Edited version of your written advice

Authorisation Number: 1051305856441

Date of advice: 13 November 2017

Ruling

Subject: Termination payment from overseas employer

Question

Is your redundancy payment from an overseas employer considered to be a genuine redundancy payment under section 83-175 of the Income Tax Assessment Act 1997 (ITAA 1997) and therefore subject to the tax treatment under section 83-170 of the ITAA 1997?

Answer

Yes

This ruling applies for the following periods:

Income year ended 30 June 201E

The scheme commences on:

1 July 201D

Relevant facts and circumstances

You were employed by the Employer as a Manager.

Your employment commenced in 201A and you were employed continuously until you were made redundant in 201D.

The income received in this position was taxed at source overseas and was declared as assessable foreign income in the 201A-1B, 201B-1C and 201C-1D income years.

Your position was made redundant due to a structural re-organisation.

Your severance pay was paid in accordance with overseas Labour Laws and was calculated at 6 months of your Basic salary plus various allowances.

Your primary place of employment was overseas however you remained an Australian resident for tax purposes for the duration of your employment.

You were under 60 years old as at the date of redundancy.

Relevant legislative provisions

Income Tax Assessment Act 1997 s83-170

Income Tax Assessment Act 1997 s83-175

Income Tax Assessment Act 1997 s83-235

Reasons for decision

Summary

Your redundancy payment received from the Employer is considered to be a genuine bona fide redundancy. You are thus entitled to a tax-free component of $xxxxx for your three years of service for the severance pay component.

Detailed reasoning

Foreign termination payments

Subdivision 83-D of the ITAA 1997 deals with termination payments that arise out of foreign employment. These payments are not employment termination payments (ETPs), and are generally tax-free.

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)

Whilst you were based primarily overseas and were employed by an overseas company, you remained an Australian resident for tax purposes. As there is no period in which you were a foreign resident, the above does not apply and your termination payment is assessed as per below.

Genuine redundancy payments

The requirements to be satisfied before any payment made to a person whose employment is terminated qualifies for treatment as a genuine redundancy payment under section 83-175 of the ITAA 1997 are discussed in Taxation Ruling TR 2009/2 Income tax: genuine redundancy payments (TR 2009/2).

With regard to the first requirement set out in subsection 83-175 (1) of the ITAA 1997, the Commissioner of Taxation (the Commissioner) considers that there are four necessary components within this requirement:

● The payment must be received in consequence of an employee's termination.

● That termination must involve the employee being dismissed from employment.

● That dismissal must be caused by the redundancy of the employee's position.

● The redundancy payment must be made genuinely because of a redundancy.

Payment ‘in consequence of’ termination

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 Income tax: eligible termination payments (ETP): payments made in consequence of the termination of any employment: meaning of the phrase 'in consequence of' (TR 2003/13).

While TR 2003/13 contains references to repealed provisions, some of which may have been rewritten, the ruling still has effect as both the former provision under the Income Tax Assessment Act 1936 and the current provision under the ITAA 1997 both use the term 'in consequence of' in the same manner.

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

5. ... a payment is received by a taxpayer in consequence of the termination of the taxpayer’s employment 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 this case, you commenced employment with the Employer in 201A. The Employer underwent a restructure and as a result you were notified in 201D via letter that your position was made redundant.

As part of the redundancy you were advised that the Employer was terminating your employment on two months’ notice with the Employer deciding to make a payment in lieu of notice.

Based on the above, the severance payment was paid in consequence of the termination of your employment with the Employer because if not for the agreement to terminate employment, the payment would not have been made.

‘Dismissal’ from employment

The second condition of a genuine redundancy is that the termination be made as a result of dismissal. In considering this, paragraph 18 of TR 2009/2 requires a decision to terminate employment at the employer's initiative without the consent of the employee.

Further paragraph 19 stipulates in determining whether an employee has consented to their termination requires an assessment of the facts and circumstances of each case.

In your case, the redundancy was solely decided by the Employer. Therefore, it is accepted that you were dismissed from employment by the employer and consequently, the second requirement of a genuine redundancy has been met.

Dismissal caused by the ‘redundancy’

Section 83-175 of the ITAA 1997 requires that the dismissal be caused by redundancy of the employee’s position and not for some other reason. Redundancy must be the primary reason for termination of employment by way of dismissal.

Paragraphs 25 and 28 of TR 2009/2, the Commissioner makes the following comments:

25. An employee’s position is redundant when an employer determines that it is superfluous to the employer’s needs and the employer does not want the position to be occupied by anyone. Accordingly, it is fundamentally the employer’s decision that a position is redundant. On occasion the decision may be unavoidable due to the circumstances of the employer’s operations.

28. A dismissal is not caused by redundancy where personal acts or default are the prevailing or most influential cause for the termination. For example, a person may be dismissed due to unsatisfactory performance or behaviour.

Based on the information provided, it is evident that the Employer made the ultimate decision that your position was redundant due to a change in structure and re-organisation of the company and that was the prevailing reason you were dismissed from your employment. In addition, there is nothing to indicate that the redundancy was caused by personal acts or default on your part.

Therefore, the third requirement of a genuine redundancy has been satisfied.

Further conditions for a genuine redundancy payment

Before a payment that meets the basic redundancy requirement in subsection 83-175(1) of the ITAA 1997 qualifies as a genuine redundancy payment, all other conditions in subsections 83-175(2) and (3) of the ITAA 1997 must be met. These conditions include:

● the payment must be made before a person turns 65 or an earlier mandatory age;

● the termination was not at the end of a fixed period of employment;

● the actual amount that was paid is not greater than the amount that could reasonably be expected to be paid had the parties been dealing at arm’s length;

● there was no arrangement for re-employment with the employer or a related party after the termination date; and

● the payment was not in lieu of superannuation benefits.

Based on the notification letter, it is considered that all the conditions of subsection 83-175(2) and 83-175(3) of the ITAA 1997 are also satisfied.

As it is accepted that your employment was terminated because your position was genuinely redundant, part of the condition under subsection 83-175(1) of the ITAA has been met. Subsection 83-175 (1) also requires that for the payment to be a genuine redundancy payment, it should exceed what you would have received had you voluntarily resigned from your employment. That is, only that part of the payment that exceeds the amount that could reasonably be expected to be received had you voluntarily terminated is treated as a genuine redundancy.

The notification letter states that you were paid a severance payment based on your service time. We accept that you would not have been entitled to this additional payment had you voluntarily left your employment. Therefore, subsection 83-175 (1) of the ITAA 1997 has been satisfied.

Tax-free amount of a genuine redundancy payment

Subsection 83-170(2) of the ITAA 1997 provides that so much of the genuine redundancy payment that does not exceed the amount worked out using the formula prescribed in subsection 83-170(3) of the ITAA 1997 is non-assessable, non-exempt income.

Therefore, in accordance with sub section 83-170 (3) of the ITAA 1997, the formula for working out the tax-free amount is:

Base amount + (Service amount × Years of service)

Years of service is the number of whole years in the period, or sum of periods, of employment to which the payment relates.

For the 201D-1E income year:

● the tax-free part of your severance component will be $xxxxx Australian dollars.

Any amount in excess of the tax-free amount is an employment termination payment and will be taxed accordingly.

Conclusion

Your redundancy payment received from the overseas Employer does not meet the conditions of a foreign termination payment and is therefore considered to be a genuine bona fide redundancy as it satisfies all criteria set out in section 83-175 of the ITAA 1997. The tax-free component of your severance payment is calculated to be $xxxxx.

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