• Legal database
Legal database

CASE 1/2008

Members:
R Hunt SM

Tribunal:
Administrative Appeals Tribunal, Sydney

MEDIA NEUTRAL CITATION: [2008] AATA 64

Decision date: 24 January 2008

R Hunt (Senior Member)

Summary

1. The taxpayer disagrees with the Commissioner's tax treatment of part of his salary and other employment related reimbursement for the income year ended 30 June 2003. The taxpayer's income that year included payments for termination of his employment and of his overseas secondment. Payments to him included an eligible termination payment. The Commissioner rejected the taxpayer's claim for exemption from income tax of the whole of this payment or part of it as exempt overseas payments. The Commissioner also rejected a claim for exemption of a "repatriation allowance" as "foreign earnings". The Commissioner issued to the taxpayer an assessment to which the taxpayer objected and the Commissioner disallowed his objection. The taxpayer applied to the tribunal for review of the Commissioner's decision of 9 March 2006 to disallow the taxpayer's objection to the notice of assessment issued on 14 June 2005 for the year ended 30 June 2003. The decision, which is reviewable under section 25 of the Administrative Appeals Tribunal Act 1975 (AAT Act) and Div 4 of Part IVC of the Taxation Administration Act 1953, is the Commissioner's decision to disallow the taxpayer's objection to his income tax assessment for the 2003 year. I have found that the amounts considered in the objection decision are assessable in accordance with sections 27A(1) and 27CD as an eligible termination payment and are not exempt as an exempt non-resident foreign overseas termination payment.

History

2. The taxpayer was employed by Deutsche Australia Limited (DAL) from 1993 to 2002. He accepted a secondment to the Tokyo branch of Deutsche Securities Limited (DSL) in 2000. The terms of his employment for the secondment were set out in two letters. The first letter, dated 28 July 2000, was from DAL and the second letter, dated 9 August 2000, was from DSL.

3. In the letter of 28 July 2000, DAL stated that the "employing company will continue to

ATC 103

be Deutsche Australia Limited". The 9 August 2000 letter from DSL stated that DSL was responsible for paying the taxpayer's salary for service in Japan. The initial period for the secondment was three years. DAL's letter of 28 July 2000 also set out that it "expected that at the end of this assignment you will return to work in this Division". DAL also promised, under the heading "Relocation Allowance", that upon re-assignment to Australia, DAL would pay the taxpayer "a non-accountable, lump sum payment equivalent to one month's Shadow Salary current at the time, which will be subject to Australian tax".

4. In 2002, when the taxpayer was in Japan working under secondment to DSL, his employment was terminated. The taxpayer worked in Japan between 1 August 2000 and 15 October 2002 and returned to Australia on 22 December 2002. During the time he worked in Japan, he received a salary from DSL. The taxpayer was resident in Japan for the whole of this time of service under the secondment.

5. The taxpayer recounts in his affidavit of 14 August 2007 that, on 14 October 2002, he was informed by a representative of DAL that his position had become redundant. A copy of an unsigned "letter of understanding" from the human resources section of DSL, dated 23 October 2002, sets out that, due to termination of the taxpayer's employment with DAL, his "assignment" with DSL Tokyo would be terminated and DSL would be responsible for his Japanese salary until 31 December 2002, or earlier date, should he leave Japan sooner. A further unsigned letter dated 5 November 2002 from Deutsche Bank AG to the taxpayer set out proposed termination payments and repatriation arrangements.

6. The termination payments proposed to the taxpayer on 5 November 2002 comprised several elements. In addition, the letter set out proposed repatriation payments and arrangements for his return to Australia. Payments suggested included a repatriation allowance equivalent to 1 month of "shadow salary" or $23,875. Actual costs of transporting the family and personal effects were shown as borne by the employer and the repatriation allowance was an additional payment to the taxpayer. The repatriation allowance was one of the elements of the lump sum payment DAL made to the taxpayer. The payment occurred in 2003, after his return to Australia.

