Edited version of your private ruling

Authorisation Number: 1012581046428

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Ruling

Subject: Genuine redundancy

Issue 1

Question 1

Is any part of the Compensation Payment (the Payment) paid on the termination of your employment the tax-free part of a genuine redundancy payment?

Answer:

No.

Question 2

Are the other payments made to you under an Agreement (the Agreement) employment termination payments?

Answer:

No.

Issue 2

Question 3

Are the payments you received on termination of employment under the Agreement taxable in Australia?

Answer:

Yes.

Question 4

Where are the amounts to be declared in your relevant tax return?

Answer:

Not a valid question for a private ruling but advice provided in the body of the 'Detailed reasoning'.

Question 5

Are you entitled to a credit in an overseas country for any tax you have paid in Australia?

Answer:

No.

This ruling applies for the following period

Year ended 30 June 2013

The scheme commences on:

1 July 2012

Relevant facts and circumstances

You were born in an overseas country (the overseas country) and you are less than 55 years of age.

Several years ago you commenced employment in the overseas country for an overseas company (Company A), which is now a subsidiary of another overseas company (Company U).

A copy of your employment contract, which was prepared by Company A, shows amongst other matters:

(a) the contract is between you and the overseas subsidiary;

(b) your initial job title;

(c) you would be initially based in at a site in the overseas country but may be required to work on a temporary or permanent basis at any other locations with mutual agreement. In addition you would be expected to travel both within the overseas country abroad as reasonably required by the overseas subsidiary;

(d) you would be eligible to participate in the overseas subsidiary's employee bonus scheme (the Scheme); and

(e) clauses in relation to 'notice period' and 'termination of employment'.

In the 200X income year you moved to Australia on a temporary 457 visa.

You state Company A agreed to you continuing in your role by working remotely for the overseas subsidiary from an associated company's office in Australia.

You state that you were informed that for commercial reasons you were required to sign a contract of employment in Australia for a fixed period to tie in with the duration of your visa.

Subsequent to your arrival in Australia you signed an Offer (the Offer) with an Australian company (the Company) which you state was the Australian subsidiary of the overseas subsidiary.

In the Offer it stated amongst other matters:

(a) your employment role with the Company;

(b) to whom you would report;

(c) the Australian premises where you would be working from;

(d) your employment in Australia was on a fixed term full time basis commencing on a specified date and ending on a specified date;

(e) if your Visa status changed you were required to notify the Company as soon as possible of the change;

(f) your status with Company A would be recognised for the purposes of continuous service;

(g) clauses in relation to reassignment;

(h) your annual base salary would be in AUD$ and you would to be eligible to participate in Company A's Scheme;

(i) an amount equivalent to X% of your base salary and your sales commissions would be paid into your nominated superannuation fund. If you did not nominate a superannuation fund then the Company will pay the superannuation into the default superannuation fund on your behalf.

(j) the notice period to be given by either you or the Company in relation to termination of employment;

(k) pre conditions to employment with the Company; and

(m) a clause which stated that the contract, i.e. the Offer, replaces, supersedes and cancels all previous arrangements between you and the Company that existed prior to the date of this contract.

You commenced working from the Company's Australian premises with all the work allocated to you being from the overseas subsidiary.

You reported to managers, one in the overseas country (the overseas manager) and another in Australia (the Australian manager)

The overseas manager:

(a) organised and monitored the work that was allocated to you;

(b) conducted your performance reviews;

(c) organised regular meetings; and

(d) authorised leave requests.

The Australian manager processed your leave requests.

Your salary and superannuation payments were processed in Australia by the Company. (You believe the Company was reimbursed for these costs by Company A or the overseas subsidiary).

In the 20XX income year you were granted permanent Australian residency.

In the 20YY income year you contacted the overseas manager as:

(a) your fixed term contract in Australia would expire within a certain period of time; and

(b) request an extension to the contract with a view to returning to the overseas country in another income year.

