Private ruling: Genuine redundancy payment
Published: September 2013
Ruling period: 1 July 2012 to 30 June 2013
Date scheme commenced: 1 July 2012

Ruling: Q1: 1. Does the payment made to you on termination of employment when you were a non-resident of Australia have an Australian source? 2. Is the payment made to you on termination of employment exempt from tax under subdivision 83-D of the ITAA 1997 as a foreign termination payment? 3. Is the payment made to you on termination of employment assessable as an employment termination payment under subsection 82-130(1) of the Income Tax Assessment Act 1997 (ITAA 1997)? 4. Is any part of the payment made to 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? Advice/Answers: 1. Yes. 2. No. 3. Yes. 4. Yes.


Relevant legislative provisions: Income Tax Assessment Act 1936 Section 27F. | Income Tax Assessment Act 1997 Subsection 6-5(3). | Income Tax Assessment Act 1997 Subsection 6-10(5). | 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 Paragraph 82-130(1)(a). | Income Tax Assessment Act 1997 Paragraph 82-130(1)(b). | Income Tax Assessment Act 1997 Paragraph 82-130(1)(c). | 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(e). | Income Tax Assessment Act 1997 Section 82-140 | Income Tax Assessment Act 1997 Section 82-145 | Income Tax Assessment Act 1997 Section 82-150 | Income Tax Assessment Act 1997 Section 82-155 | Income Tax Assessment Act 1997 Section 83-170. | Income Tax Assessment Act 1997 Subsection 83-170(2) | Income Tax Assessment Act 1997 Subsection 83-170(3). | Income Tax Assessment Act 1997 Section 83-175. | Income Tax Assessment Act 1997 Subsection 83-175(1). | Income Tax Assessment Act 1997 Subsection 83-175(2). | Income Tax Assessment Act 1997 Subsection 83-175(3). | Income Tax Assessment Act 1997 Subsection 83-175(4). | 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(b). | Income Tax Assessment Act 1997 Paragraph 83-235(c). | Income Tax Assessment Act 1997 Paragraph 83-235(d). | Income Tax Assessment Act 1997 Section 83-240.

Reasons for decision: Summary: You received the redundancy payment (the payment) when you were a non-resident of Australia. The payment has an Australian source and therefore is assessable income. The payment is not exempt from tax as a termination payment from foreign employment. The payment is an employment termination payment as it was made in consequence of your termination of employment. However, as explained under the heading ' Tax-free part of a genuine redundancy payment ', part of the payment is considered to be tax-free and therefore is not an employment termination payment. The remainder is an employment termination payment and a life benefit termination payment comprised entirely of a taxable component - untaxed element. You may be eligible for a foreign income tax offset as the payment is taxable both in Australia and in the second foreign country. | Detailed Reasoning - Residency status: On the basis of the facts provided, you were a resident of the second foreign country and therefore a non-resident of Australia at the time you received the payment on termination of your employment with the Company. | Detailed Reasoning - Assessable income of a non-resident: Subsections 6-5(3) and 6-10(5) of the Income Tax Assessment Act 1997 (ITAA 1997) deal with the assessable income of a non resident. They state the following: 6-5(3) If you are a foreign resident, your assessable income includes: (a) the ordinary income you derived directly or indirectly from all Australian sources during the income year; and (b) other ordinary income that a provision includes in your assessable income for the income year on some basis other than having an Australian source. 6-10(5) If you are a foreign resident, your assessable income includes: (a) your statutory income from all Australian sources; and (b) other statutory income that a provision includes in your assessable income on some basis other than having an Australian source. Therefore the assessable income of a non-resident taxpayer includes income from all Australian sources and other income that the Australian tax law specifically includes. Ordinary income is dealt with under section 6-10 of ITAA 1997, described as income according to ordinary concepts which may be assessable income, for example, salary and wages. Statutory income is dealt with under section 6-10 of ITAA 1997. Subsection 6-10(2) of ITAA 1997 describes statutory income as amounts which are not ordinary income but which are included in assessable income provisions about assessable income. Employment termination payments fall within this category and are listed in section 10-5 of the ITAA 1997. In your case, we are only concerned with statutory income because the payment in question was made to you as a consequence of your termination of employment with the Company. The payment which is the subject of the private ruling is the redundancy payment equal to Z month's salary paid