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The Federal Court has held that a portion of an amount of “foreign earnings” paid to a taxpayer by his former employer was not exempt from Australian income tax under s 23AG(1) of the Income Tax Assessment Act 1936 (Cth).

In an earlier judgment (see 2014 TaxVine No 4, 28 February 2014), the court had held that amounts (paid by way of instalments and totalling USD160,033,328.25) received by a taxpayer from his former employer pursuant to a deferred compensation scheme were ordinary income and assessable to the taxpayer in the years in which they were received or otherwise dealt with on his behalf. The amounts were ordinary income on the basis that they were a reward for his services as an employee: Blank v FCT [2014] FCA 87 (21 February 2014).

The taxpayer sought to re-open his case to enable him to make submissions to the effect that some part of the amount qualified as “foreign earnings derived by [the applicant] from ... foreign service”, and was exempt from tax: s 23AG(1).

The court declined to allow the taxpayer to re-open the case, on the basis that the taxpayer did not have a strong argument that s 23AG applied to exempt a portion of the payments of principal received, or constructively received, by him in the years in dispute.

The court decided that the amount qualified as “foreign earnings”, if only on the basis that it represented deferred compensation of the taxpayer as a reward for his services as an employee and therefore constituted “earnings”, being one of the classes of income qualifying as “foreign earnings”. However, the amount was not exempt from tax under s 23AG(1) because it was derived by the taxpayer from both foreign service and service in Australia that was not foreign service.

Apportionment of the amount into two portions, one being exclusively for foreign service and the other being exclusively for service in Australia, so as to enable the former to trigger the exemption from tax afforded by s 23AG(1), was neither appropriate nor possible.

Blank v FCT (No 2) [2014] FCA 517 (22 May 2014).

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