7. The amounts of termination payment, repatriation and other payments to the taxpayer occurred after the taxpayer's taking action to sue and subsequent negotiation. Solicitors then acting for the taxpayer sent a letter of demand to DAL on 18 November 2002. DAL's solicitor sent a letter on 26 February 2003, following an exchange of letters between the parties, informing the taxpayer's solicitor of an offer to pay the taxpayer, an after-tax amount of $1,052,426.72, which included a component of $497,068.82 in respect of a payment in lieu of notice and redundancy (the redundancy payment). On 1 May 2003, the taxpayer received separate payments from DAL and another from DSL. The payment of $497,068.82, less tax, was made by DAL according to the taxpayer's affidavit of 14 August 2007. DAL made a further payment of $285,625.37, less tax, according to the affidavit and a third payment also. However, in the later deed of release it was DSL that made a third payment. The third payment is not involved in the parties' dispute.

8. The taxpayer then commenced proceedings against DAL in the NSW Supreme Court on 30 June 2003. He later sought to join DSL as a party to the proceedings and a proposed statement of claim was drafted. However, the proceedings were settled and a deed of release was entered into. The taxpayer and DAL on 8 June 2005 executed the deed of release. The taxpayer also signed a deed poll on the same day as part of the settlement terms and affirmed the effect of the deed of release. Under the terms of the deed of release, the taxpayer received a total of $1,506,569.20 in exchange for withdrawing the legal proceedings and releasing DAL from further liability.

9. 

ATC 104

Both DAL and DSL paid the taxpayer amounts related to the termination of his employment. According to the deed of release, dated 8 June 2005, DAL ultimately paid him $535,068.03, representing a gross amount of $771,529.03, made up as follows:
(i) repatriation allowance $23,875.00
(ii) payment in lieu of untaken Australian annual leave $125,307.35
(iii) a payment in lieu of Australian long service leave $125,277.85
(iv) 14 months' salary representing a payment in lieu of notice of 3 months and an additional payment under the company's redundancy guidelines of 11 months pay ( redundancy payment ) $497,068.83
Total $771,529.03
Less income tax deducted $236,461.00
Total $535,068.03

10. As well, DSL paid him $595,040.17, representing a gross amount of $735,040.17, made up as follows:

(i) an amount known as "the second Guaranteed Sum" less tax $560,000.00
(ii) accrued Japanese annual leave less tax $35,040.17
Total $595,040.17

11. The recitals to the deed of release set out the parties' agreement regarding the purpose of the payments the taxpayer received on 1 May 2003. Recital F(a)(iv) states that the amount of $497,069 from DAL represents a payment in lieu of three months' notice and an additional payment pursuant to DAL's redundancy guidelines of 11 months' salary.

12. A copy of an email from the head of human resources at Deutsche sets out "Redundancy Guidelines" dated 25 May 2001. These indicate that directors are entitled to be paid three months salary in lieu of notice and uncapped redundancy of one month per year of service or part thereof. The taxpayer acknowledges that the redundancy payment was calculated in accordance with DAL's redundancy guidelines.

13. The objection and review before me concerns only two elements of the settlement amounts paid to the taxpayer, the repatriation allowance, which is listed as part of the DAL payment and the redundancy payment made by DAL. In a letter dated 24 June 2005, written on behalf of the taxpayer, objecting to the Commissioner's assessment, the taxpayer's accountant advised that the termination payment was broken down by the parties between -

  • (a) Three months' salary in lieu of notice.
  • (b) Two months' salary for being made redundant, attributable to two years' employment in Japan.
  • (c) Nine months salary for being made redundant, attributable to nine years' employment in Australia.

14. The objection decision was made in response to the taxpayer's accountant's contention that the termination payment could be split between a component of $177,524, which was attributable to foreign service, and the balance of $288,613, which was not. Although the taxpayer's objection suggested that only a portion of the redundancy payment might be exempt from income tax, the taxpayer argued before me that the whole of the redundancy payment was an exempt non-resident foreign termination payment or ENRFTP.

