Income tax: Exempt Foreign Income

Whether the taxpayer's compensation from the British Government for loss of employment in Hong Kong is assessable income in Australia.

The compensation payment is not assessable income.

The taxpayer was employed by the British Government (BG) in the Overseas Civil Service (OCS) and employed as a public servant in Hong Kong by the Hong Kong Government (HKG). Due to an international agreement, Hong Kong was to be transferred to China on 1 July 1997 so the taxpayer left the employment with the HKG in 1996.

The taxpayer is eligible for statutory compensation under the Hong Kong (Overseas Public Servants) (Retirement and Compensation) Order 1996 (UK). The compensation is 5 annual payments, starting in November 1996. The BG will meet any liability to UK income tax. An agreement has been reached with UK Inland Revenue so that the payments do not have to be declared as taxable income in the UK

The payment is made in consequence of the termination of employment therefore it needs to be determined if it is an eligible termination payment (ETP) for Australian tax purposes. The definition of an ETP, as defined in subsection 27A(1) of the Income Tax Assessment Act 1936 (the Act) excludes an 'exempt non-resident foreign termination payment' - paragraph 27A(1)(ka) of the definition of ETP.

An 'exempt non-resident foreign termination payment' is defined in subsection 27A(1) of the Act to include a payment made otherwise than from a superannuation fund in consequence of the termination of the taxpayer's employment, where the payment would, apart from paragraphs (ka) and (ma) of the definition of ETP, be an ETP. The employment must have been in a foreign country as the holder of an office or in the capacity of an employee and the payment must relate to a period of employment where the taxpayer was a non-resident of Australia.

The taxpayer's payment satisfies these criteria. It is being made as a result of the termination of employment. The compensation is being paid from consolidated revenue, not from a superannuation fund. The payment relates to service as an employee for a period when the taxpayer was a non-resident of Australia. The annual payment is therefore an 'exempt non-resident foreign termination payment', is not an ETP and is excluded from assessable income by section 27CD of the Act.

Section 23AG does not apply - see definition of foreign earnings in subsection 23AG(7).

There are no capital gains tax implications.