Edited version of your private ruling

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Ruling

Subject: Residency status, foreign income, redundancy payout and superannuation

Questions and answers:

Are you a resident of Australia for income tax purposes?

Yes.

Is the salary that you receive as a result of your employment in another country assessable in Australia?

Yes.

Is the accommodation allowance that you receive as a result of your employment in another country assessable in Australia?

Yes.

Is the local transport allowance that you receive as a result of your employment in another country assessable in Australia?

Yes.

Is the severance payment made to you considered to be a tax-free part of a genuine redundancy payment in accordance with section 83-170 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes.

Are you entitled to claim a tax deduction for personal superannuation contributions made to a complying superannuation fund under section 290-150 of the ITAA 1997?

No.

This ruling applies for the following period:

Year ended 30 June 2013

The scheme commences on:

1 July 2012

Relevant facts and circumstances

Facts for questions 1-4

You were born in country Y and are a citizen of both Australia and country Z.

You have a spouse and a child.

You were made redundant by your Australian employer.

After unsuccessfully seeking employment in Australia, you were forced to seek employment overseas.

You found employment working in country R for a resident country R company.

You departed Australia to take up your employment position in country R which commenced on arrival in country R.

You entered country R on an employment pass that is valid an extended period.

The nature of your overseas employment is such that you are on an extended employee contract that may be extended for a further period.

Your overseas employment entitles you to the following;

· a base salary

· rental accommodation, utilities and sundry expenses allowance; and

· travel allowance.

You pay tax to the country R Government on the income derived in country R.

While in country R you initially lived in a hotel before moving to a rental apartment.

Your personal items have remained in Australia.

While you are overseas your spouse, who is employed, has remained in Australia.

Your spouse is unable to resign from her position due to the nature of her short term contract.

You daughter, who is enrolled in an Australia university has also remained in Australia.

Since first departing Australia you have returned for short periods

In addition, you plan to make trips in the future for short periods.

When you are in Australia you live with your spouse and child in your family home.

The assets that you hold in Australia consist of the following:

· your family home;

· an investment property; and

· shares.

The overseas assets that you hold consist of a negatively geared investment property in country R.

The income that you derive from your overseas employment is transferred to Australia to support your family and pay your country R investment loans.

Your social and sporting ties in Australia consist of your spouse and child.

You do not have any social and sporting ties in country R.

Neither you nor your spouse have been an employee of the Commonwealth Government of Australia.

The income that you derive from your employment in country R is not attributable to any of the following:

· the delivery of Australian official development assistance by your employer

· the activity of your employer in operating a public fund declared by the Treasurer to be a developing country relief fund; or a public fund operated by a public benevolent institution solely to provide relief to people in a foreign country other than one which has been declared to be a developing country by the Foreign Affairs Minister

· the activities of your employer, being a prescribed institution that is exempt from Australian income tax

· deployment outside Australia by an Australian Government (or an Australian Government authority) as a member of a disciplined force

Your return to Australia is dependant on the progress of the project that you are working on.

Facts for questions 5-6

You commenced employment with your Australian employer until your position as a professional was terminated by your Employer.

In a letter which was entitled 'Confirmation of redundancy', your employer advised:

(a) Your employment will be terminated by the company as a result of the sale of the company you were employed by.

(b) Your Australian employer, in accordance with a Transition Agreement, has provided written confirmation that your position is no longer required. As a result of that instruction your role will cease to exist.

(c) The Employer has no suitable roles within its organisation and accordingly your employment with the Employer will terminate on a given date.

In relation to entitlements the letter stated that you are entitled to the following:

(a) a severance payment.

(b) Long Term Retention bonus.

In addition you will be paid any unused accrued annual leave up to the date of your departure.

The final payment will be made directly to your bank account in the normal monthly pay process.

Your employment was terminated due to redundancy.

The pay advice statement from the Employer shows the pay date with the following payments made to you on termination of employment:

Retention bonus

Salary

Allowance

Term Sum A

Term Sum C

Term Sum D

There is no evidence to show that, at the time of termination, there was an arrangement between yourself and the Employer, or any other person, to employ you after your termination of employment.

