Edited version of private ruling

Authorisation Number: 1011600279751

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Ruling

Subject: Termination payments

Questions

Is the payment of an amount (Amount A) made by your employer during the income year an approved early retirement scheme payment under section 27E of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer: No.

Are any parts of the payment of an amount (Amount B) made by your employer during the income year (an amount (Amount C)to yourself and an amount (Amount D) to a superannuation fund) early retirement scheme payments under section 83-180 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer: No.

Is the payment of an amount (Amount E) made by your employer during the income year in lieu of an unused travel voucher an employment termination payment under section 82-130 of the ITAA 1997?

Answer: Yes.

This ruling applies for the following periods:

2006-07 income year

2007-08 income year

The scheme commences on:

1 July 2006

Relevant facts and circumstances

You were employed by an employer (the employer) several years ago.

During the income year, the General Manager of the employer suggested the Board of Management may be agreeable to pay you an amount in return for agreeing to terminate on a specified date in the income year.

An agreement (the Agreement) between yourself and the employer was signed on a specified date in the income year detailing your employment conditions and pay for the next 12 months as well as the payment on your termination on a specified date in the 2006-07 income year.

Under the terms of the Agreement you were to be paid the following less taxes within 7 days of the termination date:

· all outstanding annual leave entitlements accrued to termination date;

· an ex-gratia sum of Amount F; and

· a travel voucher to the value of Amount G to be used in any manner that you elected.

In addition, under the terms of the Agreement you could also elect to be paid an amount of up to Amount A of the ex-gratia sum on or before 30 June 2007.

During the income year you were paid the following:

Amount A (from the Agreement's ex-gratia sum of Amount F); and

Amount H (from the Agreement's travel voucher sum of Amount G).

You terminated employment with the employer on the specified date in the income year.

During the income year the remaining amount, Amount B (from the Agreement's ex-gratia sum of Amount F) was paid as follows:

· a payment to yourself of Amount C in your final pay; and

· a contribution to a superannuation fund of Amount D which you had asked your employer to treat as a 'salary sacrifice'.

During the income year you were also paid Amount E being the balance from the Agreement's travel voucher sum of Amount G.

In your PAYG Payment Summary from the employer for the income year an amount, Amount I was shown as 'Gross Payments'. Various documents provided by the employer and yourself showed the 'Gross Payments' amount of Amount I was made up of the following:

Amount D paid by the employer to your superannuation fund was not included in the 'Gross Payments' on your PAYG Payment Summary.

A statement from the superannuation fund stated that Amount D was contributed by the employer on your behalf as 'salary sacrifice' on during the income year. The superannuation fund also confirmed they had withheld 15% tax.

You have advised you commenced an allocated pension from the superannuation fund during the income year.

Your are over 60 years of age.

Relevant legislative provisions

Section 27E of the Income Tax Assessment Act 1936

Section 6-5 of the Income Tax Assessment Act 1997

Section 6-10 of the Income Tax Assessment Act 1997

Subsection 15-2(1) of the Income Tax Assessment Act 1997

Subsection 15-2(2) of the Income Tax Assessment Act 1997

Section 82-130 of the Income Tax Assessment Act 1997

Section 82-135 of the Income Tax Assessment Act 1997

Paragraph 82-135(e) of the Income Tax Assessment Act 1997

Subsection 82-130(1) of the Income Tax Assessment Act 1997

Paragraph 82-130(1)(a) of the Income Tax Assessment Act 1997

Paragraph 82-130(1)(b) of the Income Tax Assessment Act 1997

Paragraph 82-130(1)(c) of the Income Tax Assessment Act 1997

Subsection 83-130(2) of the Income Tax Assessment Act 1997

Subsection 83-130(3) of the Income Tax Assessment Act 1997

Section 995-1 of the Income Tax Assessment Act 1997

Section 12-85 of the Taxation Administration Act 1953

Reasons for decision

Summary

The payment of Amount A made by your employer during the income year is not an approved early retirement scheme payment under section 27E of the ITAA 1936 and is assessable as ordinary income. This amount was correctly assessed in your 2007 income tax return.