under a Deed of Separation and Release between you and the Australian subsidiary company. | Detailed Reasoning - Taxation of termination payments from foreign employment: Termination payments that arise out of foreign employment are dealt with under Subdivision 83-D of the ITAA 1997. There is no provision in the ITAA 1997 to apportion an employment termination payment between a taxpayer's period of foreign service and Australian service. Therefore the payment relates to the whole of the employment service period recognised by the employer. In your case, on the basis of the tax treatment of the payment by the Company, the redundancy payment clearly relates to the whole of your service period with the Company (that is, the total complete years of service) which covered your period of residency as well as a period of non-residency. Under sections 83-235 and 83-240 of the ITAA 1997 termination payments arising out of foreign employment are tax free if, among other conditions, · they relate only to a period when the taxpayer was not an Australian resident (section 83-235 of the ITAA 1997); or · they relate only to a period when the taxpayer was an Australian resident (sections 83-240 of the ITAA 1997). As you were not an Australian resident when your employment terminated, it is only necessary to look at section 83-235 of the ITAA 1997. It states: 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. In relation to paragraph (a), clearly the payment was made in consequence of the termination of your employment in the second foreign country. Therefore this condition has been met. The requirements of paragraphs (b) and (c) have been met. This is because the payment was not made from a superannuation fund and is not a payment of a pension or annuity. The condition under paragraph (d) requires that the payment relates to a period when you were not an Australian resident for tax purposes. As stated above, the calculation of the tax treatment of the redundancy payment relates to the whole of your service period with the Company which covered your period of residency as well as a period of non-residency. The calculation is explained below under the heading ' Tax-free part of a genuine redundancy payment ' As you commenced employment more than ten years ago, clearly, the payment is made for the period starting from then and ending on the date of your termination of employment. Therefore the payment was not made only in relation to your employment as a non-resident as it also covers your period of employment in Australia. As a result the requirement in paragraph (d) of section 83-235 of the ITAA 1997 has not been satisfied. Consequently, the payment is not exempt from tax under subdivision 83-D of the ITAA 1997. | Detailed Reasoning - Source of income: ATO interpretative Decision 2010/110: Income Tax - Assessability of an employment termination payment paid to a foreign resident (ATO ID 2010/110) deals with a case where a foreign resident for Australian tax purposes was employed in Australia by an Australian resident employer. The taxpayer worked in Australia for a period and then worked for the same employer in the United Kingdom (UK) on secondment. On termination of employment the taxpayer received an employment termination payment (ETP). In relation to source of income ATO ID 2010/110 states in part: Therefore the most important elements in determining the source of the ETP in this case are the employer's decision to terminate the employment and the consequent legal liability of the employer to pay an ETP to the taxpayer under the employment contract. The Australian employer's decision to terminate the employment contract occurred in Australia, the employment contract which entitled the taxpayer to an ETP was entered into in Australia and the Australian employer paid the ETP from Australia. The fact that the taxpayer was in the UK performing services pursuant to the employment contract when they received notification of the termination of their employment is not a significant factor in determining the source of the ETP. … Accordingly, the source of a payment made as a consequence of the termination of employment will not necessarily be the same as the source of salary or wages from the performance of services during the period of employment. In the case of this ETP, as the most important factors that gave rise to the payment of the ETP occurred in Australia, the source of the ETP is Australia. Accordingly, the taxable component of the life benefit ETP is included in the taxpayer's assessable income under paragraph 6-10(5)(a) of the ITAA 1997. The case discussed above is similar to yours. You have claimed that you were actively employed by the overseas company with 100% of your costs being borne by the overseas company. Further, you have provided inter-company invoices for X months. While your salary may have been funded by the overseas company, the Deed of Separation and Release (the Deed) is