Edited version of private ruling

Authorisation Number: 1011602961436

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Ruling

Subject: Employment termination payment and transitional termination payment

1. Is the payment for unused sick leave received by your client an employment termination payment under section 82-130 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes.

2. Is the payment for unused sick leave received by your client a transitional termination payment as defined in section 82-10 of the Income Tax (Transitional Provisions) Act 1997 (IT(TP)A)?

Yes.

This ruling applies for the following period

Year ending 30 June 2010

The scheme commenced on

1 July 2009

Relevant facts

Your client entered into a position vested with substantial powers and duties with their Employer under a contract prior to 10 May 2006 (the old contract). The position is ongoing and has a separate existence.

Your client subsequently entered into the new contract which engages them in a substantially different role with wider responsibilities under terms different from the old contract.

Had your client not applied for the new position with the Employer and accepted the new contract, your client's employment would have terminated on a specific date in the 2009-10 income year as provided in the old contract.

Your client did not have any discretion to extend the old contract.

Your client's annual leave and long service leave will roll forward from the old contract to the new contract.

Your client will be paid an amount for unused sick leave prior to 30 June 2010.

The payment is made under a clause of the old contract which outlines the Employer's unused sick leave policy.

A letter from the Employer states:

…we advise that [your client] commenced service with this organisation on [date] and ceased employment on [date]. All applicable benefits accrued to that date were paid at the time of [the] termination, in accordance with [your client's] terms of employment.

You are employed in a new position.

The amount has been made within 12 months after the termination of your client's old contract.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 80-5.

Income Tax Assessment Act 1997 Section 82-130.

Income Tax Assessment Act 1997 Subparagraph 82-130(a)(i).

Income Tax Assessment Act 1997 Section 82-135.

Income Tax (Transitional Provisions) Act 1997 Section 82-10.

Income Tax (Transitional Provisions) Act 1997 Subsection 82-10(1).

Income Tax (Transitional Provisions) Act 1997 Paragraph 82-10(1)(b).

Income Tax (Transitional Provisions) Act 1997 Subsection 82-10(3).

Reasons for decision

Summary

The payment for unused sick leave received by your client is an employment termination payment as it is:

· received by your client in consequence of the termination of their employment

· it is received no later than 12 months after that termination, and

· it is not a payment excluded from being an employment termination payment.

Further, the payment is a transitional termination payment as:

· the payment is received by your client because they are entitled to it under a written contract, and

· the entitlement is provided for under that contract, as in force just before 10 May 2006.

Detailed reasoning

An employment termination payment is defined in section 82-130 of the Income Tax Assessment Act 1997 (ITAA 1997) as follows:

A payment is an employment termination payment if:

(a) it is received by you:

(i) in consequence of the termination of your employment; or

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

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

(c) it is not a payment mentioned in section 82-135.

For the purposes of subparagraph 82-130(a)(i) of the ITAA 1997 stated above, section 80-5 extends the ordinary meaning of employment to include the holding of an office.

The Butterworths Australian Legal Dictionary states the following regarding the meaning of the term office:

1. A position of authority to which duties and functions are attached

2. In relation to income tax assessment, a position of defined authority in an organisation (for example, company director, president of a club, holder of a position with statutory powers)

3. A post or employment that is subsisting, permanent position existing independently of the person who fills it, and that goes on and is filled in succession by successive holder 4. In relation to corporations, reference is made to the office of director in Corporations Law ss 224, 227 (vacation of office, removal from office).

The term 'office' is not defined in the ITAA 1997 but it has been considered in a number of cases.

In AAT Case 8603 (1993) 93 ATC 148; (1993) 25 ATR 1082, Deputy President BJ McMahon dealt with a case of a woman who had been an Inspector of Schools and who became (when that position phased out) a Cluster Director. Paragraphs 14 and 15 read as follows:

14. The word "office" is a word that had been considered in many cases but no satisfactory definition has emerged. As was pointed out in Grealy's case [Grealy v. Commissioner of Taxation (1989) 24 FCR 405; (1989) 20 ATR 403; (1989) 89 ATC 4192] the word usually connotes a position of defined authority in an organisation, such as a director of a company, or a tertiary education body. Their Honours held (at 4197 column 2) that it was not a word normally applicable to a relatively low level employee, such as a university lecturer. As the court observed the applicant, like many holders of professional employment, is not made an office holder merely because her position has a name.

15. This view was consistently taken by the Boards of Review. For example, in Case K4, 78 ATC 29 [(1978) 22 CTBR (NS) 212], Mr Dempsey suggested that an office connotes something more than substantial, something more in the nature of a continuing executive position, the holder of which has distinct responsibilities. In Grealy's case itself, their Honours noted that the word "office" usually connoted a position of defined authority. [additional case citations added]

AAT Case 39/97 97 ATC 407; Case 12,178 (1997) 37 ATR 1174 concerned a taxpayer who received a payment in respect of unused sick leave when he resigned from his position as a Branch Manager after having successfully won a position of Division Director for the same employer (a local council). In determining the case, one of the issues raised was whether the taxpayer was the holder of an office and whether a retirement or termination had occurred. In that case, Senior Member J Block stated:

The test as to whether a position is an office will no doubt usually be one involving questions of fact and degree...

In his findings, Senior Member Block also referred to a few previous cases which looked at the issue of office and at (ATC) 421; (ATR) 1189, he made the following observation:

In Great Western Railway Co v. Bater [1920] 3 KB 266 Rowlett J had held that an office was "a subsisting, permanent, substantive position which had an existence independent of the person who filled it, which went on and was filled in succession by successive holders".

