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Ruling

Subject: Foreign termination payment

Question

Is the payment received by your client tax-free as a foreign termination payment?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 2009.

The scheme commences on:

1 July 2008.

Relevant facts and circumstances

Your client was previously a resident of country A and was employed by a foreign employer in country A.

Your client's employment was terminated by way of redundancy which gave rise to a payment of X euro in accordance with the termination agreement. Your client signed the agreement on during the 2007-08 income year.

You have stated your client was required to take his balance of time in lieu and annual leave before the effective termination date during the 2007-08 year.

Your client arrived in Australia during the 2007-08 income year on a permanent resident visa. He intended to remain in Australia and considered himself a resident of Australia for tax purposes.

You have confirmed the entire payment of X euro was for genuine redundancy.

You have advised the payment did not include any accrued interest.

You have confirmed that the payment related to services performed entirely overseas and not in Australia.

You have provided the termination agreement which identifies the payment being made by the company rather than a superannuation fund.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 995-1.

Income Tax Assessment Act 1997 Section 82-135.

Income Tax Assessment Act 1997 Subsection 82-150(1).

Income Tax Assessment Act 1997 Subsection 82-130(1).

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).

Reasons for decision

Summary

The payment made to your client for X Euro is classified as a foreign termination payment as all of the requirements have been satisfied.

As such, the whole payment is tax-free.

Detailed reasoning

Employment termination payment

Section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997) states that:

employment termination payment has the meaning given by section 82-130.

Subsection 82-130(1) of the ITAA 1997 declares:

A payment is an employment termination payment if:

(a) it is received by you:

(i) in consequence of the termination of your employment; or

(ii) after another person's death, in consequence of the termination of the other person's employment; and

(b) it is received no later than 12 months after the termination (but see subsection (4)); and

(c) it is not a payment mentioned in section 82-135 (discussed below)

The above three conditions need to be satisfied in order for the payment to be treated as an employment termination payment.

Failure to satisfy any of the three conditions will result in the payment not being considered an employment termination payment. Any termination payments received outside of the 12 months will be taxed as ordinary income at marginal tax rates.

According to the facts, you have stated your client was terminated by way of redundancy. As such, the payment was be made in consequence of the termination of your client's employment and therefore the requirement pertaining to paragraph 82-130(1)(a) is satisfied.

Further, as the termination payment was made within 12 month of their employment being terminated, the requirement pertaining to paragraph 82-130(1)(b) is satisfied.

Employment termination payment exclusions

Section 82-135 of the ITAA 1997 provides that certain payments are not employment termination payments, including:

· payment for unused annual leave or unused long service leave;

· the tax-free part of a genuine redundancy payment or an early retirement scheme payment; and

· reasonable capital payments for personal injury.

As such, this provision excludes payments or benefits that compensate or reimburses the taxpayer for or in respect of the particular injury.

As none of the above apply to the circumstances in the present case, the requirements pertaining to paragraph 82-130(1)(c) are satisfied.

Foreign termination payments

In this case section 83-235 of the ITAA 1997 is relevant as your client was not a resident of Australia for tax purposes during the period of overseas employment. It 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)

The facts show that the payment of X Euro was received by your client in consequence of the termination of their employment during the 2007-08 income year. This payment was not a superannuation benefit and was made to your client as a lump sum.

Consequently, the requirements in paragraphs (a), (b) and (c) of the definition in section 83-235 of the ITAA 1997 have been satisfied.

However, in considering whether the payment of X Euro made to your client as a termination payment satisfies the requirement in paragraph 83-235(d) of the ITAA 1997, it is necessary to ascertain the source of the employment termination payment.

In determining the source of an employment termination payment the normal source and residency rules will apply. The payments can be seen to be closely associated with your employment as they were made in consequence of the termination of your employment. On that basis it seems that the guidelines relating to the source of receipts for services rendered should apply.

Following the High Court decision in Federal Commissioner of Taxation v French (1957) 31 ALJ 689; [1958] ALR 49; (1957) 11 ATD 288; (1957) 98 CLR 398, it is accepted that the source of remuneration under a normal contract of employment or service is generally the place where the duties or services are performed.

Consequently, as an employment termination payment is by its very nature related to employment, the source of such an employment termination payment will be considered to be the place where the duties or services in relation to that employment are performed.

You have stated that the termination payment related to services performed solely in country A and not in Australia. Despite your client arriving in Australia a few days before the effective termination date, the employment termination payment relates to services he performed solely in country A and as such relates only to a period of employment where your client was not an Australian resident. Therefore the requirement in paragraph 83-235(d) of the ITAA 1997 is satisfied.

Therefore, the entire payment of X Euro is a foreign termination payment as defined in section 83-235 of the ITAA 1997.