between you and the Australian company which based on its Australian Business Number (ABN) clearly is a company registered in Australia. There is no mention in the Deed about overseas company, therefore, clearly, the payment cannot be said to have been sourced in the overseas country. Secondly, the employment contracts in relation to your employment in the first foreign country (contract 1) and the second foreign country (contract 2), both state that the duration of your assignment is a particular number of years. Contract 2 states that during that period your existing Australian contract remains in force and your role is on an assignment basis. Further, they state that during that time you will remain an employee of the Australian company. Both contracts refer to your employment overseas as an 'assignment'. The relevant definitions of the term 'assignment' in The ' Macquarie Dictionary , online, are 1. something assigned, as a particular task or duty; and 2. the act of assigning. Based on the meanings quoted above, 'assignment' would mean that you were given a task to be performed overseas by the Australian company. Therefore you were an employee of the Australian company. Contract 2 states that if termination is initiated by the company you will be eligible for a separation payment equal to Y times your Australian base salary. This is what you received on termination of your employment. In your case the employment contract which entitled you to an ETP (discussed below) was entered into in Australia and the Australian employer paid the ETP from Australia. A clause of the Deed states in that the Deed supersedes all previous understandings and negotiations on that subject matter. As a result the Deed has superseded all other understandings and is the final say on the matter at hand. Therefore clearly all of the above indicate that you were an employee of the Australian company. Further, the payment was made by the Australian company and therefore the payment has an Australian source. Therefore the ETP is assessable under paragraph 6-10(5)(a) of the ITAA 1997. There is no distinction in the tax treatment of an ETP whether paid to a resident or a non-resident of Australia. | Detailed Reasoning - Is the payment an employment termination payment?: A payment made to an employee is an employment termination payment if the payment satisfies all the requirements in section 82-130 of the Income Tax Assessment Act 1997 (ITAA 1997), and is not specifically excluded under section 82-135 of the ITAA 1997. Subsection 82-130(1) of the ITAA 1997 states: 82-130(1) 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. The phrase in consequence of is not defined in the ITAA 1997. However, the words have been interpreted by the courts in several cases. The Commissioner has also issued Taxation Ruling TR 2003/13 (TR 2003/13) which discusses the meaning of the phrase. | Detailed Reasoning - Payment is made in consequence of the termination of employment: The first condition to be met is that there must be an employment termination payment that is made in consequence of the termination of employment of the taxpayer. The phrase 'in consequence of' is not defined in the ITAA 1997. However, the Commissioner has issued Taxation Ruling TR 2003/13 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. 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. Hence the payment will be an employment termination payment unless the payment is specifically excluded under section 82-135. You were employed by the Australian branch of the Company, (the Employer) and commenced employment on more than ten years ago. Your employment was in accordance with the terms and conditions set out in a written offer of employment as varied and supplemented by expatriate assignment agreements from time to time (contract). The payment has been classified as a redundancy payment by the employer in the Deed of separation and Release (the Deed). Therefore it is evident that the payment was made in consequence of your termination of employment. The payment would not be made if there was no termination of employment. The termination of employment and the payment are intertwined and connected. Therefore the requirement of subparagraph 82-130(1)(a) of the ITAA 1997 has been met. | Detailed Reasoning - The 12 month rule set out in paragraph 82-130(1)(b) of the ITAA 1997:: To qualify as an employment termination payment, the payment must be received 'no later than 12 months after' the termination of the taxpayer's employment (paragraph 82-130(1)(b) of the ITAA 1997). In this case the termination of employment occurred in the relevant income year and the payment was made within 12 months of the termination. Therefore this condition is satisfied. Therefore the requirement of subparagraph 82-130(1)(b) of the ITAA 1997 has been met. | Detailed Reasoning - Payments excluded from being employment termination payments: Paragraph 82-130(1)(c) of the