Edited version of your private ruling

Authorisation Number: 1012576919925

Ruling

Subject: Income - Eligible Termination Payment (ETP)

Questions and Answers

1. Will you be a resident of Australia for tax purposes at the time the ETP is made?

No

2. Is the ETP: salary, wages and other similar remuneration derived in respect of an employment for the purposes of the relevant Double Tax Agreement (DTA)?

No

This ruling applies for the following period(s)

Year ended 30 June 2014

Year ended 30 June 2015

The scheme commences on

1 July 2013

Relevant facts and circumstances

You are a citizen of country X.

You are currently an Australian resident for tax purposes.

You were born in country X and came to Australia.

You are married with dependent children.

You developed an illness or injury.

Since that time, you have been on sick leave.

Given that there appears to be very little, if any, prospect of your health improving, you and your spouse and children are planning to move permanently back to Country X.

Once you arrive in Country X you will be a resident of Country X for Country X tax purposes.

You have sold your house in Australia in anticipation of moving back to Country X.

You took a lease of a property in Australia, which will be maintained until your spouse and children join you in Country X.

You plan to go to Country X and arrange accommodation, bank accounts and other necessities, while your spouse packs up the house and your children finish the school year.

Your spouse and children will likely go to Country X a month or two after you.

Once you, your spouse and children leave Australia, you will have no family or assets in Australia except for some shares in listed companies.

You are employed and part of the terms of your employment are that you are required to hold a licence.

In order to obtain such a licence, you must receive an appropriate medical certificate.

Due to being on extended sick leave, you do not hold a current medical certification.

You have recently applied to renew your medical certification but that was refused as a result you will lose your licence.

You will apply to your employer for an ETP.

Any ETP paid, will be received by you after you have permanently moved back to Country X.

Relevant legislative provisions

Income Tax Assessment Act 1936 Subsection 6(1)

Income Taxation Assessment Act 1997 Section 995-1

Reasons for decision

Summary

You will not be a resident of Australia for tax purposes at the time the ETP is made.

The ETP is not salary, wages and other similar remuneration derived in respect of an employment for the purposes of the relevant DTA.

Detailed reasoning

Generally 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.

The terms 'resident' and 'resident of Australia', in regard to an individual, are defined within the tax provisions and provides four tests to ascertain the residency status.

Relevant to your situation are the first two tests which are examined in Taxation Ruling IT 2650 Income Tax: Residency - permanent place of abode outside Australia.

Given regard to your circumstances as a whole and a consideration of the relevant residency tests, it is accepted that after you leave Australia you will not be a resident of Australia for tax purposes.

The DTA allocates taxing rights between Australia and Country X in relation to 'salaries, wages and other similar remuneration derived by a resident of a Contracting State in respect of the employment in which you were engaged.

The term 'salaries, wages and other similar remuneration' is not defined in the Country X DTA. In accordance with the DTA, the term shall, unless the context requires otherwise, have the meaning it has under the laws of Australia, with any tax law meaning prevailing over any other meaning under other laws of Australia.

The terms 'salary', 'wages' and 'remuneration' are not defined in Australia's taxation legislation. Accordingly, it is necessary to consider the ordinary and common law meaning of each of the terms 'salary', 'wages' and 'remuneration'. The Macquarie Dictionary and relevant case law clearly demonstrate that these terms commonly refer to 'pay or reward for work or services rendered' (in particular see Mutual Acceptance Co Ltd v. Federal Commissioner of Taxation (1944) 69 CLR 389; (1944) 7 ATD 506, and Chalmers v. The Commonwealth of Australia (1946) 73 CLR 19).

An ETP is not a payment or reward for work or services rendered. An ETP, even where calculated by reference to the number of years of employment with that employer, is paid in consequence of termination of employment to compensate for the loss of employment with that employer. The performance of services does not trigger the legal obligation to pay an ETP; rather the obligation to pay an ETP only arises because of the termination of the employment.

It is necessary to consider whether the context requires a meaning other than the ordinary and common law meaning of the term 'salary, wages and other similar remuneration'. Relevant context for the purposes of interpreting an Australian tax treaty includes the Commentaries on the OECD Model Tax Convention on Income and on Capital (the OECD Commentary).

Paragraph 2.1 of the OECD Commentary on Article 15 of the Model Tax Convention states that member countries have generally understood the term 'salaries, wages and other similar remuneration' to include 'benefits in kind' received in respect of an employment, such as stock options; the use of a residence or automobile; health or life insurance; and club memberships.

Accordingly, if an ETP paid by an employer is a 'benefit in kind' received in respect of an employment, the context would require an ETP to be treated as 'salary, wages or other similar remuneration' for the purposes the relevant DTA.

'Benefits in kind' referred to in the OECD Commentary are benefits which are provided to employees during their employment in lieu of additional salary or wages.

As explained above, an ETP is not a payment for services provided by an employee; it is a payment compensating for the loss of employment. An ETP is therefore not a 'benefit in kind'.

As a result, the treaty context does not require that the term 'salary, wages or other similar remuneration' takes on a meaning that would include an ETP.

Accordingly, the DTA does not apply to the ETP at issue in your case as it is not salaries, wages or other similar remuneration derived in respect of employment.

Conclusion

You will not be a resident of Australia for tax purposes when you receive the ETP. The ETP is derived in respect to loss of employment not for services rendered and is not salary, wages and other similar remuneration for the purposes of the DTA.