There was no date prior to your 65th birthday when you were required to cease employment.

No part of the severance payment was made to you in lieu of superannuation benefits.

You commenced employment in country R in the current income year.

You estimate that your total assessable income, reportable fringe benefits total, and reportable employer superannuation contributions will be $XXX,XXX. That is employment income of $XXX,XXX from the Employer in Australia and $XXX,XXX from the overseas employer for the current income year.

You propose to make personal superannuation contributions to a complying self managed superannuation fund, and claim the personal contributions as a tax deduction.

You are considered to be a resident of Australia for tax purposes.

You under 65 years of age.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 82-10(2).

Income Tax Assessment Act 1997 Section 82-135.

Income Tax Assessment Act 1997 Section 83-170.

Income Tax Assessment Act 1997 Subsection 83-170(2).

Income Tax Assessment Act 1997 Subsection 83-170(3).

Income Tax Assessment Act 1997 Section 83-175.

Income Tax Assessment Act 1997 Subsection 83-175(1).

Income Tax Assessment Act 1997 Subsection 83-175(2).

Income Tax Assessment Act 1997 Paragraph 83-175(2)(a).

Income Tax Assessment Act 1997 Paragraph 83-175(2)(b).

Income Tax Assessment Act 1997 Paragraph 83-175(2)(c).

Income Tax Assessment Act 1997 Subsection 83-175(3).

Income Tax Assessment Act 1997 Subsection 83-175(4).

Income Tax Assessment Act 1997 Subsection 995-1(1).

Income Tax Assessment Act 1936 Subsection 6(1).

Income Tax Assessment Act 1997 Subsection 6-5.

Income Tax Assessment Act 1936 Section 23AG.

Reasons for decision

Residency

Subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997) defines an Australian resident as a person who is a resident of Australia for the purpose of the Income Tax Assessment Act 1936 (ITAA 1936).

The terms resident and resident of Australia, in regard to an individual, are defined in subsection 6(1) of the ITAA 1936. The definition provides four tests to ascertain whether a taxpayer is a resident of Australia for income tax purposes. These tests are:

1. the resides test

2. the domicile test

3. the 183 day test

4. the superannuation test

The first two tests are examined in detail in Taxation Ruling IT 2650.

The primary test for deciding the residency status of an individual is whether the individual resides in Australia according to the ordinary meaning of the word resides. If the primary test is satisfied the remaining three tests do not need to be considered as residency for Australian tax purposes has been established.

The resides test

The ordinary meaning of the word 'reside', according to the Macquarie Dictionary, 2001, rev. 3rd edition, The Macquarie Library Pty Ltd, NSW, is 'to dwell permanently or for a considerable time; having one's abode for a time', and according to the Compact Edition of the Oxford English Dictionary (1987), is 'to dwell permanently, or for a considerable time, to have one's settled or usual abode, to live in or at a particular place'.

Taxation Ruling TR 98/17 focuses on the quality and character of an individual's behaviour while in Australia (which includes, in addition to family and business ties, factors such as intention or purpose of presence, social and living arrangements, and maintenance and location of assets), in conjunction with the period of physical presence in Australia.

Taxation Ruling IT 2650 emphasises the intended and actual length of the individual's stay in an overseas country, any intention to return to Australia or travel elsewhere, the establishment or abandonment of any residence, and the durability of association that the individual maintains with a particular place in Australia as the main factors to be considered when determining the residency status of individuals leaving Australia.

In the recent case of Iyengar v FCT 2011 ATC 10-222, the Administrative Appeals Tribunal held that the taxpayer was a resident of Australia, even though he was working overseas. The taxpayer's family ties, his intention (to complete his contract) and motive (to pay off his mortgage), and his maintaining an Australian place of abode while working overseas, were all indicative that he was an Australian resident during the relevant period.

In your case, your ties to Australia are stronger because your spouse and child continue to reside in Australia, and you return to your family home in Australia when you are not working. The main purpose of your presence in Australia is to be with your family, whereas the main purpose of your presence in country R is to work. This indicates that you are residing in Australia according to the ordinary meaning of resides.