ITAA 1997 requires that an employment termination payment is not a payment under section 82-135 of the ITAA 1997. Section 82-135 of the ITAA 1997 includes payments such as pensions, foreign termination payments, unused annual leave and unused long service leave and the tax-free part of genuine redundancy payments or early retirement scheme payments. From the information provided, it is clear that the payment does not include any payment mentioned in section 82-135 of the ITAA 1997, with the exception of subsection 82-135(e) of the ITAA 1997. As explained below in the section titled ' Tax-free part of a genuine redundancy payment ', part of the payment is considered to be tax-free and therefore is not an employment termination payment. As all the three conditions of Subsection 82-130(1) of the ITAA 1997 have been satisfied, part of the payment is an employment termination payment. We will now consider if any part of the payment is a tax free part of a genuine redundancy payment. | Detailed Reasoning - Genuine redundancy payment: A payment made to an employee is a genuine redundancy payment (GRP) if it satisfies all criteria set out in section 83-175 of the ITAA 1997. Section 83-175 of the ITAA 1997 replaces former section 27F of the Income Tax Assessment Act 1936 (ITAA 1936) where such payments were referred to as bona fide redundancy payments. The first criteria to be satisfied (subsection 83-175(1) of the ITAA 1997) is: Ÿ that the payment is received by an employee who is dismissed from employment because the employee's position is genuinely redundant; and Ÿ that 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. Subsection 83-175(2) of the ITAA 1997 requires that all of the following conditions must be met: Ÿ The employee is dismissed before the earlier of: Ÿ the day he or she turned 65; or Ÿ 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 that age or complete the period of service (as applicable). Ÿ If the dismissal was not at arms length the payment must not exceed the amount that could reasonably be expected to be made if the dismissal was at arms length. Ÿ 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 the dismissal. Subsection 83-175(3) of the ITAA 1997 imposes a further condition that the 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 of the payment or at a later time. Each condition is discussed below. | Detailed Reasoning - Dismissal because of genuine redundancy: The first condition requires the taxpayer to be dismissed from employment because the taxpayer's position is genuinely redundant. The terms 'dismissal' and 'redundancy' are not defined in the income tax legislation. Therefore, it is necessary to consider the ordinary meaning of the terms and the meaning the courts have ascribed to each word. The Explanatory Memorandum to the Income Tax Assessment Amendment Act (No.3) 1984 which inserted former section 27F into the ITAA 1936 states at page 91: The terms "dismissal" and "redundancy" are not defined in the legislation and, therefore, should be given their ordinary meanings. "Dismissal" carries with it the concept of the involuntary (on the taxpayer's part) termination of employment. "Redundancy" carries the concept that the requirements of the employer for employees to carry out work of a particular kind, or for employees to carry out work of a particular kind in the place where they were so employed, have ceased or diminished or are expected to cease or diminish. Redundancy, however, would not extend to the dismissal of an employee for personal or disciplinary reasons or for reasons that the employee was inefficient. The Commissioner's view as stated in Taxation Ruling TR 2009/2 - Income tax: genuine redundancy payments (TR 2009/2) is that a position is redundant when the functions, duties and responsibilities formerly attached to the position are determined by the employer to be superfluous to the current needs and purposes of the organisation. The decision to make an employee's position redundant is fundamentally one made by the employer. Dismissal requires that a termination of employment is made at the initiative of the employer without the consent of the employee. Further, a dismissal is not caused by redundancy where personal acts or default are the cause for termination for example unsatisfactory performance or behaviour. Therefore the questions to be answered are whether the position you occupied was abolished and whether you were dismissed from employment. The Deed states that a redundancy payment equal to X months salary will be paid to you. Contract 2 regarding your employment in the second foreign country states that if the company terminates your employment, this is what will be paid. As this is what you were paid, clearly, the payment is made because the company has terminated your employment. 