No part of Amount B made by your employer during the income year is an early retirement scheme payment under 83-130 of the ITAA 1997.

Amount C made by your employer during the income year is an employment termination payment under section 82-130 of the Income Tax Assessment Act 1997 (ITAA 1997). Similarly, the payment of Amount E in lieu of an unused travel voucher is also an employment termination payment. Both amounts are subject to taxation at 15%. As these amounts were taxed at your marginal rate, you will need to request an amendment to your assessment to have these payments assessed correctly.

Amount D paid by your employer to a superannuation fund is also an employment termination payment and should not have been paid to the fund under a salary sacrifice arrangement. This amount should have been returned in your assessable income for the year.

Detailed reasoning

Payment of Amount A during the income year

Under section 27E of the Income Tax Assessment Act 1936 (ITAA 1936), three conditions need to be satisfied for a scheme to qualify as an approved early retirement scheme. Those conditions are:

· the scheme must be offered to all employees within a class identified by the employer;

· the scheme must be entered into with a view to rationalising or re-organising the operations of the employer with an identified purpose in mind; and

· the scheme must be approved by the Commissioner prior to its implementation.

In this case Amount A paid by your employer during the income year has not been paid from a scheme that satisfies any of the above conditions. Accordingly, it is not an approved early retirement scheme payment.

Under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) your assessable income includes income according to ordinary concepts, which is called ordinary income. If you are an Australian resident, your assessable income includes the ordinary income you derived directly or indirectly from all sources, whether in or out of Australia, during the income year.

Characteristics of ordinary income that have evolved from case law include receipts that:

· are earned;

· are expected;

· are relied upon; and

· have an element of periodicity, recurrence or regularity.

Your assessable income also includes some amounts that are not ordinary income. Under section 6-10 of the ITAA 1997, amounts that are not ordinary income, but are included in your assessable income by provisions about assessable income, are called statutory income. If an amount would be statutory income apart from the fact that you have not received it, it becomes statutory income as soon as it is applied or dealt with in any way on your behalf or as you direct.

In relation to the ex-gratia payment of Amount A you received during the income year, under subsection 15-2(1) and (2) of the ITAA 1997 it states;

15-2(1) Your assessable income includes the value to you of all allowances, gratuities, compensation, benefits, bonuses and premiums provided to you in respect of, or for or in relation directly or indirectly to, any employment of or services rendered by you (including any service as a member of the Defence Force).

15-2(2) This is so whether the things were provided in money or in any other form.

Therefore the ex-gratia payment of Amount A you received is assessable under section 15-2 of the ITAA 1997. It was correctly included in the 'Gross payments' section of your PAYG Payment Summary by your employer for the year ended 30 June 2007. You have correctly declared this income in your return for that year and the payment has been correctly taxed.

Payments that total Amount B during the income year

A scheme is an early retirement scheme if it satisfies all the conditions under subsection 83-180(3) of the ITAA 1997.

Subsection 83-180(3) states that:

A scheme is an early retirement scheme if:

all the employer's employees who comprise such a class of employees as the Commissioner approves may participate in the scheme; and

the employer's purpose in implementing the scheme is to rationalise or re-organise the employer's operations by making any change to the employer's operations, or the nature of the work force, that the Commissioner approves; and

before the scheme is implemented, the Commissioner, by written instrument, approves the scheme as an early retirement scheme for the purposes of this section

In this case the two payments which make up Amount B (Amount C and Amount D) have not been paid from a scheme that satisfies any of the above conditions. Accordingly, the payments cannot be classified as early retirement scheme payments.

We will now consider whether the payments are employment termination payments. For the following analysis we will ignore 'how' the payments were made. From 1 July 2007, payments made in consequence of the termination of a taxpayer's employment are known as employment termination payments.