Therefore, consistent with the principles established in Iyengar's case you continue to be a resident of Australia for taxation purposes under the 'resides test'.

As it has been established that you are a resident under the 'resides test' there is no need to consider the remaining 3 tests.

Your residency status

As you are a resident of Australia under the 'resides test' outlined in subsection 6(1) of the ITAA 1936 and subsection 995-1(1) of the ITAA 1997, you are an Australian resident for income tax purposes for the 2012-13 income year.

Assessability of foreign sourced income

Subsection 6-5(2) of the ITAA 1997 provides that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources, whether in or out of Australia, during the income year.

Salary, wages and allowances are ordinary income for the purposes of subsection 6-5(2) of the ITAA 1997.

Subsection 6-15(2) of the ITAA 1997 provides that if an amount is exempt income then it is not included in assessable income.

Section 11-15 of the ITAA 1997 lists those provisions dealing with income that may be exempt. Included in this list is section 23AG of the Income Tax Assessment Act (ITAA 1936), which deals with overseas employment income.

Subsection 23AG(1) of the ITAA 1936 provides that where Australian resident individuals are engaged in foreign service for a continuous period of not less than 91 days, foreign earnings derived from that foreign service are exempt from tax in Australia.

You are employed by a country R national company and are engaged in foreign service for a continuous period of not less than 91 days. Therefore your foreign earnings derived from that foreign service are exempt from tax in Australia, subject to other provisions listed under section 23AG of the ITAA 1936.

Subsection 23AG(1AA) of the ITAA 1936, which took effect from 1 July 2009, provides that those foreign earnings will not be exempt under section 23AG of the ITAA 1936 unless the continuous period of foreign service is directly attributable to any of the following:

· delivery of Australian official development assistance by your employer;

· activities of your employer in operating a public fund declared by the Treasurer to be a developing country relief fund, or a public fund established and maintained to provide monetary relief to people in a developing foreign country that has experienced a disaster (a public disaster relief fund);

· activities of your employer as a prescribed charitable or religious institution exempt from Australian income tax because it is located outside Australia or the institution is pursuing objectives outside Australia; or

· deployment outside Australia by an Australian government (or an authority thereof) as a member of a disciplined force.

Broadly, the foreign service must be directly attributable to Australia's overseas aid program, a relief fund, an exempt institution or a disciplined force.

In your case the employment income that you derive from your employment in country R is not attributable to any of the provisions listed under subsection 23AG(1AA) of the ITAA 1997. Therefore, section 23AG of the ITAA will not apply to exempt your foreign sourced income from Australian income tax.

Accordingly, the foreign sourced income that you derive in country R is assessable in Australia subject to Australian income tax under section 6-5 of the ITAA 1997.

Double tax agreement

In determining your liability to pay tax in Australia it is necessary to consider not only the domestic income tax laws but also any applicable double tax agreements.

Section 4 of the International Tax Agreements Act 1953 (Agreements Act) incorporates that Act with the ITAA 1936 and the ITAA 1997 so that all three Acts are read as one. The Agreements Act overrides both the ITAA 1936 and ITAA 1997 where there are inconsistent provisions (except in some limited situations).

Section 5 of the Agreements Act states that, subject to the provisions of the Agreements Act, any provision in an Agreement listed in section 5 has the force of law. The Country R Agreement is listed in section 5 of the Agreements Act.

The Country R Agreement is located on the Austlii website (www.austlii.edu.au) in the Australian Treaties Series database. The Country R Agreement operates to avoid the double taxation of income received by residents of Australia and Country R.

Article 11 of the Country R Agreement advises that salaries, wages and other similar remuneration derived by a resident of Australia shall be taxable only in Australia unless the employment is exercised in Country R. If the employment is exercised in Country R then the income may also be taxed in Country R.

Accordingly, the salary derived by you as an Australian resident for income tax purposes from employment exercised in Country R is assessable in Australia under subsection 6-5(2) of the ITAA 1997.

