Private ruling: Foreign settlement payment
Published: November 2013
Ruling period: Year ending 30 June 2013
Date scheme commenced: 1 July 2012

Ruling: Questions and answers: | 1. Is the payment received in settlement of a wrongful termination claim in respect of employment in a foreign country not assessable income and not exempt income under section 83-235 of the Income Tax Assessment Act 1997 (ITAA 1997)? | Yes. | 2. Are you entitled to a tax offset for the costs associated with the travel to attend the mediation of your termination payment in the US? | No. | 3. Are you entitled to a deduction for the costs associated with the travel to attend the mediation of your termination payment in the US? | No.

Relevant facts and circumstances: A number of years ago you were terminated from your employer overseas. Shortly after, you filed a suit for wrongful termination. Official civil action started. You were not a resident of Australia for taxation purposes at the time you were employed overseas. You attended mediation overseas. You were awarded a payment. The settlement lump sum was dissected into a number of components. The lump sum was a full and final settlement of all your claims against the employer. You received the payment after you became a resident of Australia for taxation purposes.

Relevant legislative provisions: Income tax Assessment Act 1997 Section 8-1 | 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)

Reasons for decision: Summary: Section 83-235 of the ITAA 1997 sets out the conditions under which a payment will be a tax free termination payment in respect of a foreign resident period. These are that: a) it was received in consequence of the termination of the taxpayer's employment in a foreign country (paragraph 83-235(a) of the ITAA 1997) b) it is not a superannuation benefit (paragraph 83-235(b) of the ITAA 1997) c) it is not a payment of a pension or an annuity (whether or not the payment is a superannuation benefit) (paragraph 83-235(c) of the ITAA 1997) d) it relates only to a period of employment when the taxpayer was not an Australian resident (paragraph 83-235(d) of the ITAA 1997). All the four conditions must be met for the payment to be treated as not assessable and not exempt income and hence tax free. In your case, you were a foreign resident working overseas for a foreign employer until your employment was terminated. You settled your claims against your employer for a lump sum payment. It was a payment in full and final settlement of all your claims against the employer. The payment was in regard to the termination of your employment while you were a resident of another country. Therefore it can be said that the payment you received relates only to a period of employment when you were not an Australian resident. As all of the conditions have been met, the payment you received is a foreign termination payment. It is therefore tax free as it is not assessable income and is exempt income pursuant to section 83-235 of the ITAA 1997. | Detailed Reasoning - Tax offsets: There are a number of offsets which are available to taxpayers in particular circumstances, such as a medical expenses tax offset, a low income tax offset, zone or overseas forces tax offset, and Senior Australians and Pensioner tax offsets. There are no tax offsets that cover the costs associated with travelling to mediation or other negotiations. Accordingly, the cost (or any part of the cost) incurred by you in travelling overseas for mediation relating to your employment termination payment cannot be claimed as a tax offset. | Detailed Reasoning - Deductions: The general deduction provisions of the tax law are contained in section 8-1 of the ITAA 1997 which allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income, or in carrying on a business to gain or produce assessable income. Deductions are not allowed under section 8-1 of the ITAA 1997 if the outgoing for which a deduction is sought is capital, private or domestic in nature. The costs associated with travelling to and from work and in your case in relation to the settlement of your work related mediation sessions is generally incurred to put the employee in a position to perform duties of employment and to derive their income, rather than in the performance of those duties. In your case the cost associated with the travel to attend the mediation overseas is private and domestic in nature and therefore no deduction is allowable.