not the rights, thus the assessment on the entire $US 160 million. This outcome depends critically on the conclusion that the rights were not the income, just the cash.

The importance of understanding cross-border tax

The Court agreed that the proper construction of the arrangements was to be determined according to Australian law, which means that the Swiss documents need to be analysed, however, Australian domestic law is used to interpret arrangements for tax purposes. For example, you cannot simply assume that a foreign pension receipt is to be taxed as a pension income stream if the ATO doesn’t think the payer is actually a superannuation fund according to Australian domestic law.

Getting the right advice for earning foreign income 

This could have ended differently for the taxpayer had he understood the realities of foreign income rules whilst resident in Australia. 

Last updated May 2017. This factsheet is provided for information purposes only and is correct at the time of publishing. It should not be used in place of advice from your accountant. Please contact us on 02 9957 4033 to discuss your specific circumstances.