Genuine redundancy payment

Summary

The severance payment made on the termination of your employment is considered to be a genuine redundancy payment as all the legislative conditions have been satisfied.

The portion of the payment in excess of the tax-free amount is a taxable component of an employment termination payment and is to be included in your assessable income for the current income year.

Detailed reasoning

To determine if any part of the payment you received from your Australian employer (the Employer) constitutes a genuine redundancy payment (GRP), all the conditions in section 83-175 of the ITAA 1997 will need to be satisfied.

Where a payment is made to an employee, a GRP is defined in subsection 83-175(1) of the ITAA 1997 as:

so much of a payment received by an employee who is dismissed from employment because the employee's position is genuinely redundant as exceeds the amount that could reasonably be expected to be received by the employee in consequence of the voluntary termination of his or her employment at the time of the dismissal.

Subsection 83-175(2) of the ITAA 1997 states that for a payment to qualify as a GRP all of the following conditions must be met:

(a) the employee is dismissed before the earlier of the following:

(i) the day he or she turned 65;

(ii) if the employee's employment would have terminated when he or she reached a particular age or completed a particular period of service - the day he or she would reach the age or complete the period of service (as the case may be);

(b) if the dismissal was not at arm's length - the payment does not exceed the amount that could reasonably be expected to be made if the dismissal were at arm's length;

(c) at the time of the dismissal, there was no arrangement between the employee and the employer, or between the employer and another person, to employ the employee after the dismissal.

In addition, subsection 83-175(3) of the ITAA 1997 provides that a GRP does not include any part of a payment that was received by the employee in lieu of superannuation benefits to which the employee may have become entitled at the time of the payment or at a later time. In addition, subsection 83-175(4) provides that a payment is not a GRP if it is a payment mentioned in section 82-135.

The Commissioner has issued Taxation Ruling TR 2009/2 which outlines the Commissioner's view of the requirements to be satisfied for a payment to qualify as a GRP under section 83-175 of the ITAA 1997.

It is proposed to examine each of these provisions.

The requirement under subsection 83-175(1) of the ITAA 1997

The first requirement which is specified in subsection 83-175(1) of the ITAA 1997 has three criteria:

· the payment is received by an employee who is dismissed from employment;

· the employee is dismissed because the employee's position is genuinely redundant; and

· the payment exceeds the amount that could reasonably be expected to be received by the employee in consequence of the voluntary termination of his or her employment at the time of the dismissal.

Dismissal from employment

The first criterion is that there has been a dismissal from employment, which usually means that the termination of employment is involuntary on the part of the employee concerned and is instigated by the employer.

According to the facts, your employment was terminated by your Employer as the Employer had determined that your position was no longer required as a result of the sale of the vessel and ongoing changes within the operations of the Employer.

The termination of your employment is clearly a dismissal for the purposes of subsection 83-175(1) of the ITAA 1997, because your employment is being terminated at the instigation of the Employer due to the sale and restructuring of the organisation. Therefore, it is considered that you have satisfied the first criterion under subsection 83-175(1) in this instance.

Genuine redundancy

Having established that there will be a dismissal from employment for the purposes of subsection 83-175(1) of the ITAA 1997, the next criterion that needs to be considered is whether you were dismissed because your position is genuinely redundant.

Redundancy is a situation where the dismissal of an employee is not caused by any consideration peculiar to the employee. Redundancy does not extend to a situation where an employee is dismissed for personal or disciplinary reasons or because the employee was inefficient, but rather because an employer no longer requires employees to carry out work of a particular kind or to carry out work of a particular kind at the same location.

At paragraph 27 of TR 2009/2 the following comment is made:

… if an employer decides after downsizing or some other structural reorganisation to terminate an employee, the former position of the employee is redundant as long as the downsizing or reorganisation is the prevailing or most influential cause of the termination.

As stated in the facts the Employer advised, in a letter, that as a result of the sale of the vessel and ongoing changes within the organisation your role will no longer exist. Therefore your position will become redundant and your employment would cease on a determined date.

