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Edited version of your private ruling

Authorisation Number: 1012225901619

Ruling

Subject: Genuine redundancy payment

Question:

Are the 'Transitional Support Payments' to be made by an Agency employment termination payments?

Answer:

Yes

This ruling applies for the following period:

Year ended 30 June 2012

Year ended 30 June 2013

The scheme commenced on:

1 July 2011

Relevant facts:

A government contributed a sum of money to the Grantee to Administer and provide transitional support payments (TSPs) to assist workers who are directly impacted by a particular industry restructuring, including employees of contractors who are made redundant as their employer exited from the industry concerned.

A Deed was signed in the 2011-12 income year.

To be eligible for the TSPs under the scheme, the criteria on equity and efficiency are to be applied based on the following principles:

The TSPs to be made to all workers who are directly impacted by the industry restructuring consequent of a company (the Company) exiting from the industry concerned. This is to include workers employed by contractors of the Company who are made redundant as a consequence of the exit. Eligible workers are those whose jobs were made redundant on or after a specific date.

There are four separate payments that are made under the scheme and eligibility for each payment is based on individual circumstances:

This payment takes into account what the employee was paid by their employer for their redundancy. Redundancy payments usually contain an amount based on how long the employee worked there.

Example: John worked for XYZ for 10 years. His employer paid him 8 weeks redundancy. He would be eligible for (3 × 10) - 8 = 22 weeks pay (at ordinary hours and ordinary rate of pay).

This payment take into takes into account what the employer pays and is only applied to the length of time the person has worked for the employer, Redundancy payments usually take into account workers that are over the specified age.

Example: i.e. John is 10 years over the specified age and has worked for his current employer for 5 years; John will receive 5 weeks.

The fund will look after long service leave from 0 - a specified number of years and the employer must look after long service leave from the specified number of years onwards.

This payment is based on individual situations and will have to be worked out by the Accounts Manager.

All of the above payments in total for any one individual will have a financial limit.

Employees who have been made redundant will have their redundancy entitlements paid by their employers (based on Fair Work Australia National Employment Standards). The payments are in additional to standard redundancy and provide additional support to assist in the transition.

The payments are to be made within 18 months after the date of the signed Deed.

A private company will act as an Agent (the Agency) on behalf of eligible employers, both current and former in the industry to calculate and make the payments to eligible employees.

Eligible employees are defined as employees carrying out certain types of work and those whose jobs were made redundant on or after the signed Deed.

There are two mechanisms will be used to ensure that each worker receives the correct TSP as quickly as possible:

It is estimated that in respect to mechanism (2) above, less than a certain number of payments will be made to eligible employees under the scheme.

In the 2011-12 income year, the Agency has provided the following information regarding the recipients of the payments:

Assumptions

None

Relevant legislative provisions:

Income tax Assessment Act 1997 Section 82-130

Income tax Assessment Act 1997 Subsection 82-130(1)

Income tax Assessment Act 1997 paragraph 82-130(1)(a)

Income tax Assessment Act 1997 paragraph 82-130(1)(b)

Income tax Assessment Act 1997 Subsection 82-130(2)

Income tax Assessment Act 1997 Subsection 82-130(4)

Income tax Assessment Act 1997 sub-paragraph 82-130(4)(a)

Income tax Assessment Act 1997 subsection 82-130(5)

Income tax Assessment Act 1997 subsection 82-130(7)

Income tax Assessment Act 1997 Subsection 82-130(2)

Income tax Assessment Act 1997 Section 82-140

Income tax Assessment Act 1997 Section 82-145

Income tax Assessment Act 1997 Section 82-175

Income tax Assessment Act 1997 Section 995-1

Income tax Assessment Act 1997 Section 82-155

Taxation Administration Act 1953 Section 12-85

Reasons for decision

Summary

The transitional support payments (TSPs) received or to be received by eligible employees are employment termination payments.

Detailed reasoning

Employment termination payment

An employment termination payment, where the payment is made during the life of a taxpayer, is known as a life benefit termination payment (subsection 82-130(2) of the Income Tax Assessment Act 1997 (ITAA 1997)).

Section 995-1 of the ITAA 1997 states:

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

A payment is an employment termination payment if:

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

To determine if the TSPs are 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 conditions will result in the TSP not being considered an employment termination payment.

Payment is made in consequence of the termination of employment

The first condition to be met is that the payment is received by the person in consequence of the termination of their employment.