15. The Commissioner's delegate decided that only $463,325 of the payment was an eligible termination payment and that the whole of that amount was taxable as such. The delegate decided this amount could not be apportioned between periods of foreign and Australian service. That is, the whole of the payment was subject to Australian income tax and not exempt as an exempt non-resident foreign eligible termination payment or "ENRFTP".

16. On the other hand, the delegate did apportion the payment of $535,068.03 so far as the repatriation allowance of $23,875 was concerned. The decision ruled that the repatriation allowance was assessable in Australia under subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) and was not exempt under section 23AG of the Income Tax Assessment Act 1936 (ITAA 1936).

17. For the review, the taxpayer argued that this amount was not income according to ordinary concepts and that it was exempt under section 23L because it constituted the provision

ATC 105

of a fringe benefit that was taxable to the employer. This argument was not raised in the objection decision.

Issues

18. The issues for the review are those raised and ruled upon in the objection decision. The main issues before me are:

  • • Was the whole of the redundancy payment of $497,068 (or thereabouts) an "exempt non-resident foreign termination payment" (ENRFTP), according to section 27CD of the ITAA 1936?
  • • Was part of the payment of $497,068 (or thereabouts) an "exempt non-resident foreign termination payment" (ENRFTP)?
  • • Was the taxpayer's receipt of $23,875 exempt as an allowance which was not part of assessable income?

19. Further, in relation to the repatriation allowance, issues raised before me were:

  • (a) whether the allowance was income according to ordinary concepts;
  • (b) whether the allowance was reimbursement of costs and a fringe benefit under the Fringe Benefits Tax Assessment Act 1986 and therefore not assessable to the taxpayer because of section 23L of the ITAA 1936.
  • (c) whether the allowance was part of an eligible termination payment and, if assessable, a bona fide redundancy payment under section 27F of the 1936 Act and exempt under section 27CB.

20. Although the reviewable decision was made on the basis that the grounds of objection were confined to consideration of section 23AG, the Commissioner indicated he did not oppose an amendment allowing the further grounds argued at the hearing.

Legislative background

21. Section 27CD of the Income Tax Assessment Act 1936 exempts those payments to a taxpayer in a situation as follows:

"If an exempt resident foreign termination payment or an exempt non-resident foreign termination payment is made in relation to a taxpayer, the taxpayer's assessable income does not include that payment."

22. The expression "exempt non-resident foreign termination payment" is defined in section 27A(1) as meaning, so far as is relevant, in relation to a taxpayer:

"(a) a payment made in respect of the taxpayer to which the following subparagraphs apply:

  • (i) the payment is made otherwise than from a superannuation fund (as defined by subsection 6(1) in consequence of the termination of the taxpayer's employment;
  • (ii) the payment would, apart from paragraphs (ka) and (ma) of the definition of "eligible termination payment", be an eligible termination payment;
  • (iii) the employment was service in a foreign country as a holder of an office or in the capacity of an employee;
  • (iv) the payment related solely to a period of the employment during which the taxpayer was not a resident of Australia."

23. It is not in dispute that the payment satisfies paragraphs (i) and (ii) of section 27A(1) but it is disputed that:

  • (a) The relevant employment was service in a foreign country in accordance with paragraph (iii); and
  • (b) The payment related solely to a period of the employment during which the taxpayer was a non-resident in accordance with paragraph (iv).

24. A bona fide redundancy payment is an eligible termination payment where it satisfies the definition in section 27F. Pursuant to section 27CB, a component of such a payment may be exempt.

Consideration

25. I have first considered the objection to assessment of the redundancy payment of $497,068.

The redundancy payment

26. The taxpayer was on secondment to DSL at the time of his redundancy but he was still employed by DAL. This is clear from the letters above setting out the terms of the placement in Tokyo. DAL took the initiative in terminating his services. Termination of the DSL arrangement occurred simultaneously. This is evident from the correspondence of October

ATC 106

and November 2002. The contractual terms of the placement included continuing employment by DAL throughout the secondment, secondment for a limited fixed period, and the expectation that, at the end of the assignment, the taxpayer would return to work in the Structured Debt Division of DAL in Australia.

