Edited version of private advice

Authorisation Number: 1052019345161

Date of advice: 23 August 2022

Ruling

Subject: Foreign employment termination payment

Question 1

Is the payment received by you on termination of employment exempt from tax under subdivision 83-D of the Income Tax Assessment Act 1997 (ITAA 1997) as a foreign termination payment?

Answer

No.

Question 2

Is any part of the payment received by you on the termination of employment a tax-free part of a genuine redundancy payment in accordance with section 83-170 of the ITAA 1997?

Answer

Yes.

This ruling applies for the following period:

1 July 20XX to 30 June 20XX

The scheme commences on:

12 November 20XX

Relevant facts and circumstances

You worked for the Employer from 20XX to 20XX. The Employer has overseas mining operations.

You lived and worked overseas and returned to Australia prior to your employment being terminated.

Your income tax returns indicate you were an Australian tax resident for part of the employment period.

During 20XX you were provided 30 days' notice by the Employer that your employment role was no longer required in the current operational requirements. Your termination of employment with the Employer was on the grounds of redundancy.

The separation package consisted of 1 month pay per year of service.

Severance pay is not provided to an employee for voluntary termination.

There was no arrangement with the Employer or between the Employer and another entity to employ you after the dismissal.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 82-135

Income Tax Assessment Act 1997 section 83-170

Income Tax Assessment Act 1997 section 83-175

Income Tax Assessment Act 1997 section 83-235

We followed these ATO view documents

Taxation Ruling TR 2009/2: Income tax: genuine redundancy payments

Taxation Ruling TR 2003/13 Income tax: employment termination payments (ETP): payments made in consequence of the termination of any employment: meaning of the phrase 'in consequence of'

Reasons for Decision

Employment termination payments

You have received a payment on the termination of your employment from a foreign employer.

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

•         superannuation benefits;

•         unused annual leave or long service leave payments;

•         foreign termination payments covered under Subdivision 83-D of the ITAA 1997; and

•         the tax-free part of a genuine redundancy payment or an early retirement scheme payment.

Accordingly, it is necessary to consider the amount, if any, that will be excluded from being an employment termination payment as either a foreign termination payment or the tax-free part of a genuine redundancy payment.

Foreign termination payment

Subdivision 83-D of the ITAA 1997 deals with termination payments that are received from foreign employment. These payments are not employment termination payments and are generally tax-free.

Section 83-235 of the ITAA 1997 applies to termination payments received where the taxpayer was a foreign resident during the period of foreign employment to which the payment relates. It states that:

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.

For a payment to be tax-free as a foreign termination payment under section 83-235 of the ITAA, it must be received in consequence of the termination of the taxpayer's employment in a foreign country and the payment relates only to a period of employment when the person was a non-resident of Australia.

The payment you received was made in consequence of the termination of your employment with the Employer.

However, at the time of the termination of your employment during 2020, you had been living in Australia. Therefore, the requirement under paragraph 83-235(a) of the ITAA 1997 has not been satisfied.

Further, paragraph 83-235(d) of the ITAA 1997 requires that the payment 'relates only to a period of employment when you were not an Australian resident'.

In this case, the termination payment was calculated by reference to your total period of employment with the Employer when you were both a resident and non-resident of Australia. Subsequently, paragraph 83-235(d) of the ITAA 1997 is not satisfied.

Therefore, the employment termination payment received by you cannot be treated as a foreign termination payment and is not exempt from tax under section 83-235 of the ITAA 1997.

Genuine redundancy

If a payment made in consequence of the termination of a person's employment:

•         does not meet the conditions in Subdivision 83-D of the ITAA 1997

•         is received within 12 months of the termination of employment or is covered by an exemption from the 12 month rule in section 82-130 of the ITAA 1997, and

•         does not otherwise fall within one of the categories of payments that are excluded from being an employment termination payment (of which there is a list in section 82-135 of the ITAA 1997),

it will be an employment termination payment as defined in section 82-130 of the ITAA 1997.