The overseas manager and an overseas Human Resources manager subsequently advised you that your role would be made redundant. The managers provided you with the reasons why it was not feasible for your role to continue in Australia and that your fixed term contract could only be extended to a particular date.

The Human Resources manager provided you with a breakdown of the redundancy package you would receive if you terminated employment on various dates and that an Agreement would have to be entered into.

In a communication from the overseas manager you were advised amongst other matters that the calculation of your redundancy package was on the basis of the overseas country's terms but as you were paid on the Australian payroll the payment will be from Australia.

You accepted an offer by the Company to extend your contract to a specified date in the relevant income year.

An agreement (the Agreement) was entered between you and the overseas subsidiary which stated:

(a) the overseas subsidiary was authorised to enter into the Agreement for itself and all Group Companies (which included the Company);

(b) your employment would be terminated due to redundancy on a specified date in the relevant income year;

(c) you would be paid in accordance with the Agreement:

(i) a Compensation Payment which comprised amounts for the loss of employment due to redundancy and confidentiality obligations which would be paid by the Company net of income tax in Australia and such other normal deductions as the Company was required to deduct by law;

(ii) a bonus payment in relation to a particular period which was based on your earnings during the period; and

(iii) your accrued salary, superannuation contribution

(d) the Agreement represents the entire agreement between the parties and shall be in substitution for and supersede any prior agreement, arrangement …relating to the subject matter of this Agreement.

You have provided copies of your last payslips and a 'PAYG Payment Summary - Individual non-business' (the Summary) which shows the Company as the payer.

The payslips show your entitlements under the Agreement were paid to you in the relevant income year and the amount of tax withheld from those payments.

The Summary, which is for the period 1 July 20YY to the date that your extended contract finished shows the gross payments made to you and tax withheld.

You did not receive a 'PAYG payment summary - employment termination payment' for the relevant income year.

In the relevant income year you became an Australian citizen.

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 82-10.

Income Tax Assessment Act 1997 Section 82-130.

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

Income Tax Assessment Act 1997 Subsection 82-130(2).

Income Tax Assessment Act 1997 Section 82-135

Income Tax Assessment Act 1997 Paragraph 82-135(c)

Income Tax Assessment Act 1997 Paragraph 82-135(e)

Income Tax Assessment Act 1997 Section 83-170.

Income Tax Assessment Act 1997 Section 83-175.

Income Tax Assessment Act 1997 Subsection 82-175(1)

Income Tax Assessment Act 1997 Subsection 82-175(2

Income Tax Assessment Act 1997 Paragraph 82-175(2)(a)

Income Tax Assessment Act 1997 Paragraph 82-175(2)(b)

Income Tax Assessment Act 1997 Paragraph 82-175(2)(c)

Income Tax Assessment Act 1997 Subsection 82-175(3)

Income Tax Assessment Act 1997 Subsection 82-175(4)

International Tax Agreements Act 1953 Section 4

Convention between the Government of Australia and the overseas country

Reasons for decision

Summary

1. No part of the payments made to you under the Agreement (the Agreement) represent a genuine redundancy payment.

2. The Payment satisfies the conditions in the income tax legislation for it to be treated as an employment termination payment (ETP) and is taxable according to its components and the relevant ETP caps.

3. The other payments made under the Agreement are not ETPs.

4. As you were a resident of Australia at the time of receiving the ETP and the other payments, the Double Tax Agreement between the overseas country and Australia allocates the taxing rights over those payments to Australia. Accordingly those payments are included as assessable income in your Australian tax return for the relevant income year.

5. In accordance with the Convention between the Government of Australia and the overseas country the items of income sourced by a resident of Australia, wherever arising, shall be taxable only in Australia. As a consequence, there is no provision for the allowance of a credit against any tax payable in the overseas country as this would be in contravention of the Agreement between the overseas country and Australia.

Detailed reasoning

Questions 1 and 2

Employment termination payment

A payment made to an employee is an employment termination payment (ETP) if the payment satisfies all the requirements in section 82-130 of the ITAA 1997 and is not specifically excluded under section 82-135.