The termination of your employment will not be on account of any personal act or default on your part, and will not be due to the ordinary and customary turnover of labour. Rather the Employer no longer requires anyone to perform the job you had been doing. Therefore the Employer's decision to terminate your employment is due to a redundancy.

Accordingly, it is considered that you have also satisfied the second criterion under subsection 83-175(1) of the ITAA 1997 in this instance.

The payment exceeds what you would have received in consequence of the voluntary termination of your employment at the time of your dismissal

The third criterion that needs to be considered is whether the payment exceeds the amount that you could reasonably be expected to receive in consequence of the voluntary termination of your employment will be treated as a genuine redundancy payment.

The meaning of the phrase 'in consequence of'

The phrase 'in consequence of' is not defined in the ITAA 1997. However, the courts have interpreted the phrase in a number of cases. Whilst the courts have divergent views on the meaning of this phrase, the Commissioner's view on the meaning and application of the in consequence of test are set out in Taxation Ruling TR 2003/13 entitled 'Income tax: eligible termination payments (ETP): payments made in consequence of the termination of any employment: meaning of the phrase in consequence of'.

While TR 2003/13 considered the meaning of the phrase 'in consequence of' in the context of eligible termination payments under the Income Tax Assessment Act 1936 (ITAA 1936), TR 2003/13 can still be relied upon as both the former provision under the ITAA 1936 and the current provision under the ITAA 1997 both use the term 'in consequence of' in the same manner. Eligible termination payments ceased to exist from 1 July 2007, being replaced by employment termination payments.

In paragraph 5 of TR 2003/13 the Commissioner states:

…a payment is made in respect of a taxpayer in consequence of the termination of the employment of the taxpayer if the payment follows as an effect or result of the termination. In other words, but for the termination of employment, the payment would not have been made to the taxpayer.

In paragraph 6 of TR 2003/13, the Commissioner recognises that:

The phrase requires a causal connection between the termination and the payment, although the termination need not be the dominant cause of the payment. The question of whether a payment is made in consequence of the termination of employment will be determined by the relevant facts and circumstances of each case.

The phrase in consequence of termination of employment has been interpreted by the courts in several cases.

Of note are the decisions made by the High Court in Reseck v. Federal Commissioner of Taxation (Reseck) and the Full Federal Court in McIntosh v Federal Commissioner of Taxation (McIntosh).

Both Courts' views were that for a payment to be made in consequence of the termination of employment it had to follow on as a result or effect of the termination of employment. Additionally, while it is not necessary to show that termination of employment is the sole or dominant cause, a temporal sequence alone would not be sufficient.

Therefore, if the payment follows as an effect or a result from the termination of employment, the payment will be made in consequence of the termination of employment.

There is also a broader view of the meaning of 'in consequence of the termination of employment'. Paragraph 29 of TR 2003/13 provides that a payment will be in consequence of the termination of employment if the termination is either a cause of the payment or an antecedent event.

The question of whether a payment is made in consequence of the termination of employment will be determined by the relevant facts and circumstances of each case.

In the facts of this case, the Employer has advised that, as a result of the sale of the vessel and ongoing changes within the operations, your position would become redundant and your employment would cease on determined date.

It is clear from the facts provided that the severance payment of $XX,XXX made to you on the termination of your employment with the Employer is made as 'in consequence of' your termination of employment. As such, there is a direct causal connection between the termination of employment and the making of the payment.

The termination of employment and the payment are all intertwined and connected. If not for the termination of employment the payment would not be made. It is considered that there is sufficient nexus between the making of the payment and the termination of employment to say that the payment is being made in consequence of your termination of employment.

The Commissioner considers that it is necessary to show how the amount an employee is entitled to be paid exceeds the amount that is payable to employees who voluntarily terminate their employment.

Paragraphs 61 to 63 of TR 2009/2 state:

61. It would generally be expected that a greater amount would be paid on redundancy than voluntary termination. This recognises the purpose of redundancy payments, being primarily to compensate for loss of non-transferable entitlements (for example accrued sick leave and accrued long service leave prior to 10 years service) and the peculiar hardship associated with being made redundant.

