Edited version of private advice

Authorisation Number: 1052128152156

Date of advice: 16 June 2023

Ruling

Subject: Assessable income - non-exempt non-assessable

Question 1

Is your employment income (salary and bonus) derived by you in the relevant financial year, considered non-exempt non assessable?

Answer

Yes.

Question 2

Is the employment termination payment (ETP) derived by you in the relevant financial year non-exempt non-assessable in part?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You are a Country Z citizen

You are not an Australian citizen.

You are not a permanent resident of Australia.

You are a non-resident (foreign resident) for taxation purposes of Australia since your permanent departure from Australia.

Your spouse is an Australian citizen but does not reside in Australia and is a not a tax resident of Australia.

You do not have any intention to apply for permanent residency or to permanently reside in Australia.

You and your spouse were not present in Australia for several months or more in an earlier period and did not previously claim welfare benefits in Australia.

You resided in City Z whilst on assignment with your employer who was Employer X which is a joint venture entity of a number of other businesses.

Previously to and after those dates you have not resided in Australia.

You have resided permanently in Country Z following the completion of your last international work assignment with your employer in Country Y.

You are a tax resident of Country Z.

You and your spouse are both considered tax non-residents of Australia for the whole of the relevant tax year.

As a tax resident of Country Z for domestic tax purposes, you are a resident solely of Country Z and for the purposes of the relevant DTA.

You have worked for Employer Z for a number of years.

During the employment period, the vast majority of your employment was working for Employer Z outside of Australia.

You only worked in Australia for the period several years ago.

For a few years after that period, you were on an international assignment from your employer in Country Z to a related entity of your employer in Country Y.

Your base country employment contract was with Employer Z in Country Z.

As part of a restructure, Employer Z divested the Country Z business and your base country employer changed to Employer Y.

You remained on secondment to Employer Z in Country Y and did not provide any employment services in Australia.

At the end of your secondment to Country Y you repatriated to Country Z and your employment was subsequently terminated.

In the absence of an employer entity in your home location (i.e., Country Z), your employer paid your salary for services in the period of several months.

In the absence of an employer entity in your home location, your employer paid your bonus for services in the period prior to your termination.

This was reported by your employer as foreign income.

In the absence of an employer entity in your home location, Employer Y paid you an Employee Termination Payment.

The employer's redundancy terms provided to you set out the terms of the termination payment with a payment calculated by reference to your entire service period with your employer.

Your severance communications from Employer Y included reference to the company's redundancy policy being based upon total years of service with them worldwide.

You have correspondence from Employer Y explaining that the severance payment amount was determined in accordance with total global 'years of service and final salary'.

All payments were made in Australian dollars into an Australian bank account.

Whilst working outside of Australia you were employed by the host country entity and the contract outlines that it is governed and construed in accordance with the laws of Country Y.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 6-10

Income Tax Assessment Act 1997 section 10-5

International Tax Agreements Act 1953

REASONS FOR DECISION

Salary and bonus payment

Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that where you are a resident of Australia for taxation purposes, your assessable income includes income gained from all sources, whether in or out of Australia. However, where you are a foreign resident, your assessable income includes only income derived from an Australian source.

In Nathan v. Federal Commissioner of Taxation 25 CLR 183 at 189 190 it was recognised that the ascertainment of the actual source of a given income is a practical, hard matter of fact.

As stated by Bowen J in Federal Commissioner of Taxation v. Efstathakis (1979) 9 ATR 867; 79 ATC 4256 (the Efstathakis Case) at ATR 870; ATC 4259, to determine source:

... the answer is not to be found in the cases, but the weighing of the relative importance of the various factors which the cases have shown to be relevant.

In the Cam, French and Efstathakis cases it was held that the source of the income was where the taxpayer performed the services:

Commissioner of Taxation v Cam & Sons Ltd (1936) 36 SR (NSW) 544 (the Cam Case) - concerned wages paid to seamen employed to work on trawlers. They were engaged and paid in New South Wales, but most of their services were provided outside state territorial waters. Jordan CJ, with whom Street and Bavin JJ agreed in the Cam Case at 548, held that:

Where income is derived from wages or salary, again the source has several factors. Personal exertion may be involved in negotiating and obtaining the contract of employment, in performing the stipulated services, and obtaining payment for them.... [I]n the ordinary case of the employment of a seaman... where there is nothing special, either in the circumstances of the contract of employment or in the payment, and where the work is both done and paid for in the ordinary course, the all-important factor is the doing of the work; and the contract of employment and the payment are relatively insignificant and formal elements. But this is not necessarily the case with respect to all wages or salary. In the case of an appointment to a sinecure, the engagement and the payment may be the only significant factors

Accordingly, the wages had to be apportioned based on 'working time in and out of New South Wales territorial waters.

Federal Commissioner of Taxation v French (1957) 98 CLR 398 (the French Case) - the taxpayer was employed as an engineer by the Australian company CSR which carried on business in New South Wales and, relevantly, New Zealand. Each year, the taxpayer spent two or three weeks in New Zealand as inspecting engineer for the company in its New Zealand business. At all other times, the taxpayer performed services for the company in New South Wales. A majority of the High Court held that the wages paid in respect of the period in New Zealand were sourced in New Zealand, because this is where the services were performed, this being the most important factor in Mr French's situation (see French Case at 411, 417 and 422).

