Class Ruling

CR 2005/27

Income tax: eligible termination payment: the Western Australian Egg Marketing Board - Transfer of employment

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FOI status:

may be released

Preamble

What this Class Ruling is about

1. This Ruling sets out the Commissioner's opinion on the way in which the 'tax law(s)' identified below apply to the defined class of persons, who take part in the arrangement to which this Ruling relates.

Tax law(s)

2. The tax laws dealt with in this Ruling are:

•

the paragraph (a) definition of 'eligible termination payment' in subsection 27A(1) of the Income Tax Assessment Act 1936 (ITAA 1936);

•

section 27B of the ITAA 1936; and

•

section 27C of the ITAA 1936.

Class of persons

3. The class of persons to which this Ruling applies is:

(i)

all permanent full-time and part-time employees of the Western Australian Egg Marketing Board (WAEMB); and

(ii)

all WAEMB employees on one, two or three year fixed term contracts who are eligible to receive a payment from the WAEMB,

hereafter referred to as the 'Employees', who cease employment with the WAEMB, accept a position with West Coast Eggs Limited (WCE) and receive a payment under the arrangement described in paragraphs 10 to 25.

Qualifications

4. The Commissioner makes this Ruling based on the precise arrangement identified in this Ruling.

5. The class of persons defined in this Ruling may rely on its contents provided the arrangement actually carried out is carried out in accordance with the arrangement described in paragraphs 10 to 25.

6. If the arrangement actually carried out is materially different from the arrangement that is described in this Ruling, then:

•

this Ruling has no binding effect on the Commissioner because the arrangement entered into is not the arrangement on which the Commissioner has ruled; and

•

this Ruling may be withdrawn or modified.

7. This work is copyright. Apart from any use as permitted under the Copyright Act 1968, no part may be reproduced by any process without prior written permission from the Commonwealth. Requests and inquiries concerning reproduction and rights should be addressed to:

Commonwealth Copyright Administration

Intellectual Property Branch

Department of Communications, Information Technology and the Arts

GPO Box 2154

CANBERRA ACT 2601

or by e-mail to: commonwealth.copyright@dcita.gov.au

Date of effect

8. This Ruling applies from 31 March 2005. However, the Ruling does not apply to taxpayers to the extent that it conflicts with the terms of settlement of a dispute agreed to before the date of issue of the Ruling (see paragraphs 21 to 22 of Taxation Ruling TR 92/20). Furthermore, the Ruling only applies to the extent that:

•

it is not later withdrawn by notice in the Gazette;

•

it is not taken to be withdrawn by an inconsistent later public ruling; or

•

the relevant tax laws are not amended.

Withdrawal

9. This Ruling is withdrawn and ceases to have effect after 31 January 2006. The Ruling continues to apply, in respect of the tax law(s) ruled upon, to all persons within the specified class who enter into the specified arrangement during the term of the ruling. Thus, the Ruling continues to apply to those persons, even following its withdrawal, for arrangements entered into prior to withdrawal of the Ruling. This is subject to there being no change in the arrangement or in the persons' involvement in the arrangement.

Arrangement

10. The arrangement that is the subject of this Ruling is described below. This description is based on the following documents. These documents, or relevant parts of them, as the case may be, form part of and are to be read with this description. The relevant documents or parts of documents incorporated into this description of the arrangement are:

•

correspondence from the applicant for the Ruling to the Tax Office; and

•

records of telephone conversations with a representative of the applicant.

11. The WAEMB, trading as Golden Egg Farms, is a State/Territory Body for the purposes of Division 1AB of Part III of the ITAA 1936 and was established under the Marketing of Eggs Act 1945 as amended.

12. The WAEMB is involved in the collection, handling, examination, grading, storage, distribution and sale of eggs. In addition it has the power to fix, from time to time, the maximum price at which each respective grade of eggs may be sold by retail, and other incidental or auxiliary services associated with the industry.

13. The Government of Western Australia (the 'Government') intends to divest itself of its involvement in the egg industry (the 'industry') and hand over the control and operation of the industry to the Western Australian egg producers.

14. In divesting its interests in the industry, the Government will have WCE, a public unlisted company established on 3 December 2004, take over the marketing and processing of eggs.

15. The functions performed by WCE will be similar to those of the WAEMB, but without the regulatory responsibilities attached to the WAEMB.

16. As a result of the divestment, the Marketing of Eggs Act 1945 will be repealed.

17. The divestment is planned to occur on 31 March 2005 (the 'transition date') or as soon as possible after that date.

18. At the transition date, the positions of the Employees of the WAEMB will cease to exist.

19. As a consequence of their employment being terminated the Employees of the WAEMB will be offered a position with WCE. Employees of WAEMB may choose either:

(i)

to accept a position with WCE; or

(ii)

to seek redeployment elsewhere in the Public Sector under the Public Sector Management (Redeployment and Redundancy) Regulations 1994.