Section 995-1 of the ITAA 1997 states:

employment termination payment has the meaning given by section 82-130.

Subsection 82-130(1) of the ITAA 1997 states:

A payment is an employment termination payment if:

· it is received by you:

· in consequence of the termination of your employment; or

· after another person's death, in consequence of the termination of the other person's employment; and

· it is received no later than 12 months after the termination (but see subsection (4)); and

· it is not a payment mentioned in section 82-135.

Therefore, it can be seen that a number of conditions need to be satisfied in order for a payment to be treated as an employment termination payment.

Failure to satisfy any of the conditions will result in a payment not being considered an employment termination payment.

The first condition to be met is that the payment is received by the person in consequence of the termination of their employment. The Commissioner has issued Taxation Ruling TR 2003/13 which discusses the meaning of the phrase.

Paragraph 5 of TR 2003/13 states:

the Commissioner considers that 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.

Therefore, if the payment follows as an effect or a result from the termination of employment, the payment will be made in consequence of the termination of employment for the purposes of subparagraph 82-130(1)(a)(i) of the ITAA 1997. Hence, the payment will be an employment termination payment unless the payment is otherwise excluded.

From the facts provided, there was an Agreement between you and the employer on a specified date in the income year (the Agreement) detailing the payment that you would receive for terminating employment on a specified date in the income year. The payment of Amount B is considered to be made in consequence of your termination of employment and not in respect of duties performed. The termination of employment, the Agreement and the payment are all intertwined and connected. If not for the termination of employment, the payment would not have been paid.

Therefore the total amount of the specified amount is considered to be received by you in consequence of the termination of your employment. The requirement under subparagraph 82-130(1)(a) of the ITAA 1997 has been met.

The second condition for the payment to meet the criteria as an employment termination payment is stated under paragraph 82-130(1)(b) of the ITAA 1997. The payment must be received within 12 months of the employee's termination of employment, unless they are covered by a determination exempting them from the 12 month rule.

As noted in the facts, your employment was terminated on a specified date in the 2007-08 income year. The payments making up Amount B were paid during the income year which is within 12 months after the termination of your employment. Therefore, the requirement under paragraph 82-130(1)(b) of the ITAA 1997 has been met.

The final requirement under paragraph 82-130(1)(c) of the ITAA 1997 is that the payment is not specifically excluded under section 82-135 of the ITAA .

Section 82-135 of the ITAA 1997 provides that certain payments are not employment termination payments, including any accrued annual and long service leave, superannuation benefits and capital payments for personal injury.

Based on the information provided, it is accepted that this section does not apply to your payment. Hence, no part of Amount B is excluded from being an employment termination payment in accordance with paragraph 82-135(e) of the ITAA 1997.

In this case, as all the conditions in section 82-130 of the ITAA 1997 have been satisfied, the payment of Amount B is an employment termination payment.

Under subsection 82-130(2) of the ITAA 1997 a life benefit termination payment is an employment termination payment that is made in consequence of the termination of employment. Therefore the payment of Amount B from your employer is assessable as a life benefit termination payment.

Circumstances around the payments of a specified amount

During the income year an amount was included in your final pay. This amount was also included under 'Gross Payments' on your PAYG Payment Summary which meant it was taxed at marginal rates when you lodged your income tax return for that year. It should have been taxed as an employment termination payment at concessional rates. The correct treatment for this payment is set out in the section below headed 'Tax Treatment of the employment termination payments'.

The balance of Amount B (i.e. Amount D) was paid by the employer to your superannuation fund on your behalf as a 'salary sacrifice' type contribution. The facts around the payment are:

a statement from the superannuation fund confirmed Amount D was contributed by the employer on your behalf as 'salary sacrifice';

the superannuation fund also confirmed they had deducted 15% tax on receipt of the contribution;

Amount D was not included in the 'Gross Payments' on your PAYG Payment Summary; and

the amount has not been included in your assessable income for the year.