27. The parties agree that, apart from the repatriation allowance amount, the redundancy payment is an eligible termination payment (ETP) and that the taxpayer meets the requirements of paragraphs (a)(i) and (ii) of the definition of an ENRFTP in section 27A(1) in respect to the redundancy payment. I further note that although the Commissioner has claimed in contentions for the review that paragraph (iii) of the definition was not met, the objection decision found that this requirement had been met. The decision sets out not only that paragraph (ii) is met but in addition states that the "employment was service partly in a foreign country as a holder of an office or in the capacity of an employee".

28. As to the requirement in paragraph (iii) of the definition that the requisite employment is service in a foreign country, I note that the taxpayer's employment over the last two years had been performed in Japan. However, the taxpayer was still employed by DAL throughout and the character of the payment in his hands will depend on all the surrounding circumstances.

29. The redundancy payment the taxpayer received from DAL compensated the taxpayer for the termination of his position with DAL at least in part. This was implicit in the taxpayer's original claim for part of the payment to be exempted. While there may have been an element related to cutting short his expected three year position with DSL, DSL separately compensated the taxpayer for his entitlements related to his service in Japan. The calculation of the DAL contribution was based on 14 months' salary in lieu of notice and additional payment in accordance with DAL's guidelines. This is set out in the deed of release. There is nothing to suggest that the payment was to compensate solely for the period of employment while not a resident of Australia. This is despite the taxpayer's location in Japan when he was informed of the redundancy.

30. The deed of release, which contains an explanation of the calculation of payments to the taxpayer, was executed on 8 June 2005. This was subsequent to the payments made to the taxpayer on 1 May 2003, the date set out in recital F. While the deed of release is not explicit as to whether DAL's payment on the termination was compensation for the loss of the Australian employment or for the loss of the Tokyo position, the clear implication is that the payment was governed by the employment terms in Australia. The payment in dispute was made by the Australian employer and it was made in accordance with the guidelines applying to DAL employees. The perception that the payment is related principally to the long term Australian employment is reinforced by the circumstance that DSL made a separate payment to the taxpayer. This suggests that DSL paid the taxpayer what it considered due to him and was in accordance with the employment letters governing the secondment whereby DSL agreed to pay his Japanese salary. Had the termination payment been for the employment which was service in a foreign country, other methods might have made this clear. The deed of release might have set out that payment was for foreign service or a separate payment might have been made to the taxpayer for this purpose. Another option to make this clear might have been for payment by DSL of a greater proportion of the total termination payments. However, the objection decision has accepted that the payment was for service in a foreign country so I have not varied the decision in this respect.

31. The remaining hurdle for the taxpayer is to show that the payment meets paragraph (iv) of the definition. In order to satisfy this requirement of the definition in section 27A(1), any payment must relate solely to a period of the employment during which the taxpayer was a not a resident of Australia. For exemption, the payment must relate exclusively to a period of employment when the taxpayer was not a resident of Australia. As I have observed above, the deed of release does not assist in this construction of the payment.

32. The expression "related to" is a common English phrase and has been considered by the courts although not difficult of comprehension. The phrases "related to",

ATC 107

"in relation to" and "in respect of", have similar meanings according to Pearce & Geddes, Statutory Interpretation in Australia (6th edition) at [12.7]) and cases there referred to where these terms have been considered. In the case of
Smith v FCT 87 ATC 4883; (1987) 164 CLR 513 the High Court considered whether an award of money paid by an employer to encourage an employee to study was given "in respect of, or for or in relation directly or indirectly to any employment of or services rendered by him" for the purposes of section 26(e) of the ITAA as it then was. Toohey J, at 533, adopted a passage from the judgement of the Supreme Court of Canada in
Nowegijick v The Queen, delivered by Dickson J, in which Dickson J expressed an opinion that these words should be given the widest possible scope. The High Court ultimately found that the payment was assessable to the taxpayer because he received it in consequence of his employment.

