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Ruling

Subject: Employment termination payment

Question 1

Is the additional amount that will be paid to you on termination of employment, an employment termination payment as defined in section 82-130 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes, to the extent that it does not include the tax-free portion of the genuine redundancy payment.

This ruling applies for the following periods:

1 July 2012 to 30 June 2013

The scheme commences on:

1 July 2012

Relevant facts and circumstances

You were employed at a facility in a particular location.

As a result of the sale of the facility, your employer has confirmed that your position will cease to exist and you will be made redundant.

Your employer has stated that as a result of your redundancy you are entitled to an additional amount (amongst other entitlements) which is equivalent to six months base salary and inclusive of superannuation. This amount will be paid with your normal monthly salary payment.

As part of the sale process, your employer has offered the additional amount to secure your employment services until your employment is terminated. This amount was only payable if the sale process was successful and your employment was terminated.

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 Paragraph 82-130(1)(c).

Income Tax Assessment Act 1997 Subsection 82-130(2).

Income Tax Assessment Act 1997 Subsection 82-130(4).

Income Tax Assessment Act 1997 Section 82-135.

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

Income Tax Assessment Act 1997 Section 83-170.

Income Tax Assessment Act 1997 Section 83-175.

Income Tax Assessment Act 1997 Section 995-1.

Reasons for decision

Employment termination payment

From 1 July 2007 the taxation treatment of payments made in consequence of the termination of any employment of a taxpayer changed. These payments, formerly known as eligible termination payments, are now called employment termination payments. Where the payment is made during the life of a taxpayer the employment termination payment is known as a life benefit termination payment in accordance with subsection 82-130(2) of the Income Tax Assessment Act 1997 (ITAA 1997).

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:

(a) it is received by you:

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

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

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

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

To determine if a payment constitutes an employment termination payment, all the conditions in subsection 82-130(1) of the ITAA 1997 must be satisfied. Failure to satisfy any of the three conditions under subsection 82-130(1) will result in the payment not being considered an employment termination payment.

Payment is made in consequence of the termination of your employment

For a payment to be treated as an employment termination payment, the first condition that needs to be met is that there must be a payment that is made in consequence of the termination of employment of the taxpayer, as per subparagraph 82-130(1)(a)(i).

The phrase 'in consequence of' is not defined in the ITAA 1997. However, the courts have interpreted the phrase in a number of cases. Whilst the courts have divergent views on the meaning of this phrase, the Commissioner's view on the meaning and application of the 'in consequence of' test are set out in Taxation Ruling TR 2003/13 Income tax: eligible termination payments (ETP): payments made in consequence of the termination of any employment: meaning of the phrase 'in consequence of'.

While TR 2003/13 considered the meaning of the phrase 'in consequence of' in the context of eligible termination payments, TR 2003/13 can still be relied upon as both the former provision under the Income Tax Assessment Act 1936 and the current provision under the ITAA 1997 both use the term 'in consequence of' in the same manner. As previously noted, eligible termination payments ceased to exist from 1 July 2007, being replaced by employment termination payments.

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 paragraph 6 of TR 2003/13, the Commissioner recognises that:

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.

The phrase 'in consequence of' the 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).

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.

There is also a broader view of the meaning of 'in consequence of' the termination of employment. Paragraph 29 of TR 2003/13 provides that a payment will be in consequence of the termination of employment if the termination is either a cause of the payment or an antecedent event.

Furthermore, in Case No M 101/1976 (1977) 77 ATC 475; (1977) 22 CTBR (NS) 41 (Case No M 101/1976) the No. 2 Board of Review considered whether a production completion bonus was made in consequence of termination of employment. The facts of the case were that on the day he was retrenched, the taxpayer received a production completion bonus of $2,750 from his employer. In a letter to the Deputy Commissioner, the taxpayer's former employer explained that the bonus payment was designed as an incentive to keep the employee on a particular project until he was no longer needed. Payment of the bonus was conditional on the employee remaining on the job until retrenched. The taxpayer gave evidence that had he resigned at any time before the retrenchment date he would have received no part of the bonus.