On all aspects, this appears to be an effective salary sacrifice. However, for the reasons outlined below employment termination payments cannot be the subject of 'salary sacrifice'.

The Commissioner's view on salary sacrifice arrangements (SSA) is discussed in Taxation Ruling TR 2001/10 Income tax: fringe benefits tax and superannuation guarantee: salary sacrifice arrangements.

In Paragraph 19 of TR 2001/10, a salary sacrifice arrangement means:

An employee agrees to forgo part of his or her total remuneration that he or she would otherwise expect to receive as salary or wages, in return for the employer or someone associated with the employer providing benefits of a similar value.

Taxation Ruling TR 2001/10 also states at paragraph 2:

…we regard SSAs as remuneration arrangements involving PAYG withholding amount payers and payees covered by sections 12-35 (salary, wages, commission, bonuses or allowances paid to an individual as an employee), 12-40 (remuneration of company directors) or 12-45 (salary, wages, etc. paid to certain office holders) of Schedule 1 to the Taxation Administration Act 1953…

This paragraph makes no specific reference to section 12-85 of the Taxation Administration Act 1953 dealing with superannuation lump sums and employment termination payments. For this reason an employment termination payment cannot be the subject of a salary sacrifice arrangement.

This transaction would be rectified by:

Including Amount D in your assessable income for the year;

Advising the superannuation fund to change the type of contribution from a concessional contribution to a non-concessional contribution;

Advising the superannuation fund to re-credit your account with the 15% tax previously deducted from the contribution; and

Amending the employer's income tax return by disallowing the deduction for the contribution.

Payment of Amount E in lieu of unused travel voucher

Under the terms of the Agreement signed on a specified date in the income year you were to be paid a travel voucher to the value of Amount G to be used in any manner that you elected. You used Amount H during the income year and were reimbursed for that expenditure. During the income year you were paid a cash amount representing the unused balance of the travel voucher i.e. Amount E.

Once again, the termination of employment, the Agreement and the payment for unused travel are all intertwined and connected. If not for the termination of employment, the payment would not have been paid.

Therefore Amount E is considered to be received by you in consequence of the termination of your employment. As this payment also meets the other necessary conditions outlined in subsection 82-130(1) of the ITAA 1997, it too is an employment termination payment and should be assessed as a life benefit termination payment.

During the income year Amount E was included in your final pay. This amount was also included under 'Gross Payments' on your PAYG Payment Summary which meant it was taxed at marginal rates when you lodged your income tax return for that year. It should have been taxed as an employment termination payment at concessional rates. The correct treatment for this payment is set out in the section below headed 'Tax Treatment of the employment termination payments'.

Tax Treatment of the employment termination payments

This treatment applies to the two payments of Amount C and Amount E. These figures can be added together for calculation purposes (i.e. Amount J).

An employment termination payment made after 1 July 2007 will be comprised of the following components:

Tax free component this includes the pre-July 83 segment (if any) and/or the invalidity segment (if any); and

Taxable component the amount remaining after deducting the tax free component from the total payment.

The tax free component is not assessable income and is not exempt income. The taxable component is included, in full, as assessable income.

The taxable component is subject to tax, depending on the person's age when the payment is received. The rates of tax are as follows:

Preservation age is the age at which retirees can access their superannuation benefits. This will be 55 for persons born before 1 July 1960 and between 55 and 60 for persons born after 30 June 1960.

The taxable components of all life benefit employment termination payments received in an income year are counted towards this cap. Any tax-free amounts are not counted towards the cap.

Based on a total employment termination payment of Amount J (i.e. Amount C plus Amount E), a specified start date with your employer several years ago and a termination date on a specified date during the income year, your components include:

Tax free component: Amount K

Taxable component: Amount L

You will need to request an amendment to your income tax return to reflect these figures. You should include a copy of this ruling with your request.

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