The Case of a Taxpayer Paid too Late and Legislating the ‘Objective’ of Super
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.
Legislating the ‘Objective’ of Super
The proposed objective of superannuation released in recently released draft legislation is: ‘to preserve savings to deliver income for a dignified retirement, alongside government support, in an equitable and sustainable way.’
The significance of legislating the objective of super is that any future legislated changes to the superannuation system must be in line with this objective. It’s a fairly broad definition. For example, “equitable” seeks to address the distributional impact of superannuation policy. That is, latitude for the Government to target tax concessions to address differences in demographic factors and structural inequities including intergenerational inequity and outcomes for different groups including women, First Nations Australians, vulnerable members and low-income earners.
“Sustainable” encapsulates the changing needs of an ageing population including reducing the reliance on the Age Pension. The draft also alludes to the viability of the cost of tax concessions used to incentivise Australians to save for retirement.
“Deliver income” appears to reinforce the concept that superannuation savings “should be drawn down to provide individuals with a source of income during their retirement.”
More than 15 million Australians now have a superannuation account. Australia’s superannuation pool has grown from around $148 billion in 1992 to $3.5 trillion in 2023, and will continue to grow. Total superannuation balances as a proportion of GDP are projected to almost double from 116% in 2022–23 to around 218% of GDP by 2062-63.
The consultation also recognises the value of the superannuation system as a source of capital, “which can support investment in capacity-building areas of the economy where there is alignment between the best financial interests of members and national economic priorities.”
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