Among the exclusions in section 82-135 of the ITAA 1997, paragraph 82-135(e) provides that the (tax free) part of a genuine redundancy payment calculated under section 83-170 is not an employment termination payment.

A payment made to an employee is a genuine redundancy payment if it satisfies all of the criteria set out in section 83-175 of the ITAA 1997.

In accordance with subsection 83-175(1) of the ITAA 1997, 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 the dismissal.

Paragraph 11 of Taxation Ruling TR 2009/2: Income tax: genuine redundancy payments, outlines the requirements to be satisfied under subsection 83-175(1) of the ITAA 1997. There are four necessary components within this requirement:

•         The payment being tested must be received in consequence of an employee's termination.

•         That termination must involve an employee being dismissed from employment.

•         That dismissal must be caused by the redundancy of the employee's position.

•         The redundancy payment must be made genuinely because of a redundancy.

Payment 'in consequence of' termination

Taxation Ruling TR 2003/13 Income tax: employment termination payments (ETP): payments made in consequence of the termination of any employment: meaning of the phrase 'in consequence of' outlines the Commissioner's view of the phrase 'in consequence of'. The view of the courts of the meaning of the phrase that the Commissioner prefers is stated in paragraph 29 of the ruling as; 'there be a causal connection in the sense that the payment follows as an effect or result of the termination of employment. That is, but for the termination of employment the payment would not have been made to the taxpayer'.

In this instance, your employment was terminated in relation to the decision taken by your Employer that your role was no longer needed in the current operation requirements. As a result of the termination, the Employer provided you with a separation payment. If not for the termination, this payment would not have been made to you. Therefore, the payment was received by you in consequence of the termination of your employment.

Dismissal and redundancy

The term 'dismissal' is not defined in the ITAA 1997 therefore, consistent with basic principles of statutory interpretation, its meaning must be determined according to the ordinary meaning of the words, having regard to the context in which they appear.

Accordingly, the Commissioner's view, as stated at paragraph 18 in TR 2009/2, is that 'dismissal' means 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.

The Commissioner's view is that a genuine redundancy payment can only arise where there is no suitable job available for the employee with the employer, meaning that he or she must therefore be dismissed. TR 2009/2 states:

25. An employee's position is redundant when an employer determines that it is superfluous to the employer's needs and the employer does not want the position to be occupied by anyone. Accordingly, it is fundamentally the employer's decision that a position is redundant. On occasion the decision may be unavoidable due to the circumstances surrounding the employer's operations.

In this case, your role was made redundant by the Employer due to business necessity.

Based on the information provided, the essential components of subsection 83-175(1) of the ITAA 1997 have been satisfied, however there are further conditions that must be met before the payment can be treated as a genuine redundancy. Conditions in subsections 83-175(2) and (3) of the ITAA 1997 require that:

•         the dismissed employee is not older than specified age limits

•         the termination is not at the end of a fixed period of employment

•         the actual amount paid is not greater than the amount that could reasonably be expected had the parties been dealing at arm's length, in the event that the employer and employee are in fact not dealing at arm's length in relation to the dismissal

•         there is no arrangement entered into between the employer and the employee or the employer and another entity to employ the dismissed employee after the termination (paragraph 83-175(2)(c)); and

•         the payment is not in lieu of superannuation benefits.

According to the facts, all conditions in subsections 83-175(2) and (3) of the ITAA 1997 have been met.

Conclusion

It is considered that you were dismissed from employment with the Employer due to your position becoming genuinely redundant.

Subsection 83-170(2) of the ITAA 1997 states that the extent of the genuine redundancy payment that does not exceed the amount worked out in subsection 83-170(3) of the ITAA 1997 is non-assessable and non-exempt income.

Any amount in excess of the tax-free amount will be classed as an employment termination payment, as defined in section 82-130 of the ITAA 1997.