The phrase 'in consequence of' is not defined in the ITAA 1997. However, the words have been interpreted by the courts in several cases. The Commissioner has also issued Taxation Ruling TR 2003/13 which discusses the meaning of the phrase.

In paragraph 5 of TR 2003/13 the Commissioner states:

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

Also in paragraph 5 of TR 2003/13 the Commissioner notes that the Courts have considered the meaning of the words in consequence of in several cases.

Of note are the decisions made by the Full Bench of the High Court in Reseck v. Federal Commissioner of Taxation1 (Reseck) and the Full Federal Court in McIntosh v Federal Commissioner of Taxation2 (McIntosh).

In Reseck, Justice Gibbs stated:

While Justice Jacobs, in the same case, stated:

In looking at the phrase in consequence of the Full Federal Court in McIntosh considered the decision in Reseck. In doing so the Full Federal Court emphasised that a payment may be in consequence of the termination of employment even though the termination is not the dominant cause of the payment.

In particular, 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 to say, the view of both Courts was 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 phrase in consequence of and the decisions in Reseck and McIntosh were considered more recently by the Federal Court in Le Grand v Federal Commissioner of Taxation3 (Le Grand), where Justice Goldberg stated:

Justice Goldberg concluded that the test for determining when a payment is made in consequence of the termination of employment is that which was expressed 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 noted in both paragraphs 6 and 28 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'.

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 specifically excluded under section 82-135.

In the present case, the TSPs are payable only to the eligible employees whose jobs were made redundant on or after the signed Deed. The payment of the TSP follows as an effect or result of the termination and the payment would not have been made to the eligible employees but for the termination of their employment.

The TSP is only payable on the condition that eligible employees have had their employment terminated due to redundancy. No entitlement to the TSP arises prior to this event.

In view of the above, the payment of the TSP is made in consequence of the termination of employment and is therefore an employment termination payment under section 82-130 of the ITAA 1997.

The payment is made no later than 12 months after the termination of employment

The second requirement under section 82-130 of ITAA 1997 is that the payment be made within12 months of the termination of employment. Payments made outside 12 months will be taxed as ordinary income at marginal tax rates.

In the current case, the Agency has advised that the funding for making the payments has been fully utilised. Consequently, all the payments by the Agency will be made within 12 months of termination of employment.

Accordingly, the requirement under paragraph 82-130(1)(b) of ITAA 1997 will be satisfied.

The payment is not a payment specifically excluded under section 82-135

The third condition for the payment to meet the criteria, as an employment termination payment is stated under paragraph 82-130(1)(c) of the ITAA 1997, is that the payment must not be specifically excluded under section 82-135.

Section 82-135 of the ITAA 1997 provides that certain payments are not employment termination payments, including:

On the basis of the information provided by the applicant, it is considered that the payments are not payments that are specifically excluded under section 82-135 of the ITAA 1997. Therefore the condition under paragraph 82-130(1)(c) has been met.

As the payments made or to be made to the eligible employees satisfy all the conditions under subsection 82-130(1) of the ITAA 1997, the payments are employment termination payments for the purposes of section 82-130.

It should be noted that an employment termination payment cannot be rolled over into a complying superannuation fund.

Taxation Treatment

An employment termination payment will be comprised of the following components:

PAYG Withholding

Section 12-85 of Schedule 1 of the Taxation Administration Act 1953 (TAA) states:

An entity must withhold an amount from any of the following payments it makes to an individual:

As shown above, the payment to be made to the eligible workers is an employment termination payment. Therefore, an amount must be withheld.

The amount to withhold depends on whether a Tax File Number (TFN) has been provided.

If a TFN has not been provided before the payment is made, tax must be withheld at the rate of 46.5% from the taxable component. This represents the top marginal rate plus Medicare levy.

If the payee has provided the employer with a TFN, tax must be withheld at the following rates:

Income component derived in the income year

Age at the end of the income year in which the payment is received

Component subject to tax

Maximum rate of tax (including Medicare levy)

Employment termination payment (ETP) - taxable component

Under preservation age

Amount up to the ETP cap amount

31.5%

At or above preservation age

Amount up to the ETP cap amount

16.5%

All ages

Amount above the ETP cap amount

46.5%

For the 2011-12 and 2012-13 income years the ETP cap amount is $165,000 and $175,000 respectively.

Preservation age is the age at which retirees can access their superannuation benefits generally when they retire.

If employee was born:

PAYG withholding Tax table for employment termination payments (NAT 70980) is enclosed for your reference.


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