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Ruling

Subject: Employment termination payment

Question:

Is the payment made by a company to you an employment termination payment under section 82-130 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer: No.

This ruling applies for the following period:

2010-11 income year

The scheme commences on:

1 July 2010

Relevant facts and circumstances

You were employed by the company from a specific date during the 2006-07 income year to a specific date during the 2010-11 income year.

In a calculation sheet provided by your employer it was advised that you will receive the following on the termination of employment:

· 3 month's salary and car allowance

· Payment re Key Performances Indicators (KPI's) 2010

· Accrued leave entitlements

You also received an amount for superannuation.

In a letter dated during the 2010-11 income year from your employer to your solicitor, your employer advised the payment is a performance payment and is not made in consequence of the termination of employment. The letter stated:

.. The bonus payment is not a golden handshake but a payment due under his contract for performance; the payment was assessed in the usual way and is ordinarily due around this time. It is not made in consequence of termination.

You are over 55 years of age.

Relevant legislative provisions

Section 6-5 of the Income Tax Assessment Act 1997

Section 82-130 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

Subparagraph 82-130(1)(a)(i) 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

Section 995-1 of the Income Tax Assessment Act 1997

Reasons for decision

Summary

The payment made by the company to you is not an employment termination payment under section 82-130 of the Income Tax Assessment Act 1997 (ITAA 1997). The payment is assessable as ordinary income under section 6-5 of the ITAA 1997.

Detailed reasoning

Employment termination payments made on or after 1 July 2007

From 1 July 2007, the taxation treatment of payments made in consequence of the termination of any employment of the taxpayer has changed. These payments were formerly known as eligible termination payments (ETPs).

Section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997) states that:

employment termination payment has the meaning given by section 82-130 of the ITAA 1997.

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

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.

To determine whether the payment to be made the employer is an employment termination payment all the conditions in section 82-130 of the ITAA 1997 will need to be satisfied.

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

Paid as a consequence of the termination of your employment

It should be noted that the phrase in consequence of the termination of your employment is not defined in the legislation. However, both the Courts and the Commissioner have considered the meaning of this phrase.

In Taxation Ruling TR 2003/13 the Commissioner has considered the meaning of the phrase in consequence of.

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.

As further stated by the Commissioner in paragraph 6 of TR 2003/13, there must be:

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.

The phrase in consequence of termination of employment has been interpreted by the courts in several cases.

Of note are the decisions made by the High Court in Reseck v. Federal Commissioner of Taxation (1975) 49 ALJR 370; (1975) 6 ALR 642; (1975) 5 ATR 538; (1975) 75 ATC 4213; (1975) 133 CLR 45 (Reseck) and the Full Federal Court in McIntosh v Federal Commissioner of Taxation (1979) 25 ALR 557; (1979) 10 ATR 13; (1979) 45 FLR 279; (1979) 79 ATC 4325 (McIntosh).

In Reseck, Justice Gibbs stated:

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 my opinion necessary that the termination of the services should be the dominant cause of the payment.

While in the same case Justice Jacobs stated:

It was submitted that the words in consequence of import a concept that the termination of the employment was the dominant cause of the payment. This cannot be so. A consequence in this context is not the same as a result. It does not import causation but rather a following on.

In looking at the phrase in consequence of the Full Federal Court in McIntosh considered the decision in Reseck.

Justice Brennan considered the judgments of Justice Gibbs and Justice Jacobs in Reseck and concluded that their Honours were both saying that a causal nexus between the termination and payment was required, though it was not necessary for the termination to be the dominant cause of the payment.

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.

Furthermore, in Le Grand v Federal Commissioner of Taxation [2002] FCA 1258; (2002) 124 FCR 53; (2002) 195 ALR 194; (2002) 2002 ATC 4907; (2002) 51 ATR 39 (Le Grand), the issue before the court was whether an amount received by the applicant 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 was in whole, or in part, an ETP. It was held that a settlement payment for litigation in relation to a taxpayers dismissal was an ETP.

Justice Goldberg stated:

I am satisfied that there is a sufficient connection between the termination of the applicants employment and the payment to warrant the finding that the payment was made in consequence of the termination of the applicants employment. I am satisfied that the payment was an effect or result of that termination in the sense that there was a sequence of events following the termination of the employment which had a relationship and connection which ultimately led to the payment.

Justice Goldberg concluded that the test for determining when a payment is made in consequence of the termination of employment is that which was articulated by Justice Gibbs in Reseck. Thus, for the payment to have been made in consequence of the termination of employment, the payment must follow as an effect or result of the termination of employment. As earlier stated in paragraph 6 of TR 2003/13, there must be 'a causal connection between the termination and the payment even though the termination need not be the sole or dominant cause of the payment'.

The Full Federal Court in Dibb v Federal Commissioner of Taxation [2004] FCAFC 126; (2004) 207 ALR 151; (2004) 2004 ATC 4555; (2004) 55 ATR 786 (Dibb), has applied the above decisions in finding that the payment received by the taxpayer under a Deed of Release to settle various causes of action against the employer following the termination of employment was an ETP.

In paragraph 31 of TR 2003/13 the Commissioner states:

It is clear from the decision in Le Grand, that when a payment is made to settle a claim brought by a taxpayer for wrongful dismissal or claims of a similar nature that arise as a result of an employer terminating the employment of the taxpayer, the payment will have a sufficient causal connection with the termination of the taxpayer's employment. The payment will be taken to have been made in consequence of the termination of employment because it would not have been made but for the termination.

The essence of this analysis is that 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 specifically excluded under section 82-135 of the ITAA 1997.

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.

From the facts of the case, you terminated employment the employer during the 2010-11 income year. You received a gross amount on the termination of employment. The gross amount included an amount. Your employer has referred to the amount as a 'payment re Key Performances Indicators' or a bonus. In a letter dated during the 2010-11 income year from your employer to your solicitor, your employer confirmed that the bonus payment is not made in consequence of the termination of employment. The letter stated as follows:

.. The bonus payment is not a golden handshake but a payment due under his contract for performance; the payment was assessed in the usual way and is ordinarily due around this time. It is not made in consequence of termination.

It is evident from the foregoing that the termination of employment was not a precondition to the making of the payment. Your employer has advised the payment is made "around this time" each year and relates to 'key performance indicators' and your employer has confirmed the payment is a bonus. Given it is the employer's decision as to if and when a bonus is paid, the Commissioner must be guided by the employer's characterisation of the payment. Therefore the circumstances in which the payment was made show that the payment was not made in consequence of termination of employment and is not an employment termination payment. Therefore, the first requirement under subparagraph 82-130(1)(a)(i) of the ITAA 1997 has not been satisfied.

As mentioned above all conditions under section 82-130(1) of the ITAA 1997 must be satisfied before the payment is considered to be an employment termination payment. As one condition has not been met, it is not necessary to discuss the other conditions under subsection 82-130(1) of the ITAA 1997.

Section 6-5 of the ITAA 1997 provides that the assessable income of an Australian resident includes the ordinary income derived directly or indirectly from all sources, whether in or out of Australia during the income year. As the amount is a payment of a bonus, the amount is assessable under section 6-5 of the ITAA 1997.

The amount should be included in your income tax return for the 2010-11 income year. The payment will be assessed at your marginal rate of tax as ordinary income under section 6-5 of the ITAA 1997.

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