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

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.

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.

· capital payments for personal injury.

In your case an Agreement (the Agreement) was entered into between you and the overseas subsidiary (which included the Company, as the overseas subsidiary was authorised to enter into the Agreement for itself and all Group Companies).

Compensation Payment

The facts show that under the Agreement you were entitled to a 'Compensation Payment' (the Payment) made up of amounts for the loss of your employment and consideration that you maintain your obligations in relation to confidentiality, intellectual property and restrictive covenants.

In consequence of the termination of your employment

As stated earlier, one of the main conditions for a payment to be an ETP is that the payment is made in consequence of the termination of your employment.

The phrase 'in consequence of' is not defined in the ITAA 1997. However, the courts have interpreted the phrase in a number of cases. Whilst the courts have divergent views on the meaning of this phrase, the Commissioner's view on the meaning and application of the in consequence of test are set out in Taxation Ruling TR 2003/13 Income tax: eligible termination payments (ETP): payments made in consequence of the termination of any employment: meaning of the phrase in consequence of.

While TR 2003/13 considered the meaning of the phrase 'in consequence of' in the context of the eligible termination payments, TR 2003/13 can still be relied upon as both the former provision under the Income Tax Assessment Act 1936 and the current provision under the ITAA 1997 both use the term 'in consequence of' in the same manner. It should be noted that the eligible termination payments ceased to exist from 1 July 2007 and were replaced by employment termination payments.

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.

In paragraph 6 of TR 2003/13, the Commissioner recognises that:

The phrase requires 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.

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.

In your case it is considered that the Payment is an ETP as it:

(a) was made to you in consequence of the termination of your employment as were it not for the termination of your employment you would not have received the Payment;

(b) it was received by you within 12 months of the termination of your employment; and

(c) it is not the type of payment covered by any of the exclusions in section 82-135 of the ITAA 1997.

Other Payments

In relation to the other payments (the 'Other Payments') under the Agreement they are not ETPs as:

(a) they are either specifically excluded from being ETPs under section 82-135 of the ITAA 1997, as relevant in this case, unused annual leave payments and superannuation contributions made on your behalf; or

(b) represent payments for services performed for which payment is not contingent upon a termination of employment.

In view of the above, the Payment is the only entitlement under the Agreement which requires consideration to see if any part of it is a genuine redundancy payment.

Genuine redundancy payment

To determine if any part of the Payment you received under the Agreement constitutes a genuine redundancy payment (GRP), for Australian income tax purposes, all the conditions in section 83-175 of the ITAA 1997 need to be satisfied.

Section 83-175 of the ITAA 1997 states:

(1) A genuine redundancy payment is so much of a payment received by an employee who is dismissed from employment because the employee's position is genuinely redundant as exceeds the amount that could reasonably be expected to be received by the employee in consequence of the voluntary termination of his or her employment at the time of dismissal.

(2) A genuine redundancy payment must satisfy the following conditions:

(a) the employee is dismissed before the earlier of the following:

(i) the day he or she turned 65;

(ii) if the employee's employment would have terminated when he or she reached a particular age or completed a particular period of service - the day he or she would reach the age or complete the period of service (as the case may be);

(b) if the dismissal was not at arms length - the payment does not exceed the amount that could reasonably be expected to be made if the dismissal were at arms length;

(c) at the time of the dismissal, there was no arrangement between the employee and the employer, or between the employer and another person, to employ the employee after dismissal.

(3) However, a genuine redundancy payment does not include any part of a payment that was received by the employee in lieu of superannuation benefits to which the employee may have become entitled at the time the payment was received or at a later time.

Payments not covered

(4) A payment is not a genuine redundancy payment if it is a payment mentioned in section 82-135 (apart from paragraph 82-135(e)).

(bold emphasis added)

The Commissioner has issued Taxation Ruling TR 2009/2 which outlines the Commissioner's view of the requirements to be satisfied for a payment to qualify as a genuine redundancy payment under section 83-175 of the ITAA 1997. TR 2009/2 can be viewed on the ATO website, www.ato.gov.au.

