Australian Tax Treatment of Overseas Service on Redundancy
If you are an expatriate Australian, or an Australian who has previously worked overseas, being made redundant by an Australian employer then you are very strongly advised to seek professional tax advice in respect of the treatment of any redundancy payments. Some portion of these payments may not be liable for any Australian tax and this can have a very large impact on the net redundancy or termination payment available to you.
Termination payments that relate solely to overseas employment are treated differently from domestic termination payments. Basically, the employer should split the payment into two components - one representing the overseas service and a second payment representing the domestic employment and then pay the payments separately. It is not sufficient for the employee merely to allocate the part of the payment to overseas service, so the employee needs the active support of the employer. Ideally this should be a term of the employment contract.
The conditions are outlined in sections 83-235 and 83-240 of ITAA 1997. Payments that meet these conditions are not subject to tax in the hands of the recipient. A payment received by you is not assessable income and is not exempt income if: (a) it was received in consequence of the termination of your employment in a foreign country; and (b) it is not a superannuation benefit; and (c) it is not a payment of a pension or an annuity (whether or not the payment is a superannuation benefit); and (d) it relates only to a period of employment when you were not an Australian resident.
Ensuring that these payments are made on a tax effective basis will often involve direct communications between a tax professional and an individual's employer - with a view to ensuring any payment relating to overseas service meets the ATO's requirements. Note that even if the employer does not agree to making a payment on a tax exempt basis it may be possible to pursue a later refund from the ATO if a separate payment has been arranged. Prior professional advice is absolutely recommended before the receipt of any redundancy related payment.