Issue
Does Division 82 of the Income Tax Assessment Act 1997 (ITAA 1997) include an employment termination payment (ETP) in the assessable income of a foreign resident on a basis other than having an Australian source for the purposes of paragraph 6-10(5)(b) of the ITAA 1997?
Decision
No. Division 82 of the ITAA 1997 does not include an ETP in the assessable income of a foreign resident on a basis other than having an Australian source for the purposes of paragraph 6-10(5)(b) of the ITAA 1997.
Facts
The taxpayer is a foreign resident.
The taxpayer worked for an Australian resident employer in Australia for a period, and then worked for the same employer outside of Australia.
The employer decided to terminate the taxpayer's employment and paid the taxpayer a lump sum termination payment, part of which was calculated by reference to the total period of the taxpayer's employment.
The payment is an ETP for the purposes of section 82-130 of the ITAA 1997. The ETP is a life benefit termination payment for the purposes of Division 82 of the ITAA 1997.
The payment is not a foreign termination payment for the purposes of Subdivision 83-D of the ITAA 1997 and thus is not made non-assessable non-exempt income under that Subdivision.
Reasons for Decision
Subsection 82-10(2) of the ITAA 1997 provides that the taxable component of a life benefit ETP is assessable income.
Section 10-5 of the ITAA 1997 lists section 82-10 of the ITAA 1997 as a provision which includes statutory income in assessable income.
Subsection 6-10(5) of the ITAA 1997 provides: If you are a foreign resident, your assessable income includes: (a) your statutory income from all Australian sources; and (b) other statutory income that a provision includes in your assessable income on some basis other than having an Australian source.
Accordingly, the taxable component of the foreign resident's life benefit ETP will only be included in the taxpayer's assessable income if: • it has an Australian source; or • Division 82 of the ITAA 1997 includes it in their assessable income on some other basis than it having an Australian source.
It is therefore necessary to determine whether Division 82 of the ITAA 1997 is a provision that operates to include ETPs in a foreign resident's assessable income on a basis other than having an Australian source.
The following extract from the Explanatory Memorandum (EM) to the ITAA 1997 that introduced paragraph 6-10(5)(b) makes it clear that the alternative rule in paragraph 6-10(5)(b) was only intended to apply in limited circumstances: Most ordinary and statutory income from foreign sources is not assessable to foreign residents. However, there are limited cases where an amount is assessed on a specifically expressed basis ... (emphasis added)
The EM to the ITAA 1997 goes on to cite the capital gains tax (CGT) provisions as an example of a provision that operates in this way. Rather than taxing foreign residents on Australian sourced capital gains, Division 855 of the ITAA 1997 only taxes foreign residents on capital gains from CGT assets that are 'taxable Australian property'.
A payment made in consequence of the termination of a person's employment will not be an ETP as defined in subsection 82-130(1) of the ITAA 1997 if it is a foreign termination payment to which Subdivision 83-D of the ITAA 1997 applies.
Section 83-235 of the ITAA 1997 excludes termination payments from assessable income if: • the payment relates only to a period of employment when the taxpayer was not an Australian resident; • the payment was received in consequence of the termination of the taxpayer's employment in a foreign country; and • other requirements of the section are satisfied.
It could be argued that the exclusion of foreign termination payments by section 83-235 of the ITAA 1997 is an alternative to having to determine the source of a payment from the termination of employment. Consequently, under this argument, if such a payment is not a foreign termination payment it is included in assessable income without having to consider if the payment has an Australian source.
However, if Division 82 and section 83-235 of the ITAA 1997 were to be considered provisions that included amounts in assessable income on a basis other than having an Australian source, their application would be much wider than could be considered an appropriate alternative to the normal source rule. For instance, under this view of Division 82 it would be possible for a foreign resident employed by a foreign employer to have their entire ETP included in their assessable income in Australia even though only a small portion of their employment was undertaken while a resident in Australia.
By contrast, the alternative source rule in the CGT provisions only includes capital gains from CGT assets in a foreign resident's assessable income where they are gains from 'taxable Australian property'. It therefore has a clearly defined scope which focuses on the connection the gain has with Australia. Such a clear focus on the connection an ETP has with Australia is lacking in section 83-235 of the ITAA 1997.
Consequently, because of the: • lack of focus in the words of section 83-235 of the ITAA 1997 for the provision to form an alternative basis to determining whether an amount has a sufficient connection to Australia in order to be included in assessable income; • very broad effect of Division 82 and section 83-235 of the ITAA 1997 if they were to be considered an alternative basis to determining source; and • statement in the EM that paragraph 6-10(5)(b) of the ITAA 1997 was only intended to apply in limited circumstances,
it is considered that Division 82 and section 83-235 of the ITAA 1997 are not provisions that include amounts in assessable income on a basis other than having an Australian source.
Accordingly, where a foreign resident receives an ETP, paragraph 6-10(5)(a) of the ITAA 1997 will apply and the payment will only be assessable in Australia if it is from an Australian source.