The requirement under subsection 83-175(1) of the ITAA 1997

The first requirement which is specified in subsection 83-175(1) of the ITAA 1997 has four criteria:

· the payment is in consequence of the employee's termination of employment;

· the payment is received by an employee who is dismissed from employment;

· the employee is dismissed because the employee's position is genuinely redundant; and

· the payment exceeds the amount that could reasonably be expected to be received by the employee in consequence of the voluntary termination of his or her employment at the time of the dismissal.

Payment in consequence of termination

The issue of whether the Payment made in the relevant income year was in consequence of the termination of your employment was discussed above. As the Payment was in consequence of your termination of employment, the criterion that the Payment must be received in consequence of a termination is met.

Dismissal from employment

Dismissal from employment usually means that the termination of employment is involuntary on the part of the employee concerned and is instigated by the employer.

Paragraphs 18 and 19 in TR 2009/2 state:

18. Dismissal is a particular mode of employment termination. It requires a decision to terminate employment at the employer's initiative without the consent of the employee. This stands in contrast to employment that is terminated at the initiative of the employee, for example in the case of resignation.

19. Consent in this context refers to the employee freely choosing to agree or to approve the act or decision to terminate employment in circumstances where the employee has the capacity to make such a choice. Determining whether an employee has consented to their termination requires an assessment of the facts and circumstances of each case. Consent may be either expressly stated by the employee or implied by their behaviour or conduct. (bold emphasis added).

In your case, though you wanted to continue your employment and the employer was unable to maintain your role in Australia, it is considered that you were not dismissed from employment when taking into account the other facts and circumstances relating to your employment.

As shown in your contract of employment (the contract) with the Company (the Employer), the Australian subsidiary of an overseas company, your employment was for a fixed term.

It is also noted that you later accepted the Employer's offer to extend the contract until a particular date in the relevant income year.

The above shows that the Employer had, in the contract and the extension, predetermined that your services would only be required for the specified periods of employment.

Accordingly, it is considered that when your employment was terminated it was not a dismissal by the Employer. Rather, the termination was the result of the contract automatically coming to an end on an agreed date as specified in the offer which extended the contract to that date.

As a dismissal did not occur, it follows that subsection 83-175(1) of the ITAA 1997 has not been satisfied as this requirement has not been met.

Notwithstanding the above, it should also be noted that the Payment is precluded from being a GRP under subsection 83-175(2) of the ITAA 1997 as an employee must be dismissed:

(a)…before the earlier of the following:

…

(ii) …the employee's employment would have terminated when he or she reached a particular age or completed a particular period of service - the day he or she would reach the age or complete the period of service (as the case may be); (bold emphasis added)

In your case, your employment was not terminated before the date of the agreed service period as found in the contract extension. Therefore, it is evident that subparagraph 83-75(2)(a)(ii) was not satisfied.

As stated earlier, for any part of a termination payment to be a GRP all the conditions in section 83-175 of the ITAA 1997 must be satisfied. Since some of the conditions have not been satisfied it is not necessary to consider whether the other conditions in section 83-175 of the ITAA 1997 have been satisfied.

In view of the above:

(a) no part of the Payment is a GRP;

(b) section 83-170 of the ITAA 1997, which relates to the tax-free treatment of GRPS and early retirement scheme payments, does not apply to the Payment; and

(c) all of the Payment is to be treated as an ETP.

Questions 3,4 and 5

Taxing rights

You came to Australia in the 200X income year on a temporary 457 business visa. You applied for and were granted permanent residency on in the 20XX income year and subsequently became an Australian citizen in the relevant income year.

As an Australian resident for taxation purposes, in accordance with section 6-5 of the ITAA 1997, you are required to declare your income earned from all sources, whether in or out of Australia, in your tax returns each year.

However, in determining your liability to pay tax in Australia it is necessary to consider not only the Australian domestic income tax laws but also any applicable double tax agreements.

