Edited version of your written advice

Authorisation Number: 1012744370218

Ruling

Subject: Compensation and legal expenses

Question 1

Are the proceeds from a foreign court order in a foreign country not assessable income and not exempt income under section 83-235 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 2

Are you entitled to a deduction for legal expenses incurred?

Answer

No.

This ruling applies for the following period:

Year ending 30 June 2015

The scheme commences on:

On or after 1 July 200X

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You started a case of unfair dismissal against your previous employer (the Employer) in the relevant financial year in Country X.

You emigrated to Australia in the relevant financial year.

You have been incurring legal fees overseas in Country X.

The matter should be heard in Country X during the 20XX financial year.

The maximum payout that you can receive is two years of salary.

Relevant legislative provisions

Income Tax Assessment Act 1997 Paragraph 82-135(f).

Income Tax Assessment Act 1997 Subdivision 83-D.

Income Tax Assessment Act 1997 Section 83-235.

Income Tax Assessment Act 1997 Section 8-1.

Reasons for decision

Summary

Any payment that you receive will be a foreign termination payment under section 83-235 of the ITAA 1997 and will not form part of your assessable income and will not form part of your exempt income.

You are not entitled to a deduction for legal expenses under section 8-1 of the ITAA 1997.

Detailed reasoning

Income

Subdivision 83-D of the ITAA 1997 deals with termination payments that arise out of foreign employment. In accordance with paragraph 82-135(f) of the ITAA 1997, these payments are not employment termination payments, and are not assessable income and are not exempt income, that is, they are generally tax-free.

There are two types of foreign termination payments covered by Subdivision 83-D of the ITAA 1997:

• termination payments relating to a period when the taxpayer was not an Australian resident; and

• termination payments relating to a period when the taxpayer was an Australian resident.

Section 83-235 of the ITAA 1997 applies to termination payments received where the taxpayer was a foreign resident during the period of foreign employment to which the payment relates. It states that:

A payment received by you is not assessable income and is not exempt income if:

(a) it was received in consequence of the termination of your employment in a foreign country; and

(b) it is not a superannuation benefit; and

(c) it is not a payment of a pension or an annuity (whether or not the payment is a superannuation benefit); and

(d) it relates only to a period of employment when you were not an Australian resident. (emphasis added)

Section 83-235 of the ITAA 1997 requires that for a payment to be tax-free as a foreign termination payment it must be received in consequence of the termination of the taxpayer's employment in a foreign country.

The phrase 'in consequence of' is not defined in the ITAA 1997. However, the words have been interpreted by the courts in several cases. Whilst there are divergent views as to the correct interpretation of the phrase, the Commissioner considers that 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 (Taxation Ruling TR 2003/13).

Based on the above, any payment that you receive will be a foreign termination payment under section 83-235 of the ITAA 1997 and will not form part of your assessable income and will not form part of your exempt income. This conclusion is based on the following:

• Any payment will be made as a result of the court proceedings brought against the Employer, which in turn are in consequence of the termination of your employment. That is, but for the termination of your employment with the Employer there would be no court proceedings and no order for the payment. As such, any payment will be considered to be made in consequence of the termination of your employment with the Employer; and

• At the time you commenced employment with the Employer you were a Country X citizen and only became an Australian citizen after your employment with the Employer was terminated. Therefore, the payment will relate only to a period of employment when you were not an Australian resident.

Expenses

Section 8-1 of the ITAA 1997 allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income, except where the outgoings are of a capital, private or domestic nature, or incurred in producing exempt income or non-assessable non-exempt (NANE) income. 

In your case, the legal expenses that you are incurring are in relation to an unfair dismissal claim that arose while you were employed in Country X and prior to you emigrating to Australia. As a deduction is only allowed if it is incurred in producing assessable income, you are not entitled to a deduction for legal expenses under section 8-1 of the ITAA 1997.

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