Private ruling: Foreign termination payment
Published: June 2012
Ruling period: Year ended 30 June 2012
Date scheme commenced: 1 July 2011

Ruling: Q1: Is the payment exempt from tax as a foreign termination payment? | A1: Yes.

Relevant facts and circumstances: You joined Entity 1 in Australia in 19XX. The employment contract of 19XX (as amended in 20XX).) contains the terms and conditions relating to any overall termination of employment with Entity 1 in Australia. Entity 1 was also part of a global entity group (the Entity Group). In 20XX, you commenced your assignment in an overseas country for Entity 2 which was part of the Entity Group. The letter of appointment (dated in 20XX) confirmed that during the overseas assignment, you would continue to be substantively employed by Entity 1 with the anticipated term of the overseas assignment being for up to three years. You were promoted to one of the regions in the Entity Group in 20XX. In the letter Entity 2 confirmed the following: · the Entity Group had approved the inclusion of the Regional Director role into the Corporate Management Group within the Entity Group. · the overseas assignment was extended to 20XX and · you would continue to be employed by Entity 1 during the overseas assignment. Following appointment of a new CEO, the Entity Group's global strategy shifted and you were viewed as not best placed to take the strategy forward in your capacity for the particular region. In 20XX, you were advised your overseas assignment was to terminate at the end of 20XX and that your employment with Entity 1 was also to terminate at the end of your notice period. At the time of being given notice of termination, you were advised that you would be taking up the position in the Region Asia Pacific (on termination of your overseas assignment) and expiring after 30 June 2012 (at the end of the 12 months notice period). You were to be paid a non-contractual termination payment of X amount by Entity 2 as stated in the Draft Comprise Agreement (the Agreement) as a compensation for loss of office relating to your overseas assignment. The Agreement was in reference to the termination of your overseas assignment with Entity 2 and was expected to be executed before or at the time of the termination of the overseas assignment. Entity 2 confirmed the following in their letter dated 20XX: · the claims detailed in the Agreement are referenced solely to the overseas assignment · the X amount is a compensation amount for loss of office relating to the termination of the overseas assignment and is a discretionary non-contractual payment which is not calculated with any reference to salary or service period The proposed termination date of your overseas assignment was to be after 30 June 2011. The copy of the final Compromise agreement together with the copy of the Deed of Release and the copy of the letter from Entity 2 included the following details: The overseas assignment terminated in 20XX. There were no amounts payable on termination of the overseas assignment, in addition to entitlements covered under the Compromise agreement between Entity 2 and yourself. The Comprise agreement at clause 1.1 and clause 2 stipulated the overseas assignment contract was the long term assignment letter issued by Entity 2 and your overseas assignment contract terminated in 20XX . The X amount was stipulated in clause 9 of the Compromise agreement as compensation for loss of the overseas assignment. The payment of X amount less deductions for overseas tax was pursuant to the Compromise agreement. Entity 2 confirmed again that there is no basis for the calculation of this amount. The X amount was arrived at as a matter of negotiation between yourself and the former Director of Human Resources of Entity 2. You had been formally advised of the termination of your overseas assignment. Prior to this there were discussions in relation to the termination of your overseas assignment. The termination payment amount (the X amount) was also negotiated prior to this date and the 12 months notice of termination of employment with Entity 1 (in Australia) was also given to you at that time. You were entitled to the payment (the X amount) as a consequence of the termination of your overseas assignment as it was a negotiated payment paid as compensation for the loss of your overseas assignment. You would therefore have remained entitled to it even if your employment with Entity 1 in Australia had not been terminated. A Deed of Release was entered into between Entity 1 and yourself. The parties agreed that the notice period started and that employment terminated with the employer paying the balance of the your notice period (six months) in lieu. You ceased to perform your duties, but remain employed and remunerated until the termination date. Your employment was terminated as per the Deed of Release and the entitlements were paid as per the Deed of Release for Australian dollars (AU) $Y in lieu of 6 months notice and AU $Z in respect of long service leave entitlement. The Deed of Release at clause 3.3 stipulated that there are no other entitlements or benefits on or in connection with the employment, termination or the matters recited including any entitlement to redundancy pay.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subsection 6-5(2). | Income Tax Assessment Act 1997 Section 6-10. | Income Tax Assessment Act 1997 Subsection 82-10(2). | Income Tax Assessment Act 1997 Subsection 82-10(3). | Income Tax Assessment Act 1997 Subsection 82-10(4). | Income Tax Assessment Act 1997 Section 82-130. | Income Tax Assessment Act 1997 Subsection 82-130(1). | Income Tax Assessment Act 1997 Subparagraph 82-130(1)(a)(i). | Income Tax Assessment Act 1997 Paragraph 82-130(1)(b). | Income Tax Assessment Act 1997 Subsection 82-130(2). | Income Tax Assessment Act 1997 Section 82-135. | Income Tax Assessment Act 1997 Section 82-160. | Income Tax Assessment Act 1997 Section 83-70. | Income Tax Assessment Act 1997 Section 83-75. | Income Tax Assessment Act 1997 Section 83-80. | Income Tax Assessment Act 1997 Section 83-175. | 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(d). | Income Tax Assessment Act 1997 Section 83-240. | Income Tax Assessment Act 1997 Paragraph 83-240(1)(a). | Income Tax Assessment Act 1997 Paragraph 83-240(1)(b). | Income Tax Assessment Act 1997 Paragraph 83-240(1)(e). | Income Tax Assessment Act 1997 Subsection 995-1(1).