I consider, with respect, that the meaning attributed to the term "office" by Deputy President Thompson in W31 [Case No VT 87/3438 (1989) 20 ATR 3509; (1989) 89 ATC 307] is for Australian purposes, correct. That test would require that it is a position to which "duties are attached, especially a place of trust, authority or service under constituted authority". It is thus clear that the restricted UK view is narrow, when contrasted with the less restricted Australian approach. [bold emphasis and additional case citations added]

The phrase 'in consequence of termination of employment' in subparagraph 82-130(a)(i) of the ITAA 1997 above is not defined in the legislation. However, the courts have considered the meaning of the words 'in consequence of' in relation to eligible termination payments (ETPs), the predecessor of employment termination payments.

Of note are the decisions made by the Full High Court in Reseck v. Federal Commissioner of Taxation (1975) 133 CLR 45; 75 ATC 4213; (1975) 5 ATR 538 (Reseck) and the Full Federal Court in McIntosh v. Federal Commissioner of Taxation 79 ATC 4325; (1979) 10 ATR 13 (McIntosh).

Suffice it to say that both Courts views were that for a payment to be made in consequence of the termination of employment it had to follow on as a result or effect of the termination of employment. Additionally, while it is not necessary to show that termination of employment is the sole or dominant cause, a temporal sequence alone would not be sufficient.

The Commissioner in Taxation Ruling TR 2003/13 considered the phrase 'in consequence of' as interpreted by the Courts. In paragraph 5 of TR 2003/13 the Commissioner states:

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.

In the present case, your client holds a position vested with substantial powers and duties with the Employer. The position is ongoing and has a separate existence. It is considered that the position held by your client would constitute an office within the meaning of section 80-5 of the ITAA 1997.

From the facts, your client has entered into a new contract to assume a different position with the same employer. The new position engages them in a substantially different role with wider responsibilities. Not withstanding that your client is still employed with the same employer, it is accepted that by vacating the previous position your client is terminating the holding of an office. As such, this would constitute a termination of employment for the purposes of subparagraph 82-130(a)(i) of the ITAA 1997.

As your client's unused sick leave payout follows as an effect or a result from the termination of employment, it is considered that the payment will be made in consequence of the termination of employment and will be an employment termination payment so long as it also satisfies the other requirements under section 82-130 of the ITAA 1997.

The second requirement under section 82-130 of the ITAA 1997 is that the payment be made within 12 months after the termination. From the facts, the unused sick leave payout is made within 12 months after the termination of your client's contract. Therefore, this requirement will be satisfied.

The third requirement under section 82-130 of the ITAA 1997 requires that payment is not a payment mentioned in section 82-135. As unused sick leave is not a payment listed in section 82-135, this requirement is satisfied.

As the payout of your client's unused sick leave under the old contract satisfies all the requirements under section 82-130 of the ITAA 1997, it is an employment termination payment

Transitional termination payment

Employment termination payments cannot be rolled over into a complying superannuation fund, unless the payment qualifies as a transitional termination payment under section 82-10 of the IT(TP)A.

Subsection 82-10(1) of the IT(TP)A states that:

This Division applies in relation to a life benefit termination payment received by you on or after 1 July 2007 if:

(a) the payment is received by you because you are entitled to it under a written contract, a law of the Commonwealth, a State, a Territory or another country, an instrument under such a law, a collective agreement within the meaning of the Fair Work (Transitional Provisions and Consequential Amendments) Act 2009 or an AWA within the meaning of that Act; and

(b) the entitlement is provided for under that contract, law, instrument or agreement as in force just before 10 May 2006.

Furthermore, at subsection 82-10(3) of the IT(TP)A it states:

This Division applies in relation to a life benefit termination payment only to the extent that the contract, law or agreement as in force just before 10 May 2006 specifies the amount of the payment, or a way to work out a specific amount of the payment.

The first issue for consideration is whether a payment made to your client under the old contract satisfies the requirement of being an entitlement under a written contract.

The explanatory memorandum to the Tax Laws Amendment (Simplified Superannuation) Act 2007 which introduced section 82-10 of the IT(TP)A states:

4.68 In order to ensure that the transitional provisions are not open to abuse, they are only available in situations where the payment was able to be determined as at 9 May 2006. This will encompass arrangements where the contract refers to the amount of the payment by way of a formula which can be objectively determined, or to payments made in kind (eg, shares). [Schedule 2, item 2, subsections 82-10(3) and (4)]

In this case, your client's termination entitlements and the formulas to calculate them are stated clearly in the old contract.

This will satisfy the requirement in paragraph 82-10(1)(a) of the IT(TP)A that the payment is received by a taxpayer because they have an entitlement under a written contract to the payment.

Contract in force before 10 May 2006

Paragraph 82-10(1)(b) of the IT(TP)A requires that the entitlement is provided for under that contract as in force just before 10 May 2006. Furthermore, subsection 82-10(3) provides that the division applies to a payment only to the extent that the contract as in force just before 10 May 2006 specifies the amount of the payment, or a way to work out a specific amount of the payment.

In this instance, the old contract was entered into prior to 10 May 2006, and provides a way to work out a specific amount of payment.

As all conditions under section 82-10 of the IT(TP)A have been satisfied the payment is a transitional termination payment.

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