62. Contractual or other entitlements payable by an employer on voluntary termination are generally a sound guide as to what might reasonably be expected. However, this would be less so if the employer and employee are not dealing at arm's length.

63. There may be industry norms that could be used as a guide as to what payments would be made on voluntary termination. It may also be appropriate to compare standard payments made on voluntary termination within a particular company. However, these comparisons must take account of the actual nature of the dealings as influenced by the relationship between the parties.

You were entitled to only an amount of accrued annual leave or long service leave had you resigned or retired from your employment.

The severance payment was made on the termination of your employment due to your role being abolished. The payment is paid in circumstances of genuine redundancy, and is in excess of the amount that could reasonably be expected to be received by a worker in consequence of voluntary termination.

According to the facts, your will receive a severance payment of $XX,XXXX. It is accepted that this payment exceeds the amount you could reasonably expect to receive if you had resigned or retired from employment in the position you held at the time of the dismissal. Therefore, it is considered that you have satisfied the third criterion under subsection 83-175(1) of the ITAA 1997 in this instance.

Conclusion

All the criteria stipulated in subsection 83-175(1) of the ITAA 1997 have been satisfied.

Consequently it is considered that the amount of $XX,XXX constitutes a GRP within the meaning of subsection 83-175(1) of the ITAA 1997. However, a GRP must also satisfy the conditions in subsections 83-175(2) to 83-175(4).

The requirements under paragraphs 83-175(2)(a) and (b) of the ITAA 1997

As already noted previously, paragraph 83-175(2)(a) of the ITAA 1997 prescribes that the employee must be dismissed before the earlier of:

· the day he or she turned 65; or

· if the employee's employment would have terminated when he or she reached a particular age or completed a particular period of service - the day he or she would reach the age or complete the period of service (as applicable).

It is accepted that there was no date prior to your 65^th birthday on which you were required to terminate employment, and that you were not required to terminate employment before you were dismissed on the effective date. Also given that you were under 65 years of age at the time of your dismissal, you have satisfied the requirements of paragraph 83-175(2)(a) of the ITAA 1997.

Additionally, it is accepted that all dealings between yourself and the Employer were at arm's length. Therefore it follows that you have also satisfied the requirement under paragraph 83-175(2)(b) of the ITAA 1997.

The requirement under paragraph 83-175(2)(c) of the ITAA 1997

Also, as noted previously, paragraph 83-175(2)(c) of the ITAA 1997 requires that at the time of the dismissal, there was no arrangement between the employee and the employer, or between the employer and another person, to employ the employee after the dismissal.

In the present case, there was no re-employment by your Employer or evidence of any re-employment arrangement with another entity, so it is accepted that you have satisfied the requirement under paragraph 83-175(2)(c) of the ITAA 1997 in this case.

The requirements under subsections 83-175(3) and 83-175(4) of the ITAA 1997

Subsection 83-175(3) of the ITAA 1997 provides that a GRP does not include any part of a payment that is received in lieu of superannuation benefits. No part of the payment to be made to you is in lieu of superannuation benefits. Therefore it is accepted that the requirement under subsection 83-175(3) is satisfied.

Also as noted previously, subsection 83-175(4) of the ITAA 1997 provides that a payment is not a GRP if it is a payment mentioned in section 82-135 (other than paragraph 82-135(e) which refers to a GRP or early retirement scheme payment).

Section 82-135 of the ITAA 1997 includes payments such as pensions, foreign termination payments, unused annual leave and unused long service leave.

An examination of the payment made to you shows that the requirement in subsection 83-175(4) of the ITAA 1997 has been satisfied.

A GRP under sections 83-170 and 83-175 of the ITAA 1997

You have satisfied all the criteria set out in section 83-175 of the ITAA 1997 and consequently it is considered that the amount of $X,XXX constitutes a GRP for the purposes of section 83-170.