Reasons for decision: Summary: The lump sum amount of X amount paid to you by Entity 2 as compensation for loss of office in consequence of the termination of your overseas assignment is not assessable income and is not exempt income because it was received in consequence of the termination of employment service in a foreign country and the payment relates solely to a period of employment when you were not an Australian resident. | Detailed Reasoning - Employment termination payment: The taxation treatment of payments made in consequence of the termination of employment is an employment termination payment (ETP) and defined in the Income Tax Assessment Act 1997 (ITAA 1997)). Subsection 995-1(1) of the ITAA 1997 states: employment termination payment has the meaning given by section 82-130. 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 persons death, in consequence of the termination of the other persons 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. | Detailed Reasoning - Payment is made in consequence of the termination of employment: The first condition to be met is that there must be a payment that is made in consequence of the termination of the employment of the taxpayer. The phrase 'in consequence of' is not defined in the ITAA 1997. The Commissioner has issued Taxation Ruling TR 2003/13 titled: Income tax: eligible termination payments (ETP): payments made in consequence of the termination of any employment: meaning of the phase 'in consequence of' which discusses the meaning of the phrase. 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. As further stated by the Commissioner in paragraph 6 of TR 2003/13, there must be: … 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. The phrase 'in consequence of termination of employment' has been interpreted by the courts in several cases. Of note are the decisions made by the High Court in Reseck v. Federal Commissioner of Taxation (1975) 49 ALJR 370; (1975) 6 ALR 642; (1975) 5 ATR 538; (1975) 75 ATC 4213; (1975) 133 CLR 45 ( Reseck ) and the Full Federal Court in McIntosh v Federal Commissioner of Taxation (1979) 25 ALR 557; (1979) 10 ATR 13; (1979) 45 FLR 279; (1979) 79 ATC 4325 ( McIntosh ). Both Courts' views were that for a payment to be made in consequence of the termination of employment it had to follow on as a result or effect of the termination of employment. Additionally, while it is not necessary to show that termination of employment is the sole or dominant cause, a temporal sequence alone would not be sufficient. The phrase 'in consequence of' and the decisions in Reseck and McIntosh were considered more recently by the Federal Court in Le Grand v Federal Commissioner of Taxation [2002] FCA 1258; (2002) 124 FCR 53; (2002) 195 ALR 194; (2002) 2002 ATC 4907; (2002) 51 ATR 39 ( Le Grand ), where Justice Goldberg stated: I am satisfied that there is a sufficient connection between the termination of the applicant's employment and the payment to warrant the finding that the payment was made in consequence of the termination of the applicant's employment. I am satisfied that the payment was an effect or result of that termination in the sense that there was a sequence of events following the termination of the employment which had a relationship and connection which ultimately led to the payment. Justice Goldberg concluded that the test for determining when a payment is made in consequence of the termination of employment is that which was articulated by Justice Gibbs in Reseck . Thus, for the payment to have been made in consequence of the termination of employment, the payment must follow as an effect or result of the termination of employment. As noted in both paragraphs 6 and 28 of TR 2003/13, there must be 'a causal connection between the termination and the payment even though the termination need not be the [sole or] dominant cause of the payment'. 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 for the purposes of subparagraph 82-130(1)(a)(i) of the ITAA 1997. Where a payment is made at about the same time, or after, a termination of employment, it may generally be accepted that the relevant payment is made in consequence of the termination of employment. In accordance with section 80-5 of the ITAA 1997, the holding of an office is treated as employment for the purposes of section 82-130. Hence, if the holding of an office has ceased, there will be a termination of employment for the purposes of section 82-130. In your case, you commenced to hold an office when you were appointed to the role for your overseas assignment and this role was assessed as a particular grade within the Entity Group's Corporate Management Group. In 20XX, you were promoted to role in a particular region within the Entity Group and this role was included into the Entity Group's Corporate Management Group at a particular higher grade. Your overseas assignment was also extended to 20XX following your promotion and you held this role until the termination of your overseas assignment. Entity 2 also agreed to pay you X amount as a compensation for loss of office relating to your overseas assignment. Pursuant to the final Comprise Agreement signed between yourself and Entity 2, your overseas assignment terminated in December 20XX and you were paid X amount in April 20XX as compensation for the loss of office relating to your overseas assignment. It is evident the X amount (the foreign lump sum) paid by Entity 2 for the loss of office was made in consequence of the termination of your overseas assignment as confirmed by the letters from Entity 2. Therefore, the loss of office, the termination of the overseas assignment and the foreign lump sum payment are all intertwined and connected. If not for loss of office because of the termination of the overseas assignment, the payment would not be payable. The foreign lump sum payment is therefore considered to have been received in consequence of the termination of your office which your held in Entity 2 for the term of your overseas assignment. The payment is received no later than 12 months after termination The second condition for the payment to be an ETP is stated in paragraph 82-130(1)(b) of the ITAA 1997. The payment must be received within 12 months of the