Edited version of private advice

Authorisation Number: 1051542093453

Date of advice: 9 August 2019

Ruling

Subject: Foreign termination payment

Question

Is the lump sum payment received by the Taxpayer a foreign termination payment?

Answer

Yes

This ruling applies for the following period:

Year ending 30 June 2021

The scheme commences on:

1 July 2017

Relevant facts and circumstances

The Taxpayer worked for a foreign multinational company (the Employer). Their employment was primarily in an overseas country, and was not a tax resident of Australia.

In 2017, the Taxpayer's employment was terminated under a redundancy scheme (the Redundancy Scheme).

The Taxpayer became a resident of Australia for tax purposes on during the 2018-19 income year.

Under the Redundancy Scheme, the Taxpayer is paid monthly redundancy instalments each month (the Termination Payments). These instalments will continue to be paid at this level until 2020.

During this time, the Taxpayer continues to be 'employed' by the Employer under a type of foreign employment contract; however, this is a mechanism to facilitate the payment of the redundancy payments. The Taxpayer is not expected to perform any work for the Employer during the period of the employment contract.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 23AI

Income Tax Assessment Act 1936 section 23AK

Income Tax Assessment Act 1997 Subsection 6-5(3)

Income Tax Assessment Act 1997 Section 6-10(5)

International Tax Agreements Act 1953

Reasons for decision

Summary

The redundancy payments payable each month by the Employer to the Taxpayer on the termination of their overseas employment are not assessable income and are not exempt income as they are received in consequence of the termination of employment in a foreign country and relate only to a period of employment when they were not an Australian resident.

Detailed reasoning

Foreign termination payment

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)

Essentially, section 83-235 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 and that the payment relates only to a period of employment when the person was a non-resident of Australia.

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'.

Tax Laws Amendment (Simplified Superannuation) Bill 2006 (the 2006 Bill) inserted section 83-235 into ITAA 1997. Clause 4.3 of the Explanatory Memorandum (EM) to the 2006 Bill states that:

Schedule 2 also contains a number of provisions to move associated payments from the Income Tax Assessment Act 1936 (ITAA 1936) to the Income Tax Assessment Act 1997 (ITAA 1997). These provisions retain the same effect as under existing law but have been rewritten to reflect the current drafting style and to deliver legislative simplification.

The Commissioner's view is that 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.

The EM to the 2006 Bill, 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.

Essentially, section 83-235 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 and that the payment relates only to a period employment when the person was a non-resident of Australia.

Payment is made in consequence of the termination of employment

The first condition to be met is that there must be a payment that is made in consequence of the termination of the employment of the taxpayer. The phrase 'in consequence of' is not defined in the ITAA 1997. The Commissioner has issued Taxation Ruling TR 2003/13 titled: Income tax: eligible termination payments (ETP): payments made in consequence of the termination of any employment: meaning of the phase 'in consequence of' which discusses the meaning of the phrase.

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.

As further stated by the Commissioner in paragraph 6 of TR 2003/13, there must be:

... 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 (1975) 49 ALJR 370; (1975) 6 ALR 642; (1975) 5 ATR 538; (1975) 75 ATC 4213; (1975) 133 CLR 45 (Reseck) and the Full Federal Court in McIntosh v Federal Commissioner of Taxation (1979) 25 ALR 557; (1979) 10 ATR 13; (1979) 45 FLR 279; (1979) 79 ATC 4325(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 for the purposes of subparagraph 82-130(1)(a)(i) of the ITAA 1997. Hence the payment will be an employment termination payment (ETP) unless the payment is specifically excluded under section 82-135.

On the basis of the information provided, the Taxpayer's employment with the Employer ended in 2017 as a result of redundancy. Although the Taxpayer remains under a type of foreign employment contract, this is intended to facilitate the payment of the Redundancy Payments, and the Taxpayer is not required to perform any work or supply any services to the Employer. It is evident that the amounts per month payable by the Employer are made in consequence of the termination of their overseas employment, as confirmed by paragraph 9.3 of the Redundancy Document.

Therefore, the termination of their overseas employment and the foreign termination payments are all intertwined and connected. If not for the termination of the overseas employment, the Termination Payments would not have been payable.

The Termination Payments will therefore be considered to have been received in consequence of the termination of employment.

Is not a superannuation payment

The Redundancy Payments are not superannuation benefits.

Is not a payment of a pension or an annuity

The Redundancy Payments are neither a pension nor an annuity.

Relates only to a period of employment when the Taxpayer was not a resident

The payments outlined in the Redundancy Document relate solely to the Taxpayer's employment in countries other than Australia.

Conclusion

Consequently, in interpreting the conditions in section 83-235 of the ITAA 1997, it is considered the requirements under this section have been satisfied as the payment has been confirmed as being related solely to a period of the terminated employment during which the taxpayer was not a resident of Australia and not related to any Australian service period.

Accordingly, the amount is tax free and is not assessable income and not exempt income.

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