Edited version of private advice

Authorisation Number: 5010077634187

Date of advice: 13 September 2021

Ruling

Subject: Foreign income

Question 1

Is a portion of the Employment Termination Payment (ETP) received by you considered foreign sourced under domestic law?

Answer

No.

Question 2

As a temporary resident taxpayer under section 995-1 Income Tax Assessment Act 1997 (ITAA 1997), is the foreign sourced portion of the ETP non-assessable non-exempt income (NANE) in accordance with section 768-910 ITAA 1997?

Answer

No.

Question 3

Without prejudice to the above, on the premise that you are considered a resident only of Country Z for the purposes of the Australia/ Country Z Double Tax Agreement (DTA) in accordance with Article 4 of this DTA, is the foreign sourced portion of the ETP not taxable in Australia under Article 14 (Income from Employment)?

Answer

Yes.

This ruling applies for the following period periods:

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You are a temporary resident of Australia.

You are a Country Z and Country B citizen and you are not an Australian citizen or permanent resident of Australia.

Your spouse is a Country Z citizen and is not an Australian citizen, or permanent resident of Australia.

You resided in Australia. Previously to that you have not resided in Australia for any period of your life other than occasional business trips and holidays.

You do not intend to remain in Australia permanently and will return to Country Z in the future. At this time, you are considering a permanent departure and return to Country Z.

You are considered to have remained a tax resident of Country Z and have a letter to confirm that status from the Country Z tax authority.

As a tax resident of both Australia and Country Z for domestic tax purposes, you are considered to be a resident solely of Country Z for the purposes of the Australia/Country Z DTA, in accordance with Article 4 of the DTA.

You have worked for Employer Z for many years through to the date of your employment ceasing.

Of the total employment period the majority of your time was spent working for Employer Z in Country Z.

In addition, you spent several years on assignment in Country B and Country C during your employment.

Before moving to Employer Z Australia, you worked for Employer Z in Country Z prior to the divestment of that business by Employer Z.

You were then offered a position with Employer Z.

Your employment offer and subsequent severance communications from Employer Z Australia included reference to the company's redundancy policy being based upon total years of service with Employer Z worldwide.

You have correspondence from Employer Z Australia explaining that the severance payment amount was determined in accordance with total global 'years of service and final salary'.

Country Z will seek to tax the entire severance payment (subject to the availability of potential foreign tax credits in accordance with the DTA).

The termination payment 2.1a is the equivalent of Employer Z Australia's standard redundancy payment based on your years of service and includes payment in lieu of notice.

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 83-235

Income Tax Assessment Act 1953 subsection 4(2)

International Tax Agreements Act 1953

Reasons for decision

Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that 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.

Section 83-235 of the ITAA 1997 provides that a payment received by you is not assessable income and is not exempt income if it was received in consequence of your employment in a foreign country, it is not a superannuation benefit, and it relates only to a period of employment when you were not an Australian resident.

In this case the termination payment related both to your overseas service (Country Z, Country B and Country C) and Australian service. Therefore section 83-235 does not apply to exempt the payments in their circumstance and as such they are taxable under domestic law.

Section 768-910 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that ordinary income derived from a foreign source (excluding employment related income and capital gains on shares and rights acquired under employee share schemes) and is exempt from income tax in Australia when derived by a temporary resident in Australia.

In your case the ETP was paid to you by Employer Z in Australia, therefore it is not foreign sourced for domestic law purposes and therefore not NANE under section 768-910 of ITAA 1997.

In determining liability to Australian tax on income received by a non-resident, it is necessary to consider both Australian domestic income tax laws and any applicable double tax agreement. For this purpose, section 4 of the International Tax Agreements Act 1953 (ITAA 1953) incorporates that Act with the ITAA 1936 and the Income Tax Assessment Act 1997 (ITAA 1997) so that they are read as one. Subsection 4(2) of the ITAA 1953 provides that in the case of any inconsistency with the provisions contained in the Assessment Acts, other than for Part IVA of the ITAA 1936 or an Act imposing Australian tax, the provisions of the ITAA 1953, prevail (refer also to paragraphs 5 and 6 of Taxation Ruling TR 2001/13 Income tax: Interpreting Australia's Double Tax Agreements).

Article 14 of Australia/ Country Z Double Tax Agreement (DTA) is the relevant article.

As per Thiel v Commissioner of Taxation [1990] HCA 37; (1990) 90 ATC 4717, at 4727 and 4720 the High Court accepted that the OECD Model's official Commentaries may be relevant to the interpretation of DTAs based on the OECD Model.

Relevantly the Commentary to paragraph 1 of Article 15 Income from Employment in paragraph 2.7 of OECD Model Tax Convention on Income and on Capital (condensed version as it read on 21 November 2017) states:

A different situation is that of a severance payment (also referred to as a 'redundancy payment') which an employer is required (by law or by contract) to make to an employee whose employment has been terminated. Such a payment is often, but not always, calculated by reference to the period of the past employment with the employer. Absent facts and circumstances indicating otherwise, such a severance payment should be considered to be remuneration covered by the Article for the last 12 months of employment, allocated on a pro-rata basis to where the employment was exercised during that period; as such it constitutes remuneration derived from that employment for the purposes of the last sentence of paragraph 1.

Paragraph 2.7 provides that 'absent of the facts and circumstances' the amount should be apportioned over where service was performed in the last 12 months. However, in this case the facts and circumstances are known - therefore taking an approach of apportioning over the last 12 months of service is not appropriate.

The apportionment should be calculated based on where the service was performed. You have provided that the payment was based on your global service for Employer Z. Accordingly, the payment should be apportioned based on how many days of service the payment was received and how many of those were in Australia and how many were performed in the Country B and Country C. Hence, you should use this information as the basis for apportionment.

You can claim foreign tax credits in Country Z for the part of the payment that is assess here in Australia (as per 'Elimination of Double Taxation Article of the DTA).