Tax-free treatment of a GRP

Subsection 83-170(2) of the ITAA 1997 provides that so much of the GRP that does not exceed the amount worked out using the formula prescribed in subsection 83-170(3) is not assessable income and is not exempt income. Any amount in excess of the tax-free amount is taxed as an employment termination payment. The formula for working out the tax-free amount is:

Base amount + (Service amount × Years of service)

You commenced employment with your Australian employer and were made redundant after an extended period of employment. Consequently the years of service to which the GRP relates is for a number of whole years of service.

Because your dismissal occurred during the current income year, the base amount will be $X,XXX and the service amount will be $X,XXX. Therefore in accordance with subsection 83-175(3) of the ITAA 1997, the tax-free part of a GRP you can receive in the current income year equals:

$X,XXX + ($X,XXX × X) = $XX,XXX.

Therefore the amount of $XX,XXX is the tax-free amount which is not assessable income and is not exempt income under subsection 83-170(2) of the ITAA 1997.

The amount of $X,XXX (that is $XX,XXX less $XX,XXX) is a taxable component of an employment termination payment.

Tax Treatment of the employment termination payment

An employment termination payment will be comprised of the following components:

Tax free component - this includes the pre-July 83 segment (if any) and/or the invalidity segment (if any); and

Taxable component - the amount remaining after deducting the tax free component from the total payment.

In your case, there is no tax free component.

The amount of $X,XXX is the taxable component of the employment termination payment.

As this amount is under the employment termination payment cap of $XXX,XXX for the current income year, and you have reached preservation age, it will be taxed at 15% plus Medicare levy.

The taxable components of all life benefit employment termination payments received in an income year are counted towards this cap. Any tax-free amounts are not counted towards the cap.

The portion of the payment in excess of the tax-free amount (that is, $X,XXX) is the taxable component of the employment termination payment and is to be included in your assessable income for the current income year (subsection 82-10(2) of the ITAA 1997).

Taxation treatment of an unused annual leave payment

Subsection 83-10(2) of the ITAA 1997 includes as assessable income an unused annual leave payment that you receive in the year of income. An unused annual leave payment is a payment that you received in consequence of the termination of your employment if:

(a) it is for annual leave you have not used; or

(b) it is a bonus or other additional payment for annual leave you have not used; or

(c) it is for annual leave, or is a bonus or other additional payment for annual leave, to which you were not entitled just before the employment termination, but that would have been made available to you at a later time if it were not for the employment termination.

Section 83-15 of the ITAA 1997 states:

You are entitled to a tax offset to ensure that the rate of tax on an unused annual leave payment does not exceed 30%, to the extent that:

(a) the payment was made in connection with a payment that includes, or consists of, any of the following:

(i) a genuine redundancy payment;

(ii) an early retirement scheme payment;

(iii) the invalidity segment of an employment termination payment or superannuation benefit; or

(b) the payment was made in respect of employment before 18 August 1993.

In the facts of this case, your entitlement to receive a payment of $XX,XXX.XX for unused annual leave is being made in connection with a GRP. This amount is to be included in your assessable income for the current income year and shown at Lump sum A on your Payment Summary.

Consequently, you are entitled to a tax offset to ensure that the rate of tax for the payment of $XX,XXX.XX does not exceed 30% (section 83-15 of the ITAA 1997). In addition Medicare levy may apply.

Deduction for personal superannuation contribution

Summary

The maximum earnings as an employee condition is not satisfied therefore, you are not eligible to claim a deduction for any personal superannuation contributions made to the fund in the 2012-13 income year.

Detailed reasoning

Deduction for personal superannuation contribution

Under section 290-150 of the ITAA 1997 a taxpayer can claim a deduction for a personal contribution they make to a superannuation fund for the purpose of providing superannuation benefits for themselves provided the conditions in sections 290-155, 290-160, 290-165 and 290-170 are satisfied.

Complying superannuation fund condition

The condition in section 290-155 of the ITAA 1997 requires that where the contribution is made to a superannuation fund, it must be made to a complying superannuation fund for the income year of the fund in which the contribution is made.

In this case, you intend to make personal superannuation contributions to a complying superannuation fund, in the current income year. Therefore the complying superannuation fund condition is satisfied.

