Edited version of your written advice

Authorisation Number: 1012878833873

Date of advice: 16 September 2015

Ruling

Subject: Foreign termination payment

Question

Is the severance payment your client received from the Employer not assessable income and not exempt income under section 83-235 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

This ruling applies for the following period

Year ended 30 June 2014

The scheme commenced on

1 July 2013

Relevant facts and circumstances

Your client has been working overseas as a non-resident of Australia for tax purposes for many years.

In the 20WW-XX income year your client entered into a contract of service with a foreign employer (the Employer) to undertake employment activities in a particular country (country X).

A contract between you and the Employer states that your assignment with the Employer would terminate in the 20YY-ZZ income year.

You state that your client's position with the Employer was made genuinely redundant due to the winding up of operations in country X to concentrate on existing markets and accelerate expansion in selected countries.

An email your client received states the key points of the Employer's proposal relating to the termination of employment were:

• The termination date of your client's international assignment would be in the 20YY-ZZ income year.

• Until the termination date of your client's international assignment your client would be paid, independent of their actual place of living, their contractual remuneration including assignment related benefits according to their contract. Further, your client's bonus would be unto the termination date of their international assignment.

• Until the end of your client's contract they would definitely no longer be obliged to work for the Employer. During the remaining term of your client's contract they were entitled to work for other employers and any such income earned would not be offset against your client's remuneration from the Employer.

• Your client was free to live wherever they want without risking their assignment related benefits.

• Your client would be paid a severance payment which was due on the termination date of your client's international assignment.

A termination agreement was signed in the 20YY-ZZ income year. The termination agreement outlined, amongst other matters:

• The termination of your client's international assignment in the 20YY-ZZ income year.

• The irrevocable release of your client from their work duties with immediate effect until your client's termination day, a date months later in the 20YY-ZZ income year (the termination date).

• The payment of a bonus amount for period up to the termination date.

• The payment of a severance amount.

• Any holiday entitlements and other entitlements to time off will be set off against the period of the leave of absence.

The lease on your client's residence overseas (paid for by the Employer) was due to expire in the 20YY-ZZ income year and prior to the termination date of your client's international assignment.

You state that as your client was on leave, and not required to be in country X, they suggested to the Employer early repatriation to Australia (prior to the end of their international assignment) thus:

(a) negating the need to secure a new residential lease in country X; and

(b) saving the Employer the cost of moving your client's belongings more than once.

The Employer agreed and paid for the early relocation of your client's belongings.

Your client returned to Australia in the 20YY-ZZ income year months prior to the termination date of their international assignment.

The severance payment was received by your client after returning to Australia.

You state that your client was not required to complete any further employment activities for the Employer on signing the termination agreement, however, the Employer continued to pay your client a salary until the end of their contract.

Your client was a resident of Australia when the severance payment was received.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subdivision 83-D

Income Tax Assessment Act 1997 Section 83-235 of the ITAA 1997

Income Tax Assessment Act 1936 Subsection 27A(1)

Reasons for decision

Summary

The severance payment your client received is not a foreign termination payment as the payment does not relate exclusively to a period of employment when your client was not a resident of Australia.

Detailed reasoning

Foreign termination payment

Termination payments that arise out of foreign employment ('foreign termination payments') are dealt with under Subdivision 83-D of the ITAA 1997.

Subdivision 83-D of the ITAA 1997 essentially exempts two types of termination payments from tax - termination payments relating to a period when the taxpayer was not an Australian resident (section 83-235 of the ITAA 1997) and termination payments relating to a period when the taxpayer was an Australian resident (section 83-240 of the ITAA 1997).

In your client's case section 83-235 of the ITAA 1997 is the relevant provision for consideration as to whether the payment is a foreign termination payment. Section 83-235 of the ITAA 1997 states:

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)

In this case, your client was working overseas as a non-resident of Australia for tax purposes for many years and in the 20WW-XXincome year entered into a contract of service to undertake employment activities for the Employer in country X.

Your client's position with the Employer was subsequently made genuinely redundant and, in accordance with a termination agreement between the Employer and your client which, was signed in the 20YY-ZZ income year, a severance payment (the payment) was payable to your client. Accordingly, paragraph 83-235(a) of the ITAA 1997 is satisfied as it is considered that the payment was in consequence of the termination of your client's employment in a foreign country.

Further, paragraphs 83-235(b) and (c) of the ITAA 1997 are satisfied as the payment is neither a superannuation benefit nor a payment of a pension or an annuity.

