Redundancy payment for overseas work assessable
The AAT has ruled that a taxpayer who was the managing director of a company in various countries from 2002 to 2007, and who was paid an employment termination payment (ETP) when he returned to Australia, was not assessable on that part of the annual and long service leave component of the ETP that was attributable to his foreign service in view of the exemption in s 23AG of the Income Tax Assessment Act 1936 (ITAA 1936). The AAT confirmed that he was otherwise assessable on the taxable component of the ETP, despite its foreign source, on the basis of finding that he was a resident when the ETP was paid to him.
Background
The taxpayer lived in various countries, including Australia, while he was managing director of a company. In 2006 he was made redundant and in April 2007 he was paid an ETP of over $350,000 after he had returned to Australia. At that time of payment in the 2007 income year, he had been living in Australia for more than six months (and before that for 14 months between August 2002 and October 2003). The ETP paid to him consisted of three “severance” components: the annual leave and long service leave component of approximately $113,000; a taxable component of approximately $196,000; and a non-taxable redundancy component of approximately $44,000.
The issue for determination by the AAT was the extent to which the taxpayer was assessable on the taxable component of the ETP, which in turn depended on his residency at the time it was paid to him. The AAT also had to determine if, and to what extent, s 23AG applied to exempt the annual and long service leave component of the ETP in terms of whether it had been derived by him as “a resident engaged in foreign service for a continuous period of not less than 91 days”.
The AAT noted that s 83-235 of the ITAA 1997 did not apply to the case as it only came into effect on 1 July 2007, and that as the ETP payment was made before that date, the matter was governed by ss 23AG, 26AC, 26AD, 27A and 27B of the ITAA 1936.
Decision
The AAT first noted that the taxpayer’s liability to taxation depends on whether he was a resident of Australia at the time the payments were made (given that the Commissioner accepted that the payments in dispute had a foreign source). The AAT then confirmed that in terms of the “residency” tests in s 6(1) of the ITAA 1936 and, in particular, the “6 months resides” test, the phrase “permanent place of abode outside Australia” means something less than a permanent place of abode in which a taxpayer intends to live for the rest of their life.
The AAT also noted that during the 14 months from 2002 to 2003 that the taxpayer resided in Australia, the taxpayer was treated as a resident and that, moreover, in both periods when he lived in Australia, he had not retained a permanent place of abode outside Australia. As a result, the AAT concluded that the taxpayer was a resident of Australia in the 2007 income year when the ETP was paid to him.
The AAT then found that the Commissioner had correctly treated the $44,000 amount of the ETP as a tax-free redundancy component (as calculated under the rules in s 27A(19) of the ITAA 1936 for the 2007 income year). At the same time, the AAT found that the taxpayer was assessable on the $196,000 taxable component of the redundancy payment (despite its foreign source) because he was a resident when it was paid to him and because it did not qualify as an “exempt non-resident foreign termination payment” under s 27A(1).
Finally, however, the AAT found (and agreed with the Commissioner’s changed submissions) that approximately $92,000 of the $113,000 component of the ETP received for annual and long service leave was exempt from tax pursuant to s 23AG (exemption of income earned in overseas employment) on the basis that the amount was derived by the taxpayer as a resident in respect of foreign service for a continuous period of not less than 91 days. In this regard, reliance was also placed on the precedential view in ATO ID 2002/730 (which applied to foreign earnings derived before 1 July 2009 from foreign service performed before 1 July 2009).
In short, the AAT concluded that while the exempt part of the ETP payment under s 23AG had to be taken into account in determining the tax rate applicable to the taxpayer’s remaining assessable income for the 2007 income year, only around $21,000 of the total payment for annual and long service leave was assessable to him, while the remaining amount (ie $92,000) had to be excluded by virtue of the effect of s 23AG.
Re Boyd and FCT [2013] AATA 494, www.austlii.edu.au/au/cases/cth/AATA/2013/494.html.