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 and therefore the employee must be dismissed. As the Deed states that your employment will end as a result of redundancy, clearly, your position has been abolished. Secondly the decision to terminate your employment is that of the employer and not yours. Therefore you have been dismissed from employment as your position has been made genuinely redundant and the first condition is satisfied. In light of these factors it is considered that your termination of employment is a genuine redundancy. As your position was abolished and there was a dismissal, part of the first condition under section 83-175 of the ITAA 1997 has been met. The condition also requires that for a payment to be a GRP, it should exceed the amount that would be received by the employee on voluntary termination of employment. | Detailed Reasoning - In excess of the amount that would be received on voluntary termination of employment: The Deed states that you will receive a payment in lieu of notice included in the separation payment. The Deed shows the various payments you would receive on termination of employment. These include a payment described as a redundancy payment equal to six months salary. This is in addition to outstanding annual leave and long service leave entitlements. The termination clause in your client's employment conditions provides that either party must provide 30 days notice of termination. Clearly the payment in lieu of notice would not have been paid if you had resigned voluntarily. Consequently, the payment is in excess of what you could have received on voluntary termination of employment and the first condition is satisfied. | Detailed Reasoning - Termination occurred before age 65 or expiration of fixed term: The second condition is that the termination time was a date before the taxpayer attained age 65 or such earlier date on which his or her employment would have necessarily terminated under the terms of employment because of the employee attaining a certain age or completing a certain period of service. In accordance with contract 2 the company reserved the right to interrupt your assignment. The Deed states the contract ended because of redundancy which shows it ceased before it was due to end. Your employment terminated when you were below the retirement age of 65 years. Therefore this condition is satisfied. | Detailed Reasoning - Dealing at arm's length: The third condition is that if the employer and the employee were not dealing with each other at arm's length in relation to the termination of employment, the amount of the eligible termination payment must not be greater than the amount that could reasonably be expected to have been paid if the parties had been at arm's length. In this case there is no evidence that you and the employer did not deal with each other at arm's length. Therefore this condition is satisfied. | Detailed Reasoning - No agreement to employ after date of termination: The final condition is that at the termination time, there was no agreement in force between your client and the employer or the employer and another person, to employ your client after the date of termination. There is no evidence that there was an agreement between you and the employer or the employer and another person to employ you after your termination of employment. Therefore this condition is satisfied. Therefore all requirements of subsection 83-175(2) of the ITAA 1997 have been satisfied. | Detailed Reasoning - Further requirements: In addition to the requirements discussed above, subsection 83-175(3) of the ITAA 1997 requires that no part of the payment which represents a payment in lieu of superannuation benefits will be included as part of a GRP. As no part of the payment is in lieu of superannuation benefits, this condition is satisfied. The last requirement is that the payment must not be a payment covered by section 82-135 of the ITAA 1997 apart from paragraph 82-135(e) i.e. a GRP. As noted earlier, none of the paragraphs of section 82-135 (apart from paragraph 82-135(e)) apply. Therefore, this requirement has been satisfied. All conditions must be satisfied before the payment is considered a GRP. In this case as all the conditions have been met, the payment is a GRP under section 83-175 of the ITAA 1997. | Detailed Reasoning - Tax-free part of a genuine redundancy payment: Section 83-170 of the ITAA 1997 applies to determine the tax-free treatment of a GRP. Section 83-170 places a limit on the amount of a GRP that is eligible for concessional tax treatment. So much of the GRP that does not exceed the amount worked out using the prescribed formula is not assessable income and is not exempt income. The formula for working out the tax free amount (subsection 83-170(3) of the ITAA 1997) is: Base amount + [ Service amount × Years of service] For the 2012-13 income year: Base amount means $8,806; Service amount means $4,404; and Years of service means the number of whole years in the period, or sum of periods, of employment to which the payment relates The amount