20. Further to the above, no Employee will be made redundant nor will any severance packages be made available.

21. WAEMB Employees who choose employment with WCE will have:

(i)

any leave entitlements that accrued as at the transition date preserved;

(ii)

all of their sick leave entitlements transferred to WCE; and

(iii)

the option of cashing out their accrued annual leave and pro-rated long service leave or transferring them to WCE.

22. In respect of superannuation, WAEMB Employees who choose employment with WCE will no longer be able to use the Government Superannuation Board. The Employees however have the options of:

(i)

leaving their superannuation in the State Government Superannuation Scheme and becoming members of a superannuation fund chosen by WCE; or

(ii)

rolling-over their State Government Superannuation Scheme to another superannuation fund.

23. All Employees whose employment with the WAEMB is terminated and who accept employment with WCE will be paid a 'transition payment'.

24. The transition payment, which is a one off payment made at the time of transition, will be calculated in accordance with the following table:

25. The WAEMB is seeking confirmation as to whether the transition payments made to the class of employees described in paragraph 3 constitute 'eligible termination payments' as defined in subsection 27A(1) of the ITAA 1936.

Ruling

26. The proposed transition payment, which is only payable to WAEMB Employees following termination of employment with the WAEMB and acceptance of a position in WCE, is an eligible termination payment under paragraph (a) of the definition of 'eligible termination payment' in subsection 27A(1) of the ITAA 1936. Accordingly, the ETP received by an Employee is assessed under sections 27B and 27C of the ITAA 1936 to the extent that the ETP is not rolled-over.

Explanation

27. In the context of payments made by an employer, the definition of an 'eligible termination payment' in paragraph (a) of subsection 27A(1) of the ITAA 1936 means:

(a)

any payment made in respect of the taxpayer in consequence of the termination of any employment of the taxpayer, other than a payment:

(i)

made from a superannuation fund in respect of the taxpayer by reason that the taxpayer is or was a member of the fund;

(ii)

of an annuity, or supplement, to which section 27H applies;

(iii)

from a fund in relation to which section 121DA, as in force at any time before the commencement of section 1 of the Taxation Laws Amendment Act (No. 2) 1989 has applied in relation to the year of income commencing on 1 July 1984 or any subsequent year of income;

(iiia)

from a fund that is or has been a non-complying superannuation fund in relation to any year of income;

(iv)

of an amount to which section 26AC or 26AD applies; or

(v)

of an amount that, under any provision of this Act, is deemed to be a dividend, or a non-share dividend, paid to the taxpayer.

The proposed transition payment does not fall within any of these exclusions, nor is it covered by the further exclusions in paragraphs (ja) to (s) of the definition.

28. In determining whether the payment constitutes an eligible termination payment it is necessary to determine whether:

•

there has been a termination of employment; and

•

the payment is 'in consequence of the termination of employment'.

Is there a termination of employment?

29. As at the transition date, the Government will be divesting itself of involvement in the egg industry and the Employees' positions will cease to exist as at the transition date. Accordingly, there is a termination of employment with the WAEMB.

Is the making of the transition payment 'in consequence of the termination of employment'?

30. A payment can be considered to be in consequence of termination of employment where it follows from the termination, or the termination is a condition precedent to the payment. In Reseck v. FC of T 75 ATC 4213; (1975) 133 CLR 45; (1975) 49 ALJR 370; (1975) 6 ALR 642; 5 ATR 538 (Reseck's case) Gibbs J said at pp 4216-7:

Within the ordinary meaning of the words a sum is paid in consequence of the termination of employment when the payment follows as an effect or result of the termination... It is not in my opinion necessary that the termination of the services should be the dominant cause of the payment.

In the same case, Jacobs J said that 'in consequence of' did not import causation but rather a 'following on' (p 4219).

31. The decision in Reseck's case was considered by the Full Federal Court in McIntosh v. FCT 79 ATC 4325; (1979) 25 ALR 557; (1979) 45 FLR 279; 10 ATR 13 (McIntosh's case). The case concerned a taxpayer who became entitled to a payment subsequent to his retirement. In finding that the payment was in consequence of the taxpayer's termination, Brennan J said (at page 4328):

...if a payment is made to satisfy a payee's entitlement, the phrase 'in consequence of retirement' requires that the retirement be the occasion of, and a condition of, entitlement to the payment. A sufficient causal nexus between the payment and the retirement is thus established.

32. The phrase 'in consequence of' and the decisions in Reseck and McIntosh's cases were also considered more recently by the Federal Court in Le Grand v. FC of T (2002) 195 ALR 194; (2002) 2002 ATC 4907; (2002) 51 ATR 139; (2002) 124 FCR 53; [2002] FCA 1258 (Le Grand's case).