In relation to whether the payment relates only to a period of employment when your client was not an Australian resident (paragraph 83-235(d) of the ITAA 1997) requires further examination.

According to the Macquarie Dictionary one of the meanings given to the word 'only' is 'exclusively'. In the context in which 'only' is used in paragraph 83-235(d) of the ITAA 1997, this is the relevant or appropriate meaning.

Foreign termination payments were previously known as 'exempt non-resident foreign termination payments', as defined in former subsection 27A(1) of the Income Tax Assessment Act 1936 (ITAA 1936). A payment met that definition only if it 'related solely to a period of the employment [the terminated employment] during which the taxpayer was not a resident of Australia'.

The Commissioner of Taxation considers the word 'only' in paragraph 83-235(d) of the ITAA 1997 has the same meaning as the word 'solely' in former subsection 27A(1) of the ITAA 1936.

In the Explanatory Memorandum (EM) to the Tax Laws Amendment (Simplified Superannuation) Bill 2006, which introduced the ITAA 1997 provision, it states at paragraph 4.53 that:

Division 83 of the ITAA 1997 contains the provisions related to ... foreign termination payments. The provisions relating to these payments are intended to retain their existing application but may have been redrafted to reflect current drafting approaches.

The EM goes on to say, at paragraphs 4.63 and 4.64, that:

Termination payments related exclusively to overseas employment or service are treated differently to employment termination payments resulting from domestic employment. The treatment of these payments reflects the existing treatment of exempt non-resident foreign termination payments and exempt resident termination payments as contained in the ITAA 1936.

Therefore, in interpreting the conditions in section 83-235 of the ITAA 1997, guidance is provided by case law relating to the ITAA 1936 definition.

In Case 16 / 2000 [2000] AATA 1080; 2000 ATC 243; (2000) 46 ATR 1025, the AAT considered whether a payment 'related solely' to a non-resident period. Senior Member Ettinger was satisfied that 'solely' meant 'exclusively'. Submissions during the case referred to the Shorter Oxford Dictionary in which 'solely' was defined as 'only, merely exclusively'. The Senior Member went on to conclude that because the payment was calculated by taking into account the whole period of the recipient's service, during which the person was a non-resident for only part of the time, the payment could not relate solely to non-resident employment.

Likewise, in Case 1 / 2008 [2008] AATA 64; 2008 ATC 1-000; (2008) 69 ATR 329 ( Case 1 / 2008), Senior Member Hunt of the AAT concluded that in order to show for the purposes of the definition in subsection 27A(1) of the ITAA 1936 that a payment relates 'solely' to a non-resident period of employment, the payment must relate exclusively to a period of employment when the taxpayer was not a resident of Australia. Senior Member Hunt went on to conclude that, 'if a payment is referable partly to a period of employment outside Australia but also partly to period of employment within Australia, it is not solely related to the period when the taxpayer was not a resident of Australia'.

Furthermore, the Senior Member reasoned that the payment attributable to both non-resident and resident periods of employment could not be split: 'It is the characterisation of that whole payment, not its constituent parts, with which the definition is concerned'.

In your client's case the payment was calculated and agreed upon prior to their return to Australia. Further, it is noted that the facts show for the remaining period of the employment contract your client was able to live wherever they wanted and could work for another company.

Notwithstanding the above, and your client's stating they only returned to Australia in the 20YY-ZZ income year prior to the termination date of their employment with the Employer so as not to renew their overseas residential lease, it does not negate the fact that your client's period of employment with the Employer ceased after their return to Australia.

Though your client did not perform any work activities for the Employer subsequent to the termination agreement being signed earlier in the 20YY-ZZ income year, your client is considered to have still been an employee whilst an Australian resident as evidenced by:

(a) the Employer continuing to pay your client a salary until the end of their contract (the termination date; a date later in the 20YY-ZZ by which your client had resumed being an Australian resident);

(b) the termination agreement set out that your client's employment with the Employer had to be terminated around the termination date;

(c) your client's bonus amount was to include a period up to the termination date; and

(d) any holiday entitlements and other entitlements to time off were set off against your client's leave of absence period.

From the above it is clear that your client's period of employment with the Employer extended up the termination date, a date past your client's return to Australia. Therefore, it cannot be considered that the payment relates only to a period of employment when your client was not an Australian resident.

Consequently, the payment your client received is not a foreign termination payment under section 83-235 of the ITAA 1997 as it does not relate exclusively to a period of employment when your client was not a resident of Australia.

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