33. McHugh J, in
O'Grady v Northern Queensland Co Ltd (1990) 169 CLR 356, at 376, said, subject to any contrary intention derived from its context or drafting history, the phrase "in relation to" "requires no more than a relationship, whether direct or indirect, between two subject matters". In the present matter, the phrase "related to" requires a connection between the payment and a period of employment outside Australia. Further, the word "solely" indicates a connection only to that period of employment outside Australia. Also see
Ryde Municipal Council v Macquarie University (1978) 139 CLR 633 on the meaning of "solely". It follows that, if a payment is referable partly to a period of employment outside Australia but also partly to a period of employment within Australia, it is not solely related to the period when the taxpayer was not a resident of Australia.

34. According to my understanding of the terms of the deed of release, particularly recital F(iv), and in conformity with the redundancy guidelines, the taxpayer received the redundancy payment at least partly in consequence of the loss of his position within DAL. His redundancy also brought his overseas secondment to an end as there was no longer any position for the taxpayer within DAL or DSL. This does not automatically mean the payment was made for the purpose of compensating him for the loss of the Japanese employment. The taxpayer has not presented any corroborative evidence of his own view of how the money should be apportioned.

35. In my view, the redundancy payment compensated the taxpayer for the loss of his employment at DAL, including the loss of his contractual entitlement to resume work with DAL in Australia when his secondment ended. Thus, on balance, I conclude that the amount of the redundancy payment took into account the period of the taxpayer's service within Australia in addition to his period of service in Japan. I further note that the taxpayer bears the burden of proof to show that the assessment to which he objected was excessive or should have been made differently (section 14ZZK) and he has not discharged this burden. It follows that I consider that the objection decision was correct in finding that the redundancy payment did not satisfy paragraph (iv) of the definition of an ENRFTP.

36. The Commissioner brought to my attention the matter of
Case 16/2000 2000 ATC 243 which involved a similar fact situation to that of the present taxpayer. In the earlier matter, the taxpayer commenced employment with a bank in Sydney in March 1983. He spent from March 1986 to July 1990 in England, and was posted to New York from July 1990 to February 1992. He then worked in Sydney, followed by another stint in London. In July 1996, the taxpayer was notified that his position in London had become redundant and he was requested to return to Sydney, which he declined to do. In August 1996, the taxpayer was given six weeks' notice of his redundancy, which would take effect on 11 October 1996. He received a severance payment calculated on the basis of 44.75 weeks at his Australian-based salary, which was a formula determined in accordance with a Memorandum of Agreement between the Bank and the Finance Sector Union. The issue was whether the severance pay related "solely" to the period of employment during which the taxpayer was not an Australian resident. If so, the severance pay would have been exempt as an ENRFTP under former section 27CD. Senior Member Ettinger held that the payment was not "solely" related to the taxpayer's foreign service.

37. 

ATC 108

I agree with the opinion of Senior Member Ettinger that, for a taxpayer's termination or redundancy payment to be an ENRFTP, the taxpayer must satisfy all four sub-sections of section 27A(1), paragraphs (a)(i) to (iv) of the Act. For the reasons given above, I am satisfied the taxpayer came within sub-sections (i) to (ii) and possibly (iii) of section 27A(1)(a) but does not satisfy paragraph (iv) because his termination/redundancy pay was calculated by taking into account the whole period of his service of in and outside Australia.

Might the redundancy payment be split?

38. The Commissioner submits that the proper construction of the definition of an ENRFTP does not permit the dissection of a lump sum payment into components, parts of which meet the statutory meaning and parts of which do not. I agree with the Commissioner's contention although I previously observed in
A Taxpayer and Commissioner of Taxation 2006 ATC 228; [2006] AATA 980 that it was possible to accept there had been a separate payment when two cheques had been drawn by the employer and paid to the taxpayer rather than one. In that case, the taxpayer presented clear reasons why two payments were made rather than one. Two separate payments may be a contrivance to avoid what is really lump sum but this may not always be the reason for separate payments. However, separate payments by DAL have not arisen in the taxpayer's case as he received the amount of $497,069 in one payment.