33. Le Grand's case involved a payment received by the taxpayer as a result of accepting an offer of compromise in respect of claims brought by him against his former employer, in relation to the termination of his employment. The taxpayer had made claims for common law damages for breach of the employment agreement and for statutory damages for misleading and deceptive conduct to procure the taxpayer's employment with the employer. The payment was found to be in consequence of the taxpayer's termination. Goldberg J said (at p 4914):

I do not consider that the issue can simply be determined by seeking to identify the 'occasion' for the payment. The thrust of the judgments in Reseck and McIntosh is rather to the effect that payment is made 'in consequence' of a particular circumstance when the payment follows on from, and is an effect or result, in a causal sense, of the circumstance. ... there need not be identified only one circumstance which gives rise to a payment before it can be said that the payment is made 'in consequence' of that circumstance. ... it can be said that a payment may be made in consequence of a number of circumstances and that, for present purposes, it is not necessary that the termination of the employment be the dominant cause of the payment so long as the payment follows, in the causal sense referred to in those judgments, as an effect or result of the termination.

34. The Commissioner has issued Taxation Ruling TR 2003/13 titled: 'Income tax: eligible termination payments (ETP): payments made in consequence of the termination of any employment: meaning of the words 'in consequence of'', which considers the meaning of the phrase 'in consequence of the termination of any employment' in the definition of eligible termination payment in subsection 27A(1) of the ITAA 1936.

35. In paragraphs 5 and 6 of Taxation Ruling TR 2003/13, the Commissioner, after considering the above judgments, stated:

... a payment is made in respect of a taxpayer in consequence of the termination of the employment of the taxpayer if the payment 'follows as an effect or result of' the termination. In other words, but for the termination of employment, the payment would not have been made to the taxpayer.

The phrase requires a causal connection between the termination and the payment, although the termination need not be the dominant cause of the payment. The question of whether a payment is made in consequence of the termination of employment will be determined by the relevant facts and circumstances of each case.

36. In Class Ruling CR 2002/1 titled Income tax: Eligible Termination Payment - FreightCorp Sale and Transfer of Employment, the Commissioner considered the question of the taxation of a 'transfer payment' payable to employees under a similar arrangement to that proposed between the WAEMB and WCE. The Commissioner concluded that the transfer payment payable to FreightCorp employees upon the sale of its business was a payment made in consequence of the termination of employment under paragraph (a) of the definition of 'eligible termination payment' in subsection 27A(1) of the ITAA 1936.

37. Notwithstanding that the transition payment is only payable to Employees who take up employment with WCE, the transition payment is only payable on the condition that these Employees have terminated their employment with the WAEMB. The payment follows as an effect or result of the termination and the payment would not have been made to the Employees but for the termination of their employment with the WAEMB.

38. The following aspects of the arrangement reinforce the characterisation of the 'transition payment' as eligible termination payments (as distinct from, for example, a transfer or sign-on fee):

•

the payment is calculated by reference to each Employee's years of service with the WAEMB;

•

there are no obligations imposed on the Employees to continue their employment with WCE for any particular period after commencement of their employment with WCE; and

•

the payment is to be made at the time of the Employees' transfer to WCE.

39. In view of the above, the transition payment is in consequence of the termination of employment and is therefore an eligible termination payment (ETP) under subsection 27A(1) of the ITAA 1936. The ETP will be split up into the pre-July 83 and post-June 83 (untaxed element) components. This amount can be rolled over.

40. It should be noted that the amount of an ETP may be subject to the provisions of the superannuation surcharge legislation, whether it is taken in cash or rolled-over.

Detailed contents list

41. Below is a detailed contents list for this Class Ruling:

Commissioner of Taxation
27 April 2005

Not previously issued as a draft

References

ATO references:
NO 2005/5667

Related Rulings/Determinations:

CR 2001/1
CR 2002/1
TR 92/1
TR 92/20
TR 97/16
TR 2003/13

Subject References:
eligible termination payments
employment termination

Legislative References:
ITAA 1936 Pt III Div 1AB
ITAA 1936 26AC
ITAA 1936 26AD
ITAA 1936 27A(1)
ITAA 1936 27B
ITAA 1936 27C
ITAA 1936 27H
ITAA 1936 121DA
Copyright Act 1968
Marketing of Eggs Act 1945
Taxation Laws Amendment Act (No. 2) 1989

Case References:
Le Grand v. FC of T
(2002) 195 ALR 194
(2002) 2002 ATC 4907
(2002) 51 ATR1 39
(2002) 124 FCR 53
[2002] 1 FCA 1258

McIntosh v. FC of T
79 ATC 4325
(1979) 25 ALR 557
(1979) 45 FLR 279
10 ATR 13
Reseck v. FC of T
75 ATC 4213
(1975) 133 CLR 45
(1975) 49 ALJR 370
(1975) 6 ALR 642
5 ATR 538