calculated is the tax-free amount of a GRP and is not required to be included in your income tax return for the relevant income year. After deducting the tax-free component of a GRP, the remaining amount is considered to be a life benefit employment termination payment. The tax-free and taxable components of an employment termination payment will now be considered. | Detailed Reasoning - Tax Treatment of the employment termination payment: An employment termination payment is comprised of the following components: Ÿ Tax free component - this includes the pre-July 83 segment (if any) and/or the invalidity segment (if any); and Ÿ Taxable component - the amount remaining after deducting the tax free component from the total payment. The tax free component is not assessable income and is not exempt income. The taxable component is included, in full, as assessable income. You commenced employment after July 1983. Therefore, there will not be any pre-July 83 segment within the meaning of section 82-155 of the ITAA 1997. As the payment is not made because you ceased being gainfully employed as a result of suffering from ill-health, there is no invalidity segment for the purposes of section 82-150 of the ITAA 1997. Consequently, the employment termination payment will not contain a tax free component and will be comprised entirely of a taxable component (section 82-145 of the ITAA 1997). The taxable component is subject to tax, depending on the person's age when the payment is received and on the lesser of the whole-of-income cap and the employment termination payments cap. If the calculated whole-of-income-cap is less than the employment termination payment cap of $175,000 (2012-13 income year), the calculated whole-of-income-cap will apply to your employment termination payment. For recipients below preservation age, the taxable component of an employment termination payment is taxed at 30% for amounts below the employment termination payments cap of $175,000 for the 2012-13 income year or 'whole-of-income- cap, and at the top marginal rate for amounts above the cap. Medicare levy of 1.5% is added to the tax rate that applies. Preservation age is the age at which retirees can access their superannuation benefits. This will be 55 for persons born before 1 July 1960 and between 55 and 60 for persons born after 30 June 1960. In your case, you were under preservation age on the last day of the income year in which the payment was made. | Detailed Reasoning - Foreign income tax offset: As your employment termination payment is taxable both in Australia and China you may be eligible for a foreign income tax offset. Subsection 770-10(1) of the ITAA 1997 provides the basic entitlement rule for a foreign income tax offset (FITO) and states: You are entitled to a tax offset for an income year for foreign income tax. An amount of foreign income tax counts towards the tax offset for the year if you paid it in respect of an amount that is all or part of an amount included in your assessable income for the year. Subsection 770-10(1) of the ITAA 1997 uses the phrase 'in respect of' to link the foreign income tax with an amount included in the taxpayer's assessable income. The phrase 'in respect of' was considered in the case Workers' Compensation Board of Queensland v. Technical Products Pty Ltd, (1988) 165 CLR 642; (1988) 81 ALR 260; [1988] HCA 49. In a joint judgement Justices Deane, Dawson and Toohey said the following about this phrase: The phrase gathers meaning from the context in which it appears and it is that context which will determine the matters to which it extends. Subsection 770-5(1) of the ITAA 1997 provides relevant context by explaining the object of Division 770 as follows: The object of this Division is to relieve double taxation where: (a) you have paid foreign tax on amounts included in your assessable income; and (b) you would, apart from this Division, pay Australian tax on the same amounts. The references in the objects provision to relieving 'double taxation' and 'amounts included in your assessable income' demonstrate that, where a taxpayer pays foreign tax on the whole of a lump sum but only a portion of that lump sum is assessable in Australia, the purpose of Division 770 of the ITAA 1997 is to only provide a FITO for the portion of the gain that is included in assessable income and thus subject to taxation in both Australia and the foreign country (that is, double taxation). This can be described as an 'apportionment approach' to the allowance of a FITO. Such an approach is also consistent with the approach explained in Note 2 to subsection 770-10(1) of the ITAA 1997 which states: If the foreign income tax has been paid on an amount that is part non-assessable non-exempt income and part assessable income for you for the income year, only a proportionate share of the foreign income tax (the share that corresponds to the part that is assessable income) will count towards the