Section 4 of the International Tax Agreements Act 1953 (Agreements Act) incorporates that Act with the Income Tax Assessment Act 1936 (ITAA 1936) and the ITAA 1997 so that all three Acts are read as one. The Agreements Act overrides both the ITAA 1936 and ITAA 1997 where there are inconsistent provisions (except in some limited situations).

Australia has an agreement with the overseas country (i.e. Convention between the Government of Australia and the overseas country). The overseas country agreement is located on the Austlii website (www.austlii.edu.au) in the Australian Treaties Series database. The agreement operates to avoid the double taxation of income received by residents of Australia and the overseas country.

An Article in the overseas country agreement which relates to 'Other Income' allocates taxing rights in relation to income not dealt with by the preceding Articles. Employment termination payments are not dealt with by any of those Articles and therefore they fall within the scope this 'Other Income' Article.

As you were a resident of Australia at the time of receiving the ETP, the 'Other Income' Article allocates a taxing right over the ETP to Australia and accordingly, the taxable component of the ETP is included in your assessable income for the year ended 30 June 2013, under paragraph 6-10(5)(a) of the ITAA 1997.

In relation to the bonus payment made under the Agreement this relates to a particular period of your employment and is based on your earnings during that period.

Paragraph 6 of Taxation Ruling IT 2534 Income tax: taxation treatment of directors fees, bonuses, etc states the Pay as You Earn (PAYE) provisions place an obligation on an employer to deduct tax instalments at the time salary or wages are paid to an employee. This obligation extends to directors fees, bonuses and other emoluments.

Paragraph 4 of IT 2534 further explains that a bonus is taken to have been derived for income tax purposes at the time it is paid or otherwise made available to the employee. The bonus payment was related to your employment and was based on your earnings exercised in Australia. Section 6-5 therefore applies to include it as assessable income. When you are a resident of Australia, the source of the payment is irrelevant as the section includes as assessable income, ordinary income from any source.

An Article in the overseas agreement states that salaries, wages and other similar remuneration (which also includes payments relating to annual leave) derived by a resident of Australia in respect of employment shall be taxable only in Australia unless the employment is exercised in the overseas country.

Foreign tax credit system

Australia has a foreign tax credit system and certain exemptions to provide relief from double taxation. As mentioned above, Australia has also entered into agreements with a number of countries that avoid double taxation by allocating the taxing rights over bilateral income flows between the respective treaty partners. The double tax agreements (DTAs) generally prevail over the domestic law in the case of any inconsistency pursuant to section 4 of the International Tax Agreements Act 1953 and can therefore operate to restrict the imposition of tax under the domestic law.

The distributive rules in the DTAs allocate taxing rights on a 'shall be taxable only' or 'may be taxed' (by one of the countries) basis. The inclusion of the word 'only' in the former case denotes the allocation to one of the countries of an exclusive taxing right over the category of income flow concerned. The latter formula ('may be taxed') does not itself affect the taxing right of the other country although, the Methods of Elimination of Double Taxation Article may require the residence country to give relief by means of a credit or exemption.

The phrase 'shall be taxable only' limits the exercise of a domestic law taxing power to the country concerned: that country has an exclusive taxing right. For the other country to exercise a domestic law taxing right would be in breach of the DTA.

The Other Income' Article in the overseas country agreement states that items of income sourced by a resident of Australia, wherever arising, shall be taxable only in Australia. As a consequence, as with the salaries and similar payments Article, there is no provision for the allowance of a credit against any tax payable in the overseas country as this would be in contravention of the Agreement between the overseas country and Australia.

Conclusion

The Payment is an ETP comprising wholly of a taxable component which is to be included at Question 4 in your relevant income tax return (the return)..

In relation to the rate of tax that applies to the Payment, subsection 82-10(3) of the ITAA 1997 specifies that a taxable component is subject to tax and the rate applied depends on the recipient's age.

As you were below preservation age when the Payment was made, a maximum tax rate of 30% plus Medicare levy applies on the Payment.