However, the Court also made comments to the effect that this decision did not necessarily determine what would be most important in every personal services contract. For example Dixon CJ in the French Case at 405 in relation to a director and at 406 in relation to an accountant procured to achieve a specified result, and Kitto J at 417-418 refers to a situation where remuneration was payable regardless of service, and to a person who worked sometimes overseas who was paid while on sick leave, and to where a period of overseas service might in substance be merely incidental to Australian service.,

And

the Efstathakis Case - the taxpayer was a Greek National resident in Australia who was employed by the Greek Government as a secretary/typist in the Greek embassy. She had applied for the job in Greece, and the post had been gazetted there. She performed the services in Australia. Her net pay was compiled in Greece, a cheque was drawn on a bank in Greece and then received in Australia. A condition of her employment was that she could be posted anywhere in the world, but she would probably have resigned, as she had put down roots in Sydney, having child there, buying a unit, and marrying a naturalised Greek Australian. Bowen CJ, with whom Brennan and Deane JJ agreed, held that the wages paid to the taxpayer had an Australian source. His Honour considered the above factors, but gave most weight to 'the residence of the taxpayer in Australia and the facts that the services were performed and payment received [in Australia]... The payment of remuneration depended upon actual performance of the services (the Efstathakis Case at ATR 871; ATC at 4260).

As per the above cases, cases concerning the provision of personal services are decided by weighing up the outcomes of the consideration of the following three factors (with the weighting given to each determined by their relevance to the case):

•                     the place where the contract of employment is entered into,

•                     the place where remuneration is payable, and

•                     the place where the services are performed.

In your situation, you were employed by an Australian entity and carried out employment services overseas.

As mentioned above, in the Cam, French and Efstathakis cases it was held that the source of the income was where the taxpayer performed the services. In those cases the place where the taxpayer was located was the same as where the taxpayer did the work, where it was given effect to and where the outcome of the work occurred

Therefore, the income you earned from XXXX did not have an Australian source.

In determining your liability to pay tax in Australia it is necessary to consider any applicable double tax agreements. Sections 4 and 5 of the International Tax Agreements Act 1953 (Agreements Act) incorporate that Act with the ITAA 1936 and the ITAA 1997 and provide that the provisions of a double tax agreement have the force of law.

Article X of the DTA between Australia and Country Z deals with employment income and states, in part:

Subject to the provisions of Articles 16, 18 and 19, salaries, wages and other similar remuneration derived by a resident of a Contracting State in respect of an employment shall be taxable only in that State unless the employment is exercised in the other Contracting State. If the employment is so exercised, such remuneration as is derived therefrom may be taxed in that other State.

Article X gives Country Z the taxing rights to the salary and bonus payment.

The salary and bonus income you received is excluded from your assessable income on the basis it is foreign sourced income received by a foreign resident.

Employment termination payment

Section 10-5 of the ITAA 1997 lists section 82-10 of the ITAA 1997 as a provision which includes statutory income in assessable income.

Further, subsection 6-10(5) of ITAA1997 states:

(5) If you are a foreign resident, your assessable income includes:

a. your statutory income from all Australian sources; and

b. other statutory income that a provision includes in your assessable income on some basis other than having an Australian source.

On the basis that you received the termination payment as a foreign resident of Australia, to determine the reportable ETP for Australian tax purposes requires assessment of whether the whole or part of the payment has an Australian source.

As there are no statutory sourcing rules for ETPs in either Income Tax Assessment Act 1936 or the ITAA 1997, the source of an ETP must be determined in accordance with case law. Reference to the general legal principle for determining the source of income can be made from Nathan v FCT (1918) 25 CLR 183 where it was stated that the source of income in a particular case is "a practical hard matter of fact".

It requires that one look beyond the mere form of a transaction to its reality in terms of yielding income.

For example, as mentioned above, in FCT v French (1957) 98 CLR 398 it was established that income from the provision of services is generally sourced at the place where services are performed.

Taxation Ruling TR 2001/13 discusses the Commissioner's views about interpreting double tax agreements.

Paragraph 104 of TR 2001/13 provides that the OECD Model Tax Convention and Commentary will often need to be considered in interpreting double tax agreements.

The OECD Commentary provides that the facts and circumstances of the payment should be considered to determine the source of the payment. A factor specifically provided in relation to the sourcing of severance payments is where the payment is calculated by reference to the period of past employment with the employer as opposed to a payment for loss of future compensation.

In this regard, paragraph 2.7 of the OECD Commentary concerning Article 15 and taxation of employment income states as follows:

A different situation is that of a severance payment (also referred to as a "redundancy payment") which an employer is required (by law or by contract) to make to an employee whose employment has been terminated. Such a payment is often, but not always, calculated by reference to the period of past employment with the employer.

The OECD Commentary goes on to provide that:

Absent facts and circumstances indicating otherwise, such severance payment should be considered to be remuneration covered by the Article for the last 12 months of employment, allocated on a pro-rata basis to where the employment was exercised during that period; as such it constitutes remuneration derived from that employment for the purposes of the last sentence of paragraph 1.

In your situation, there are facts and circumstances that show that the ETP you received was based on your entire period of employment with Employer Z. Therefore, you are required to apportion the ETP based on the time you were in Australia working.

The portion of the ETP which represents the period you were working in Australia has an Australian source and is assessable in Australia.

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