Private ruling: Foreign termination payment
Published: April 2012
Ruling period: Year ended 30 June 2011
Date scheme commenced: 1 July 2010

Ruling: Q1: Is any part of the employment termination payment exempt from tax as a foreign termination payment? | A1: No.

Relevant facts and circumstances: Your client is under age 50. Her employment with an Australian entity (Entity 1) commenced in 1990. In 1996 she was assigned overseas to a related entity (Entity 2) followed by another overseas assignment to another related entity (Entity 3) from 1999. The letter of appointment regarding her assignment to Entity 3 included the following: · Your client was to remain a member of the Australian employer superannuation fund. · She was permitted to carry forward 10 days leave from the Entity 2 assignment onto the Entity 3 assignment. · During the Entity 3 assignment she would accrue annual leave entitlements and all other leave entitlement days were 'encashed' on cessation from Entity 2. · The period of expatriate assignment will count as service for the purposes of long service leave (LSL). However the provision to take LSL is conditional upon her being on the Australia payroll of Entity 1. · For career planning purposes she would remain parented by Entity 1. From January 2005 she commenced her loan assignment to another related overseas entity (Entity 4) The letter of appointment confirmed her continuing employment with Entity 1 in Australia for the purposes of her loan assignment and included the following: · The Entity 4 assignment was effective from 2005 for a planned period of one year. · Should the period of the loan assignment exceed four years, the Basic Expatriate Allowance will be phased out in the fifth year of the loan assignment. · Entity 1 in Australia remained her employing company and she would be required to give her full time services to Entity 4. · During the Entity 4 assignment, annual leave continued to accrue. · For career planning services she would remain parented by Entity 1 in Australia. · At the completion of the Entity 4 assignment, whether planned or unexpectedly, her employment with Entity 4 would conclude and her employment with Entity 1 in Australia would continue; and every reasonable effort would be made to locate a suitable position for her. · However, it would be her responsibility to actively seek her next assignment through Open Resourcing and there is no guarantee that a position will be available with Entity 1 in Australia. · She would have the right to terminate her employment and loan assignment by giving not less than three months notice in writing and at the employer's discretion, three months' salary may be paid in lieu of notice. In 2010 she became an Australian resident for tax purposes on repatriation back to Entity 1 in Australia, The letter from Entity 1 dated on a day in 2010 confirmed her new proposed contractual terms of employment with Entity 1 effective from that date in 2010 (the start date), this being the date she repatriated to Australia and rejoined the Entity 1 Australia payroll. The terms including the following details: · She became employed on a permanent basis with Entity 1 in Australia from the start date subject to three months notice of termination or payment in lieu for part thereof, for reason of redundancy should a suitable role not be found in this time. · Notice was given that her employment would terminate for reason of redundancy on the date which is one month from the start date in 2010, following which she will receive payment in lieu of notice for the remaining two months and one week of the notice period. · Effective from the start date to the termination date in 2010 she would remain in a specified salary group. · Benefits payable include a relocation allowance and a discretionary pro-rated bonus. · The details of the severance process was to apply from the conclusion of the notice period. · In the event of termination for redundancy, she would be paid a termination payment which covers all entitlements arising from the termination (excluding leave and superannuation). · The employment termination payment (ETP) lump sum estimate to be received was $X gross. · The minimum repatriation requirement was that she had to be physically present in Australia for a minimum of one month of the notice period and the termination payment was to be paid and taxed in Australia. Entity 1 had determined the termination was a genuine redundancy and that she would receive a payment equivalent to two months and one week (salary) in lieu of notice. Entity 1 also determined the ETP would be a single payment, that is, the ETP and LSL payments would not be split. In the letter dated also in 2010 Entity 1 confirmed the conclusion of her employment with Entity 1 in Australia on the basis of a genuine redundancy as outlined in the earlier letter of 2010. Details used in the calculation of relevant lump sum payments included: Start date xxxx 1990 Termination date xxxx 2010 Post June 83 component $Y Plus other amounts Total lump sum $X LESS Tax free portion of genuine redundancy payment Balance of lump sum ($X less tax free portion))= $Z Plus other employment termination amounts (ETP) Total ETP $Y The above is consistent with: PAYG payment summary-ETP payment dated in October 2010: Taxable component $Y Of the total ETP of $Y , you have only included the amount in your client's 2010-11 income tax return representing the portion relevant to the Australian employment service period. During telephone discussion in April 2012, you confirmed : · your client became a resident of Australia for income tax purposes in late 2010 and her employment with Entity 1 was terminated at the end of late 2010. · The ETP from Entity 1 was calculated on the basis of her employment service period from start date of her employment service in July 1990 (adjusted start date = 3 months after the commencement date in April 1990) to termination date in 2010. That is, the ETP lump sum was paid based on the total of both her Australian and overseas service period.

