Issue
Is a lump sum payment received by a resident taxpayer in respect of the termination of their employment with the Italian Government assessable under subsection 6-10(4) of the Income Tax Assessment Act 1997 (ITAA 1997)?
Decision
No. A lump sum payment received by a resident taxpayer in respect of the termination of their employment with the Italian Government is not assessable under subsection 6-10(4) of the ITAA 1997 as section 27CD of the Income Tax Assessment Act 1936 (ITAA 1936) provides that the taxpayer's assessable income does not include that amount.
Facts
The taxpayer was an employee of the Italian Government.
At the time the taxpayer exercised their employment, the taxpayer was a resident of Italy for tax purposes and was not a resident of Australia.
The taxpayer ceased employment with the Italian Government and subsequently became a resident of Australia for income tax purposes.
The taxpayer received a lump sum payment from the Italian Government after becoming a resident of Australia.
The payment is a severance payment known as a trattamento di fine rapporto (TFR) payment which equates to one pay for each year of service plus an adjustment for inflation.
Under the TFR system, an Italian employer is required to annually accumulate amounts in a fund on behalf of its employees based on a percentage of the employee's remuneration. The employer owns and manages the fund of contributions.
The fund is an eligible non-resident non-complying superannuation fund within the meaning of section 27A of the ITAA 1936.
The amount contributed to the fund is re-valued according to a formula partially based on the rate of inflation. The re-valued amount is payable by the employer to the employee on termination of employment.
Reasons for Decision
Section 6-10 of the ITAA 1997 provides that a taxpayer's assessable income includes statutory income amounts which are not ordinary income but are included in assessable income by another provision. Subsection 6-10(4) of the ITAA 1997 states that the assessable income of an Australian resident includes statutory income from all sources, whether in or out of Australia.
However, subsection 6-15(1) of the ITAA 1997 provides that if an amount is not ordinary income and is not statutory income, it is not assessable income. The lump sum withdrawal payment received by the taxpayer is not ordinary income.
Section 10-5 of the ITAA 1997 lists those provisions about assessable income. Included in this list are sections 27A to 27H of the ITAA 1936 which provide that eligible termination payments are included in assessable income.
Section 27CD of the ITAA 1936 provides that if an exempt non-resident foreign termination payment is made in relation to a taxpayer, the taxpayer's assessable income does not include that payment. Such payments are excluded under paragraph (ka) of the definition of 'eligible termination payment' in subsection 27A(1) of the ITAA 1936 and therefore are not statutory income.
The meaning of an 'exempt non-resident foreign termination payment' is defined in subsection 27A(1) of the ITAA 1936 which covers two types of payments, outlined in paragraphs (a) and (b) of the definition.
Paragraph (a) defines an 'exempt non-resident foreign termination payment' as a payment made in respect of the taxpayer to which the following subparagraphs apply: (i) the payment is made otherwise than from a superannuation fund (as defined by subsection 6(1)) in consequence of the termination of the taxpayer's employment (ii) the payment would, apart from paragraphs (ka) and (ma) of the definition of 'eligible termination payment' , be an eligible termination payment (iii) the employment was service in a foreign country as a holder of an office or in the capacity of an employee (iv) the payment related solely to a period of the employment during which the taxpayer was not a resident of Australia.
The first condition is satisfied as the payment is not made from a superannuation fund, but by the taxpayer's employer in consequence of the termination of the taxpayer's employment.
Had it not been for paragraph (ka) of the definition of eligible termination payment in subsection 27A(1) of the ITAA 1936, the payment would have been an eligible termination payment under paragraph (a) of the definition in that subsection. None of the exclusions in that paragraph apply to the taxpayer. Therefore, the second condition is satisfied.
As the taxpayer's employment was service in Italy in the capacity of an employee, the third condition is satisfied.
As the period to which the payment relates only includes the period when the taxpayer was a non-resident, the fourth condition is satisfied.
Since all the conditions are satisfied, the payment received by the taxpayer is an exempt non-resident foreign termination payment.
In determining the liability to Australian tax on foreign sourced income received by a resident taxpayer it is necessary to consider not only the income tax laws but also any applicable double tax agreement contained in the International Tax Agreements Act 1953 (the Agreements Act).
Section 4 of the Agreements Act incorporates that Act with the ITAA 1936 and the ITAA 1997 so that those Acts are read as one.
Schedule 21 to the Agreements Act contains the double tax convention between Australia and the Republic of Italy (the Italian Convention). The Italian Convention operates to avoid double taxation of income received by Australian and Italian residents.
The Italian Convention does not contain an Article dealing with payments of the kind received by the taxpayer nor does it contain an Article dealing with income not expressly mentioned in the Italian Agreement.
Therefore, as the lump sum withdrawal payment is an exempt non-resident foreign termination payment, the payment is not included in assessable income under section 27CD of the ITAA 1936 and is excluded from the definition of an eligible termination payment in subsection 27A(1) of the ITAA 1936.
Accordingly, the payment is not included in the taxpayer's assessable income under subsection 6-10(4) of the ITAA 1997.