tax offset (excluding the operation of subsection (2)). While Note 2 is non-operative material, it is relevant context as it is provided to help understand provisions (see sections 2-35 and 2-45 of the ITAA 1997). Accordingly, Note 2 is further contextual support for the view that the words used in subsection 770-10(1) were intended to require apportionment of the foreign income tax paid when only part of an amount that is subject to foreign income tax is included in Australian assessable income. The FITO provisions in the ITAA 1997 were introduced by the Tax Laws Amendment (2007 Measures No. 4) Bill 2007. Paragraph 1.18 of the Explanatory Memorandum (EM) accompanying the Bill summarises the new law, in part, as follows: Taxpayers will be entitled to a non-refundable tax offset for foreign income tax paid on an amount included in assessable income (a 'double-taxed amount'). This offset effectively reduces the potential Australian tax that would be payable on double-taxed amounts. This statement also confirms that a foreign income tax offset will only be allowed on an amount that is included in assessable income in Australia and subject to double taxation. The EM also makes many other references to a foreign income tax offset being limited to amounts included in assessable income and subject to double taxation. The portion of foreign tax available for credit for the employment termination payment will be calculated as follows: Foreign x amount of lump sum in Australian assessable income tax paid amount of lump sum

You are under 55 years of age. | You were employed by a company (the Company) for more than ten years as follows: | First few years - Your position was based in a capital city in Australia. You were a resident of Australia during this time and tax was deducted from your salary at source. | Later years - Your position was based in X foreign countries. You first relocated from the capital city to one foreign country and then from there to the second foreign country. | From the time you moved overseas you were not a resident of Australia and Australian tax was not deducted at source. You were taxed in both the foreign countries as per their tax regulations. | The Company is a foreign corporation with headquarters (HQ) overseas. It has a 100% owned subsidiary operating in Australia. | You state that the Australian subsidiary handled your payroll and recharged it to the overseas HQ. You have provided intercompany invoices for X months. | The employment contract (contract 1) under which you were employed in the first foreign country states in part, the effective date of your assignment, that your point of origin has been designated as Australia and that the duration of your assignment would be a particular number of years. Further it states that during that period you would remain an employee of the Australian company. | The employment contract (contract 2) under which you were employed in the second foreign country states, in part, the same as stated in contract 1 above. Further, it states that your role is on an assignment basis and that the company reserves the right to interrupt the assignment. Mutual consent would be required if the duration of your assignment would be extended. The terms and conditions outlined in this memorandum will be in effect only for this temporary assignment. When you return to your home country at the end of the assignment, any premiums, allowances and differentials provided in the Host Country will cease; your base salary at the time will determine your home country salary. | Further, Contract 2 states in part that after your assignment the company will provide an assignment of reasonable equivalence. If not available or if termination is initiated by the company you will be eligible for a payment equal to Y times your monthly Australian base salary in effect at the time of termination. | Your position was eliminated due to a restructure. At that time you were in the second foreign country. You received a notice of your redundancy in the relevant income year and your employment terminated in that income year. | You entered into a Deed of Separation and Release (the Deed) with the Australian subsidiary company. Under the Deed you were to be paid a redundancy payment equal to Z months salary (the payment). The payment is the subject of the Ruling request. | The Deed states that it constitutes the entire agreement of the parties about its subject matter and supersedes all previous agreements, understandings and negotiations on that subject matter. | You received the termination payment paid into your personal bank account. Annual leave was not treated as Australian income and part of the long service leave was treated as Australian income. The company has calculated a taxable amount and an exempt amount of the redundancy payment. | The redundancy payment is taxed in the second foreign country. | You returned to Australia in the relevant income year.