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Ruling

Subject: Foreign Termination Payment

Question 1

Is the payment you received a tax free termination payment pursuant to section 83-235 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

Question 2

Should the pay as you go (PAYG) withholding amount be refunded to you pursuant to subsection 18-70(1) of Schedule 1 to the Tax Administration Act 1953 (TAA)?

Answer

No

This ruling applies for the following period:

The financial year ended 30 June 2011

The scheme commenced on:

1 July 2007

Relevant facts and circumstances

You commenced employment with a company in Australia.

You resigned from the first company when you entered into a permanent employment contract with a second company overseas.

The place of employment was overseas and a pre-condition of employment was the obtaining of appropriate visas.

You stated that your intention on leaving Australia and taking up employment overseas was to reside there permanently and to retire in the country on reaching retirement age.

You disposed of, or relocated most of your Australian assets on leaving Australia. Your spouse relocated to join you overseas, following the liquidation of all Australian assets.

You were then employed by a third company overseas but in a different city. You took out a lease on a property to live there.

You stated that at no time during the period was any work undertaken in Australia.

Your employment with the third (overseas) company was terminated.

You initiated legal proceedings in Australia against the companies for unpaid entitlements and expenses while you continued to live overseas. You returned to Australia.

You settled your claims against all the parties for an undissected lump sum payment. Upon receipt of this payment, you were to discontinue the proceedings against the companies. The deed of settlement forms part of the scheme under consideration.

A PAYG payment summary - employment termination payment made out to you, showed a taxable component with tax withheld. There was no break down of how the amount was determined.

You did not apply for the refund of the PAYG amount withheld from the company.

You requested a refund of the PAYG withheld in a letter to the ATO.

Your income tax return for the financial year ended 30 June 2011 is required to be lodged under your tax agent lodgement program.

Relevant legislative provisions

Legislation

Income Tax Assessment Act 1997 section 83-235

Income Tax Assessment Act 1997 paragraph 83-235(a)

Income Tax Assessment Act 1997 paragraph 83-235(b)

Income Tax Assessment Act 1997 paragraph 83-235(c)

Income Tax Assessment Act 1997 paragraph 83-235(d)

Taxation Administration Act 1953 Schedule 1 subsection 12-1(1)

Taxation Administration Act 1953 Schedule 1 subsection 12-1(1A)

Taxation Administration Act 1953 Schedule 1 section 12-35

Taxation Administration Act 1953 Schedule 1 section 12-90

Taxation Administration Act 1953 Schedule 1 subsection 18-70(2)

Rulings and Determinations

Taxation Ruling TR 2003/13

Reasons for decision

Question 1

Tax free termination payment - foreign resident period

Summary

The payment you received is a tax free foreign termination payment pursuant to section 83-235 of the ITAA 1997

Detailed reasoning

Section 83-235 of the ITAA 1997 sets out the conditions under which a payment will be a tax free termination payment in respect of a foreign resident period. These are that:

· it was received in consequence of the termination of the taxpayer's employment in a foreign country (paragraph 83-235(a) of the ITAA 1997)

· it is not a superannuation benefit (paragraph 83-235(b) of the ITAA 1997)

· it is not a payment of a pension or an annuity (whether or not the payment is a superannuation benefit) (paragraph 83-235(c) of the ITAA 1997)

· it relates only to a period of employment when the taxpayer was not an Australian resident (paragraph 83-235(d) of the ITAA 1997).

All the four conditions must be met for the payment to be treated as not assessable and not exempt income and hence tax free.

Paragraph 83-235(d) of the ITAA 1997 requires the payment to relate only to a period when the taxpayer was not an Australian resident. According to the Macquarie Dictionary, [Multimedia], version 5.0.0, 01/10/01, 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.

In your case you ceased to be an Australian resident when you departed Australia to take up employment with two companies overseas. You recommenced your Australian residency when you returned to Australia. Consequently you were not an Australian resident while employed overseas.

You settled your claims against the companies for a lump sum payment. The payment was not apportioned into the various claims that you made against the companies. It was a payment in full and final settlement of all your claims against the companies as stated in the proceedings. The payment was in regard to the termination of your employment while you were a foreign resident.

Therefore it can be said that the payment relates only to a period of employment when you were not an Australian resident. As all of the conditions have been met, the payment you received is a foreign termination payment. It is therefore tax free as it is not assessable income and is exempt income pursuant to section 83-235 of the ITAA 1997.

Question 2

Refund of PAYG Withholding

Summary

The PAYG withholding amount of $80,625 will be credited to you when you lodge your tax return for the financial year ended 30 June 2011.

Detailed reasoning

Under section 12-35 of Schedule 1 to the TAA an entity must withhold an amount from salary and wages, commissions, bonuses or allowances it pays to an individual as an employee (whether of that entity or another entity). Section 12-90 of Schedule 1 to the TAA provides that an entity must withhold an amount from an unused annual leave payment it makes to an individual. However, an entity need not withhold an amount under section 12-35 or section 12-90 if the whole of the payment is exempt income of the employee (subsection 12-1(1) of Schedule 1 to the TAA) or is non-assessable non-exempt income of the employee (subsection 12-1(1A) of Schedule 1 to the TAA).

Subsection 18-70(1) of Schedule 1 to the TAA provides that a recipient may apply in writing to the Commissioner for the refund of a PAYG withholding amount if:

· the payer withheld an amount purportedly under Division 12 from a payment made to the recipient

· the amount was paid to the Commissioner in error

· the payer had not become aware that it had been paid to the Commissioner in error

· the payer had already paid the amount to the Commissioner.

Subsection 18-70(2) of Schedule 1 to the TAA provides that the Commissioner must refund the amount if the recipient has quoted their tax file number or ABN and the Commissioner is satisfied that it would be fair and reasonable to refund the amount having regard to:

· the circumstances that gave rise to the withholding obligation

· the nature of the error

· any other matter the Commissioner considers relevant.

The Commissioner could also consider if the recipient would suffer hardship if the amount is not refunded. Hardship is where the recipient requires the money withheld for their immediate living expenses.

An error can include an error of fact or of law. An amount can be withheld in error when an amount is withheld from a payment that is exempt or that is not assessable and it is not exempt income to the recipient.

An amount is determined to have been withheld correctly if the payer withholds the amount correctly according to the circumstances at the time that the payment was made.

If the recipient applies to the payer for a refund the payer must refund to the recipient the amount withheld if it is before the end of the financial year in which the payment is made. The payer can offset the amount refunded against future PAYG withholding tax liabilities to the Commissioner. If the amount is not claimed from the payer before the end of the financial year then the amount can be claimed on assessment by the taxpayer.

Where the recipient identifies an error and requires a refund after the end of the financial year he applies to the Commissioner for it. If the taxpayer is required to lodge a tax return it is usually more expedient to obtain the refund in this way.

In your case, you made an agreement in your deed of settlement to request tax advice in regard to whether the payment you were to receive was a foreign termination payment. PAYG was withheld from the lump sum payment which was paid to you. You contacted the ATO to request a refund of the PAYG withheld.

PAYG tax was not required to have been withheld from this lump sum as we have now determined that it is a foreign termination payment and non-assessable exempt income. As such, you are entitled to a refund of the amount withheld. The PAYG withholding amount will be credited to you when you lodge your tax return for the financial year ended 30 June 2011.

In coming to our decision, we have taken into consideration Practice Statement Law Administration PS LA 2011/11.