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 whole lump sum amount of $Y (the ETP) received on the termination of employment with Entity 1 is assessable income because the ETP was calculated by Entity 1 based on the whole employment service period (Australian and overseas service periods). Therefore no part of the ETP lump sum amount is exempt income as the payment was not received in consequence of the termination of employment in a foreign country where the payment received relates solely (only) to a period of employment when your client was 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. 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 (ETP) unless the payment is specifically excluded under section 82-135. From the information provided, we note the following: Total lump sum $X LESS Tax free portion | Detailed Reasoning - Balance of lump sum = $Z: plus Other employment termination payment amounts | Detailed Reasoning - Total ETP $Y: Therefore it is evident that when your client's employment with Entity 1 in Australia was terminated in 2010, the lump sum payment was made in consequence of the termination of her employment . It is also clear from the schedule "calculation of tax on lump sum payments" provided that the total ETP of $Y was calculated on the basis of the total service period (adjusted start date in 1990 to termination date in xxxx 2010). Therefore, the termination of her employment with Entity 1 in Australia and the lump sum payment of $Y are all intertwined and connected. If not for the termination of her employment in 2010, the lump sum payment of $Y would not be payable. Consequently, the lump sum payment will therefore be considered to have been received in consequence of the termination of employment. | Detailed Reasoning - 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. Your client's termination of employment occurred in 2010 , and the lump sum payment date was in October 2010 which was no later than 12 months after termination. Therefore 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): Ÿ superannuation benefits; Ÿ unused annual leave or long service leave payments; Ÿ foreign termination payments covered under Subdivision 83-D of the ITAA 1997; and Ÿ the tax-free part of a genuine redundancy payment or an early retirement scheme payment. From the information provided, it is considered the termination of employment (as determined by Entity 1 in Australia) is because of a genuine redundancy in accordance with the requirements of section 83-175 of the ITAA 1997. Therefore, in order to consider if any part of the total ETP is subject to further concessional tax treatment, it becomes necessary to consider whether any part of the lump sum payment of $Y should be excluded from being an ETP as a foreign termination payment (paragraph 82-135(f) of the ITAA 1997). However, it can only be a paragraph 82-135(f) payment if it meets the requirements of section 83-235 (Subdivision 83-D) of the ITAA 1997 to be a foreign termination payment. | Detailed Reasoning - Foreign termination payments: 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 (in this case the total lump sum ETP of $Y ) 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. 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 of employment when the person was a non-resident of Australia. In the present case, the ETP relates to service in various overseas countries and also in Australia. Entity 1 in Australia (the employer) has also confirmed in their letter of xxxx 2010 to your client that the it will not split ETP and LSL payments on termination of employment. This is consistent with the details on the schedule "calculation of tax on lump sum payments" that the total ETP of $Y was calculated on the basis of the total service period (adjusted start date in 1990 to xxxx 2010). An ETP cannot be apportioned between the periods of foreign and Australian service to which the payment relates. This is because an ETP relates only to the termination of employment and does not accrue over the period of employment to which the payment relates. The rationale for this is that, with the possible exception of an ETP paid in respect of unused sick leave, an employment-related ETP would never accrue over the period of employment , let alone over a particular segment of the overall period of employment. It is not the performance of the services under a contract of employment that give rise to an ETP, but rather the termination of those services under the employment contract. An ETP will, generally, only come into existence upon the termination of the employment to which it relates, be it as a result of a specific clause in an employment contract or under a specific clause of an industrial award. In the present case, it is not possible to apportion the termination payment between your client's period of service overseas, and the employee's period of service in Australia, as the termination payment relates to the total employment service period (adjusted start date in 1990 to xxxx 2010) as a whole. It follows that the termination payment does not relate just to service in a foreign country in the capacity of an employee. Rather, the termination payment relates to the total period of employment which covers both your client's period of service overseas and your client's period of service in Australia from 1990 to 2010. The foreign termination payment provision in paragraph 83-235(d) of the ITAA 1997 requires that the payment relates only to a period of the employment service period during which the taxpayer was not a resident of Australia. It is clear, from the information provided, that the payment (the ETP) does not relate only to a period of employment when your client was not a resident of Australia. As no part of the termination payment is a payment to which Subdivision 83-D (Foreign termination payments) applies (paragraph 82-135(f) of the ITAA 1997), therefore section 83-235 will not apply to exempt any part of your client's termination payment from tax in your client's hands.

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