39. I agree with the Commissioner's submission that the definition of an ENRFTP requires that "the payment" relates solely to a period of the employment during which the taxpayer was a non-resident of Australia. It is the characterisation of that whole payment, not its constituent parts, with which the definition is concerned. Therefore, although it is possible to attribute a portion of the redundancy payment to the taxpayer's service in Japan, the whole of the redundancy payment nonetheless does not meet the statutory description of an ENRFTP for exemption from tax.

40. Further support for this approach is found in
McLaurin v FCT (1961) 104 CLR 381 at 391 the High Court (Dixon CJ, Fullagar and Kitto JJ) said that:

"It is true that in a proper case a single payment or receipt of a mixed nature may be apportioned amongst the several heads to which it relates and an income or non-income nature attributed to portions of it accordingly:
Texas Co. (Australasia) Ltd v Federal Commissioner of Taxation;
Ronpibon Tin N L and Tongkah Compound N L v Federal Commissioner of Taxation;
The National Mutual Life Association of Australasia Ltd v Federal Commissioner of Taxation. But while it may be appropriate to follow such a course where the payment or receipt is in settlement of distinct claims of which some at least are liquidated, cf
Carter v Wadman, or cannot be appropriate where the payment or receipt is in respect of a claim or claims for unliquidated damages only and is made or accepted under a compromise which treats it as a single, undissected amount of damages. In such a case the amount must be considered as a whole:
Du Cros v Ryall."

41. I find that the objection decision was correct both as to the conclusion that the whole of the payment was taxable income on the basis that it did not satisfy the terms of paragraph 27A(1)(a)(iv) of the definition and also that the payment could not be apportioned. It follows that I will affirm the objection decision in respect to the main redundancy payment.

The repatriation allowance of $23,875

42. A component of the second payment from DAL received by the taxpayer, according to the deed and the affidavit of 14 August 2007, was the so-called repatriation allowance. The letter to the taxpayer from DAL dated 28 July 2000, describes a "Relocation Allowance" as follows:

"Upon re-assignment to Australia, you will be paid by the Company [DAL] a non-accountable, lump sum payment equivalent to one month's Shadow Salary current at that time, which will be subject to Australian tax.

The allowance is designed to cover incidental expenses connected with the move; for example, the cost of purchasing clothes, household items or furnishings, electrical goods/transformers, etc."

43. 

ATC 109

The repatriation allowance of $23,875 corresponded to one month of the taxpayer's Shadow Salary of $286,500. This suggests it was an estimate rather than actual "incidental expenses connected with the move" to Australia. The Commissioner's objection decision considered this component of the redundancy payment was assessable as ordinary income and that it was not exempt under section 23AG of the ITAA 1936. I have also been asked to consider whether this amount was exempt from income tax as a fringe benefit and various other possibilities.

44. I have, however, come to the conclusion that this amount is a component of the DAL bona fide redundancy payment. The allowance, whether it was an estimate of relocation costs likely to be caused to the taxpayer or actual expenditure or in the nature of a fringe benefit in some respects or capable of some other construction, was a legitimate part of his eligible termination payment. The payment was part of the taxpayer's bona fide redundancy package and should not be treated any differently to the rest of the package.

45. The term "eligible termination payment" is also defined in section 27A(1). Under paragraph (a) of the definition of an ETP it means any payment made in respect of the taxpayer in consequence of the termination of any employment of the taxpayer, other than certain excluded types of payment. None of the excluded payments are similar to the relocation allowance.

Conclusion

46. I find that the whole of the payment by DAL to the taxpayer was an eligible termination payment which does not meet paragraph (iv) of the definition of an exempt non-resident foreign termination payment and is therefore assessable as an eligible termination payment under the special provisions contained in Part III Div 2 Subdiv AA of the ITAA 1936.

Decision

47. The decision under review is varied so as to find that the amount described as a repatriation allowance is part of an eligible termination payment and is assessable as a bona fide redundancy payment in accordance with sections 27A(1) and 27F of the Income Tax Assessment Act 1936.


Back to top

This information is provided by CCH Australia Limited Link opens in new window. View the disclaimer and notice of copyright.