employee's termination of employment, unless they are covered by a determination exempting them from the 12 month requirement. On the basis of the information provided by Entity 2, the foreign lump sum payment was paid within 12 months after termination of the overseas assignment and also within 12 months of termination of your employment with Entity 1 in Australia which occurred in March 20XX pursuant to the Deed of Release. The requirement under paragraph 82-130(1)(b) of the ITAA 1997 has therefore been met. | Detailed Reasoning - Not a payment mentioned in section 82-135 of the ITAA 1997: Section 82-135 of the ITAA 1997 provides that certain payments are not ETPs including, (among others): · 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, after considering all the facts provided, it becomes necessary to consider whether the foreign lump sum payment (the X amount ) is an amount that should be excluded from being an ETP as a foreign termination payment (paragraph 82-135(f) of the ITAA 1997). | Detailed Reasoning - Foreign termination payment: Subdivision 83-D of the ITAA 1997 deals with termination payments that arise out of foreign employment. These payments are not employment termination payments (ETPs), 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. (emphasis added) Essentially, section 83-235 requires that for a payment to be tax-free as a foreign termination payment it must be received in consequence of the termination of the taxpayer's employment in a foreign country and that the payment relates only to a period of employment when the person was a non-resident of Australia. Foreign termination payments were previously known as 'exempt non-resident foreign termination payments', as defined in former subsection 27A(1) of the Income Tax Assessment Act 1936 (ITAA 1936). A payment met that definition only if it 'related solely to a period of the employment [the terminated employment] during which the taxpayer was not a resident of Australia'. Tax Laws Amendment (Simplified Superannuation) Bill 2006 (the 2006 Bill) inserted section 83-235 into ITAA 1997. Clause 4.3 of the Explanatory Memorandum (EM) to the 2006 Bill states that: Schedule 2 also contains a number of provisions to move associated payments from the Income Tax Assessment Act 1936 (ITAA 1936) to the Income Tax Assessment Act 1997 (ITAA 1997). These provisions retain the same effect as under existing law but have been rewritten to reflect the current drafting style and to deliver legislative simplification. The Commissioner's view is that the word 'only' in paragraph 83-235(d) of the ITAA 1997 has the same meaning as the word 'solely' in former subsection 27A(1) of the ITAA 1936. The EM to the 2006 Bill, states at paragraph 4.53 that: Division 83 of the ITAA 1997 contains the provisions related to ... foreign termination payments. The provisions relating to these payments are intended to retain their existing application but may have been redrafted to reflect current drafting approaches. The EM goes on to say, at paragraphs 4.63 and 4.64, that: Termination payments related exclusively to overseas employment or service are treated differently to employment termination payments resulting from domestic employment. The treatment of these payments reflects the existing treatment of exempt non-resident foreign termination payments and exempt resident termination payments as contained in the ITAA 1936. In the Administrative Appeals Tribunal decision [2008] AATA 64, 2008 ATC 1-1000; (2008) 69 ATR 329 (Case 1/2008), Senior Member Hunt concluded that in order to show for the purposes of the definition in subsection 27A(1) of the ITAA 1936 that a payment relates 'solely' to a non-resident period of employment, the payment must relate exclusively to a period of employment when the taxpayer was not a resident of Australia. Senior Member Hunt went on to conclude that, 'if a payment is referable partly to a period of employment outside Australia but also partly to a period of employment within Australia, it is not solely related to the period when the taxpayer was not a resident of Australia.' Furthermore, the Senior Member reasoned that the payment attributable to both non-resident and resident periods of employment could not be split. 'It is the characterisation of that whole payment, not its constituent parts, with which the definition is concerned'. As discussed previously, essentially, section 83-235 requires that for a payment to be tax-free as a foreign termination payment it must be received in consequence of the termination of the taxpayer's employment in a foreign country and that the payment relates only to a period employment when the person was a non-resident of Australia. In the present case, the lump sum payment (X amount) was paid by Entity 2 as a payment for compensation for loss of office relating to the termination of your overseas assignment pursuant to the Compromise Agreement. It was a separate payment to; and clearly distinguished from; the termination payments you received pursuant to the Deed of Release payment your received from Entity 1 which were your entitlements for six months in lieu of notice and unused long service leave. Entity 2 has confirmed in their letters that: · the lump sum amount (the X amount) was made to you in consequence of the termination of your overseas assignment and was an amount of compensation for the loss of office relating to the overseas assignment. · the amount is a discretionary non-contractual payment which is not calculated with any reference to salary or service period and referenced solely to your overseas assignment. The settlement of claims clause in the Compromise agreement is a general clause that is included in compromise agreements relating to individuals of your seniority. Consequently, in interpreting the conditions in section 83-235 of the ITAA 1997, it is considered the requirements under this section have been satisfied as the payment has been confirmed by your employer (Entity 2) as being related solely to a period of the foreign employment (the office of your overseas assignment ) when you were not a resident of Australia and the payment is also not related to any Australian service period.

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