The No. 2 Board of Review held that the payment constituted an allowance or compensation paid in a lump sum in consequence of the termination of the taxpayer's employment within the meaning of former paragraph 26(d) of the ITAA 1936 (the precursor to the ETP provisions). In making the decision the judgement of the majority of the Full High Court in Reseck was followed.

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 circumstances of the present case are very similar to the circumstances in Case No M 101/1976 considered by the No 2 Board of Review.

In the facts of this case, your employer has advised that, as a result of the sale of the asset, your position will cease to exist and you will become redundant.

Your employer has indicated that as part of the sale process, they have offered you a one-off, amount, to secure your employment services until your employment is terminated.

It is clear from the facts provided that the payment to you of this additional amount is made 'in consequence of' the termination of your employment. As such, there is a direct causal connection between the termination of your employment and the making of the payment.

If not for the termination of your employment, this additional amount would not have been made. In particular, the payment is conditional on you remaining in employment with your current employer until the planned cessation date.

It is therefore considered there is a sufficient causal nexus between the making of the payment and the termination of employment to say that the payment is made in consequence of the termination of your employment.

Hence the payment will be an employment termination payment unless the payment is specifically excluded under section 82-135.

Payment is received no later than 12 months after that termination

The second condition for the payment to meet the criteria as an employment termination payment requires the payment in question be received within twelve months of that termination (paragraph 82-130(1)(b) of the ITAA 1997), unless they are covered by a determination exempting them from the 12 month rule.

Your employer has confirmed that the additional amount will be made directly to your bank account in the normal monthly pay. As it is anticipated this amount will be paid in accordance with the process specified by your employer, then the amount will be paid within twelve months of your planned termination of employment. Accordingly, paragraph 82-130(1)(b) is satisfied.

Payment is not a payment mentioned in section 82-135

The final requirement for a payment to qualify as an employment termination payment, as per paragraph 82-130(1)(c) is, that the payment is not a payment mentioned in section 82-135 of the ITAA 1997.

Relevantly in your case, paragraph 82-135(e) states that the part of a genuine redundancy payment worked out under section 83-170 of the ITAA 1997, is not an employment termination payment.

Genuine redundancy payment

Genuine redundancy payments (GRP) are tax-free up to a limit worked out under section 83-170.

As far as relevant, section 83-175 outlines the requirements to be satisfied before any payment made to a person whose employment is terminated qualifies for treatment as a GRP. This section states in part:

(1) A genuine redundancy payment is so much of a payment received by an employee who is dismissed from employment because the employee's position is genuinely redundant as exceeds the amount that could reasonably be expected to be received by the employee in consequence of the voluntary termination of his or her employment at the time of the dismissal.

(2) A genuine redundancy payment must satisfy the following conditions:

(a) the employee is dismissed before the earlier of the following:

(i) the day he or she turned 65;

(ii) if the employee's employment would have terminated when he or she reached a particular age or completed a particular period of service the day he or she would reach the age or complete the period of service (as the case may be);

(b) if the dismissal was not at *arm's length the payment does not exceed the amount that could reasonably be expected to be made if the dismissal were at arm's length;

(c) at the time of the dismissal, there was no *arrangement between the employee and the employer, or between the employer and another person, to employ the employee after the dismissal….

The first requirement which is specified in subsection 83-175(1) of the ITAA 1997 has three criteria:

(i) the payment is received by an employee who is dismissed from employment;

(ii) the employee is dismissed because the employees position is genuinely redundant; and

(iii) the payment exceeds the amount that could reasonably be expected to be received by the employee in consequence of the voluntary termination of his or her employment at the time of the dismissal.

As already considered in this case, payment of the additional amount will be made to you in consequence of the termination of your employment. Your employment is being terminated by your employer, as a result of the sale of the asset. The termination of your employment is clearly a dismissal, instigated by your employer.

