Private ruling: Assessability of foreign income
Published: April 2014
Ruling period: Year ending 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Q1: Are the proceeds from a foreign court order in a foreign country not assessable income and not exempt income under section 83-235 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes

Relevant facts and circumstances: While living in Country X and not an Australian resident, you signed a two-year contract of employment (the Employment Contract) with an organisation to work in Country Y. You renewed your Employment Contract for a further two years at the conclusion of the first period. Your Employment Contract contained the following: Both parties have to give at least six months written notice at any point of the academic year to terminate this contract. The final date for terminating contract for the end of the academic year is the last day of February in any given year. It is stated that, in accordance with the terms of the Employment Contract, the Employer was required to reimburse you for the following: • private and international health care costs; • medical and insurance costs; • air fares for you and members of your family; • education costs for your child; and • accommodation costs. On dd/mm/yyyy, your supervisor told you that your employment with the Employer would be terminated before the conclusion of the two year contract. This was confirmed in a letter. You stayed and worked for the remainder of the academic year and then came to Australia. You became an Australian resident for tax purposes and have lived in Australia ever since. You took legal action against the Employer for unfair dismissal in Country W. The judge of the sub-district court in Country W ruled that your dismissal by the Employer was an ' Unfair Dismissal' and ordered the Employer to pay damages of a single payment said to cover lost salary and costs and reimbursements with the character of working conditions.

Relevant legislative provisions: Income Tax Assessment Act 1997 Paragraph 82-135(f) | Income Tax Assessment Act 1997 Subdivision 83-D | Income Tax Assessment Act 1997 Section 83-235.

Reasons for decision: Summary: The payment is a foreign termination payment for the purposes of section 83-235 of the ITAA 1997 and is not assessable income and is not exempt income. | Detailed Reasoning - Foreign termination payment: Subdivision 83-D of the ITAA 1997 deals with termination payments that arise out of foreign employment. In accordance with paragraph 82-135(f) of the ITAA 1997, these payments are not employment termination payments, and are not assessable income and are not exempt income, that is, they are generally tax-free. There are two types of foreign termination payments covered by Subdivision 83-D of the ITAA 1997: • termination payments relating to a period when the taxpayer was not an Australian resident; and • termination payments relating to a period when the taxpayer was an Australian resident. 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) Section 83-235 of the ITAA 1997 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. The phrase 'in consequence of ' is not defined in the ITAA 1997. However, the words have been interpreted by the courts in several cases. Whilst there are divergent views as to the correct interpretation of the phrase, the Commissioner considers that 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 (Taxation Ruling TR 2003/13). Based on the above, your payment is a foreign termination payment under section 83-235 of the ITAA 1997 and is not your assessable income and is not your exempt income. This conclusion is based on the following: • The payment is to be made as a result of the court proceedings brought against the Employer, which in turn were in consequence of the termination of your employment. That is, but for the termination of your employment with the Employer there would be no court proceedings and no order for the payment. As such, the payment is considered to be made in consequence of the termination of your employment with the Employer (in Country Y). • The Employer is required to pay a single (lump sum) payment, therefore it is not a superannuation benefit or a payment of a pension or annuity. • At the time you commenced employment with the Employer you were a citizen of Country X and only became an Australian citizen after your employment with the Employer was terminated. Therefore, the payment relates only to a period of employment when you were not an Australian resident.