Tawfik v FC of T

Members:
R Olding SM

Tribunal:
Administrative Appeals Tribunal, Sydney

MEDIA NEUTRAL CITATION: [2023] AATA 2541

Decision date: 10 August 2023

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R Olding (Senior Member)

WHAT IS THIS CASE ABOUT?

1. The applicant, Mr Tawfik, was employed in Kuwait, receiving a monthly salary. At that time, Mr Tawfik was not an Australian resident.

2. In addition to his salary, Mr Tawfik became entitled to a "milestone bonus" in the first week of February 2017. His employer was unable to pay the bonus when it became due, instead paying it by three instalments in the

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2017/18 and 2018/19 financial years. By that time, Mr Tawfik was an Australian resident.

3. Mr Tawfik says the bonus was derived when he became entitled to it in February 2017. Effectively, Mr Tawfik says the bonus should be brought to account when he earned it or at least when he became entitled to recover the bonus - that is, on an accruals, rather than a receipts, basis. If Mr Tawfik is correct, no Australian income tax is payable on the bonus payments because he was not an Australian resident at that time and the payments are not Australian-sourced income.

4. The Commissioner of Taxation says the payments were derived when they were received. On that premise, the payments would be subject to income tax because Australian residents are, generally speaking, subject to Australian income tax on all of their income, regardless of its source.

5. I have decided the payments were derived when they were received. My reasons follow.

DECISION UNDER REVIEW

6. The bonus instalment payments received were received into Mr Tawfik's Australian bank account, as follows:

• (a) $41,274.05, on 23 January 2018;
• (b) $43,730.00, on 2 July 2018; and
• (c) $$44,377.78, on 3 July 2018.

7. The Commissioner issued notices of amended assessment bringing the first payment to account as assessable income in 2017/18 and the second and third payments in 2018/19.

8. Mr Tawfik objected against those assessments. It is the Commissioner's decision disallowing the objections that is before the Tribunal for review.

THE LAWTHIS MATTER TURNS UPON WHEN THE BONUS INSTALMENT PAYMENTS WERE "DERIVED" FOR THE PURPOSES OF S 6-5(2) OF THE INCOME TAX ASSESSMENT ACT 1997 (CTH), WHICH PROVIDES:

If you are an Australian resident, your assessable income includes the *ordinary income you *derived directly or indirectly from all sources, whether in or out of Australia, during the income year.

9. Section 6-5(4) states:

In working out whether you have derived an amount of *ordinary income, and (if so) when you derived it, you are taken to have received the amount as soon as it is applied or dealt with in any way on your behalf.

10. "Derived" is not otherwise defined. There is no basis on which it could be said that the bonus either in its entirety or the instalments were applied or dealt with on Mr Tawfik's behalf before it was paid to him. Mr Tawfik did not submit otherwise.

11. Hence, the issue for determination is whether the payments were derived when Mr Tawfik received them.

12. Since the decision of the High Court in Carden's Case,^[1] Commissioner of Taxes (SA) v Executor Trustee and Agency Co. of South Australia (1938) 63 CLR 108 , 154 . it has been established that:

• (a) determination of whether a method of accounting for derivation of income is appropriate requires inquiry into whether in the circumstances of the case it is calculated to give a substantially correct reflex of the taxpayer's true income; and
• (b) the object is to discover what gains during the accounting period have come home to the taxpayer in a realised or immediately realisable form.

13. Application of these principles has led to employee remuneration, and other income which is in substance a reward for professional skill or personal work, being treated as derived upon receipt. Where the source of the income is otherwise, such as profit from a trading or manufacturing business, or analogous enterprises, the accruals or earnings basis may be appropriate because the receipts basis would not give a substantially correct reflex of the income derived in a period.

14. Having regard to those foundational principles, it is not surprising that neither party could identify a single case in which it had been held that any form of employee remuneration should be brought to account on an earnings, rather than receipts, basis. Mr Tawfik sought to distinguish his circumstances on several bases.

15. Mr Tawfik noted that earlier cases were not concerned with situations analogous to his in which the taxpayer was a non-resident when the income was earned. That may be so, but it is not a relevant distinction. When income is derived, at least where the source is remuneration payable to

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an employee, is not affected by the geographical source of the income. It is the nature of the income, in the sense that it is a reward for personal services, that makes derivation upon receipt appropriate. It cannot be said that the bonus had come home to Mr Tawfik in January 2017 when he completed his work for the employer or in February 2017 when the bonus fell due for payment. He had not received it, nor had it been applied for his benefit at that time.

16. Next Mr Tawfik submitted that he had been "transparent". By this I understood Mr Tawfik to mean that he had not sought to hide the source of the bonus payments. He could, he said, have directed the payments to an account he maintained in Kuwait and then transferred it to his Australian bank account as "savings". Mr Tawfik's conduct was honourable and appropriate but that does not affect the derivation of the payments.

17. Further, Mr Tawfik complained that he was being "punished" when it was not his fault that the bonus was not paid to him when it became due and payable. It is understandable that Mr Tawfik feels aggrieved that he has become liable for Australian income tax on the instalments when that would not have been so if the employer had paid the bonus when it became due. However, the Tribunal can only apply the law to the events that occurred, not what would have occurred if the employer had paid the bonus when it fell due. The payments did not come home to Mr Tawfik until they were paid.

18. Mr Tawfik also complained about Tax Office submissions to the effect that he had not discharged the burden of proving the assessments were excessive when he had provided all information relevant to the circumstances surrounding the payments. The ultimate task for the Tribunal in a review of an objection decision is, of course, to decide whether the taxpayer has discharged the burden of proving the assessment is excessive.

19. However, where, as in this case, the outcome is determined by application of the law to essentially unchallenged facts, it is not particularly helpful to an unrepresented taxpayer's understanding of the matter for the Commissioner to repeatedly cast the case in those formal terms. For all practical purposes, the issue was simply when the payments were derived having regard to the uncontentious evidence of the relevant circumstances. Nevertheless, while an approach more attuned to the particular circumstances of the case and the needs of an unrepresented applicant may have been more helpful, these submissions do not assist Mr Tawfik. They are not relevant to the appropriate accounting method to determine the time of derivation of the bonus.^[2] In recording these observations, I intend no criticism of the Commissioner’s in-house advocate, Mr Qin, who conducted the case, including cross-examination of Mr Tawfik, in a measured and respectful fashion. Similarly, and contrary to Mr Tawfik’s submissions about the Commissioner relying upon a technicality, there is in my view no breach of the Commissioner’s model litigant obligation in the careful submission of the basis on which the Commissioner says the matter must be determined according to law.

20. Mr Tawfik also referred to section 83-235 which provides that certain termination payments - relating to a period of employment when the taxpayer was not an Australian resident - are not assessable and not exempt income. Although not relying on section 83-235 directly, Mr Tawfik submitted the section indicates the "spirit" of the law was that he should not pay tax on payments relating to a period of employment when he was a non-resident but received after he became a resident. As a contextual matter, this does not assist Mr Tawfik. The tax treatment of his bonus payments falls to be determined by subsection 6-5(2). The only relevant consideration under that provision is when the payments were derived. Section 83-235 does not, directly or indirectly, shed any light on that question.

CONCLUSION

21. For the reasons indicated above, the bonus payments were derived upon receipt. It follows the assessments are not excessive and the objection decision must be affirmed.