Maximum earnings as an employee condition

Subsection 290-160(1) of the ITAA 1997 states:

This section applies if:

(a) in the income year in which you make the contribution, you engage in any of these activities:

(i) holding an office or appointment;

(ii) performing functions or duties;

(iii) engaging in work;

(iv) doing acts or things; and

(b) the activities result in you being treated as an employee for the purposes of the Superannuation Guarantee (Administration) Act 1992 (assuming that subsection 12(11) of that Act had not been enacted).

Where a person is engaged in activities during the income year that would make them an employee for the purposes of the Superannuation Guarantee (Administration) Act 1992 (SGAA) then they will need to satisfy the 10% rule in order to claim a deduction for their personal superannuation contributions. It should be noted that the level of superannuation support by an employer or another person is no longer a relevant factor under this condition.

Subsection 290-160(2) of the ITAA 1997 provides that where the person engages in any 'employment' activities in the income year, a deduction can only be claimed where the:

· assessable income;

· reportable fringe benefits total; and

· (from 1 July 2009) reportable employer superannuation contributions (which also includes contributions made under a salary sacrifice arrangement);

attributable to the 'employment' activities are together less than 10% of the person's total assessable income, reportable fringe benefits total, and reportable employer superannuation contributions in the income year that the contribution is made.

Further, if the person has more than one period of engaging in 'employment' activities in an income year, the assessable income, reportable fringe benefits total, and reportable employer superannuation contributions attributable to each period of 'employment' is aggregated.

The Commissioner has issued Taxation Ruling TR 2010/1 which deals with, among other matters, deductions for personal superannuation contributions. At paragraphs 57 and 58 of TR 2010/1, the Commissioner states:

57. Those persons who are engaged in an 'employment' activity in the income year in which they make a contribution need to meet an earnings test if they are to deduct their contribution.

58. Those persons who have not engaged in an 'employment' activity in the income year in which they make a contribution, such as persons who although receiving workers' compensation payments are not employed at any time during the year, are not subject to the maximum earnings test.

As an Australian resident, a taxpayer's assessable income can include salary or wages, termination payments, foreign income, superannuation benefits, dividends, rent and interest. Capital gains made during the year (less capital losses and the discount percentage if relevant) are also included. Expenses in deriving that income are not taken into account, as it is assessable income and not taxable income with which section 290-160 of the ITAA 1997 is concerned.

A taxpayer's reportable fringe benefits total is the amount of fringe benefits that is included on the person's payment summary for the income year. Employers are required by the fringe benefits tax legislation to include on payment summaries the grossed-up taxable value of certain fringe benefits provided to the employee during the income year, where that grossed-up value exceeds $2,000.

In the facts of this case, you ceased employment with your Australian employer and commenced employment in country R.

You estimate that your total assessable income, reportable fringe benefits total, and reportable employer superannuation contributions for the current income year to be $XXX,XXX. That is employment income of $XXX,XXX from your Australian employer and $XXX,XXX from the overseas employer for the current income year.

On the basis of the facts provided, it is highly unlikely that your estimated amount of total income received from activities that result in you being treated as an employee ($XXX,XXX), will be less than ten per cent of your estimated total assessable income for the current income year.

As it appears that your total income from employment related activities will be greater than ten percent of your total assessable income for the 2012-13 income year, the condition under section 290-160 of the ITAA 1997 has not been satisfied.

Consequently, as the condition in section 290-160 of the ITAA 1997 has not been satisfied, it is not necessary to determine whether the other conditions of 290-165 and 290-170 have been satisfied.

Therefore, you are not eligible to claim a deduction for any personal superannuation contributions made in the current income year.

It should be noted that the Commissioner of Taxation can only exercise, or refuse to exercise, his discretion when he is given that discretion under the legislation which he administers. In these circumstances, there is no discretion available to the Commissioner to allow the deduction to be claimed where not all the conditions in sections 290-155, 290-160, 290-165 and 290-170 of the ITAA 1997 have been met.

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