Furthermore, your employer has confirmed that your role will cease to exist and you will be made redundant. The amount is therefore clearly being paid to you in circumstances of genuine redundancy.

The amount to be paid is also in excess of the amount that you could reasonably expect to receive if you had resigned or retired from employment in the position you held at the time of dismissal. If not for the termination of employment the additional amount would not have been made.

It is therefore considered that you have satisfied the requirements of subsection 83-175(1) in this instance.

Subsection 83-175(2) of the ITAA 1997 states that for a payment to qualify as a GRP all of the following conditions must be met:

(a) the employee is dismissed before the earlier of the following:

(i) the day he or she turned 65;

(ii) if the employee's employment would have terminated when he or she reached a particular age or completed a particular period of service - the day he or she would reach the age or complete the period of service (as the case may be);

(b) if the dismissal was not at arm's length - the payment does not exceed the amount that could reasonably be expected to be made if the dismissal were at arm's length;

(c) at the time of the dismissal, there was no arrangement between the employee and the employer, or between the employer and another person, to employ the employee after the dismissal.

The requirements under paragraphs 83-175(2)(a) and (b) of the ITAA 1997

As already noted previously, paragraph 83-175(2)(a) of the ITAA 1997 prescribes that the employee must be dismissed before the earlier of:

· the day he or she turned 65; or

· if the employee's employment would have terminated when he or she reached a particular age or completed a particular period of service - the day he or she would reach the age or complete the period of service (as applicable).

It is accepted that there was no date prior to your 65^th birthday on which you were required to terminate employment, and that you were not required to terminate employment before you were dismissed on the effective date. Also given that you were under 65 years of age at the time of your dismissal, you have satisfied the requirements of paragraph 83-175(2)(a) of the ITAA 1997.

Additionally, it is accepted that all dealings between yourself and the employer were at arm's length. Therefore it follows that you have also satisfied the requirement under paragraph 83-175(2)(b) of the ITAA 1997.

The requirement under paragraph 83-175(2)(c) of the ITAA 1997

Also as noted previously, paragraph 83-175(2)(c) of the ITAA 1997 requires that at the time of the dismissal, there was no arrangement between the employee and the employer, or between the employer and another person, to employ the employee after the dismissal.

In the present case, there will not be any re-employment by your employer or evidence of any re-employment arrangement with another entity, so it is accepted that you have satisfied the requirement under paragraph 83-175(2)(c) of the ITAA 1997 in this case.

A GRP under sections 83-170 and 83-175 of the ITAA 1997

As you have satisfied the relevant criteria set out in section 83-175 of the ITAA 1997, it is considered that the additional amount constitutes a GRP for the purposes of section 83-170.

Tax-free treatment of a GRP

Some or all of a genuine redundancy payment may be non-assessable and non-exempt income, and accordingly tax-free, under section 83-170 of the ITAA 1997.

Subsection 83-170(2) of the ITAA 1997 provides that so much of the GRP that does not exceed the amount worked out using the formula prescribed in subsection 83-170(3) is not assessable income and is not exempt income.

The extent to which the payment is tax-free will depend on the amount of the payment and the total number of whole years of employment to which the payment relates. The formula for working out the tax-free amount is:

Base amount + (Service amount × Years of service)

As your termination of employment will occur during the 2012-13 income year, the base amount will be $Y and the service amount will be $Z.

You will need to calculate, in accordance with subsection 83-170(3) of the ITAA 1997, the tax-free part of your GRP that you can receive in the 2012-13 income year, ensuring that all redundancy payments made in consequence of your dismissal are taken into account in the calculation.

Any amount in excess of the tax-free amount will be included in your assessable income (in the 2012-13 income year) and taxed as an employment termination payment.

Conclusion

The additional amount to be paid in consequence of the termination of your employment is a genuine redundancy payment.

As such, the genuine redundancy payment will contain a part that is not assessable income and not exempt income and is accordingly tax-free. Any amount in excess of the tax-free amount will be assessable income and taxed as an employment termination payment.

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