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Ruling

Subject: Employment termination payment - long retention bonus

Questions

1. Does the payment described as a 'long retention bonus' made by the Employer to its employees constitute an employment termination payment?

2. Is any part of the 'long retention bonus' made to the employees a genuine redundancy payment?

Answers

1. No.

2. No.

This ruling applies for the following periods

Year ended 30 June 2012

Year ending 30 June 2013

The scheme commenced on

1 July 2011

Relevant facts and circumstances

In the relevant year a related entity of the Employer entered into an agreement to sell an asset (the asset) to an interested entity (the Purchaser).

The related entity's employees (the Site X Employees) performed services on the asset.

The Employer also employed some individuals in relation to the asset who were located at a site where the asset was not located (Site Y Employees).

During the process of the negotiation it became apparent to the Employer (and the related entity) that the services of many employees would no longer be required.

You state as a result of the sale:

(a) many of the positions of the employees would no longer exist;

(b) the Purchaser had no intention of continuing the employment of the Site Y Employees; and

(c) the above would result in the redundancy of all the related entity's Employees as well as some, but not all, of the Employer's Site Y Employees.

The Employer decided to retain the services of some Site Y Employees as they performed various other tasks which could be used in the business of the Employer and these selected Employees (Continuing Site Y Employees) would continue in their current positions following the sale.

To assist its Employees on redundancy, and provide an incentive for these employees to continue their employment up until the sale and a period thereafter, the Employer offered these Employees the opportunity to participate in an Incentive Payment Plan (the Plan).

In the relevant year the Employer sent letters (the Offer letters) to the Site Y Employees, including the Continuing Site Y Employees, which detailed the Plan. A generic copy of the letters has been provided which states:

(a) the sale of the asset could result in redundancies;

(b) the Plan was implemented to ensure all employees providing critical support continue to be motivated and committed to performing their role during the sales process of the asset and a period following the sale

(c) Under the Plan, if an agreement was signed for sale of the asset to the Purchaser and the title in the asset being transferred to the Purchaser before a specified date, each Site Y Employee who accepted the Plan and continued their employment until a specified date, or earlier upon their role with the Employer becoming redundant, would receive a 'Long Retention Bonus' (the Bonus);

(d) In order to receive the Bonus, each Site Y Employee who accepted the Plan was required to:

(i) remain employed by the Employer until a specified date or earlier, if the redundancy occurred earlier (Termination Date);

(ii) continue to perform their roles until the Termination Date; and

(iii) provide assistance and co-operation in respect to any requests made concerning the sale process of the asset.

In the offer to the Site Y Employees, the Bonus was stated to be in addition to the Employer's other payment obligations to each Site Y Employee. These other payments are:

(a) an amount in lieu of the contractual obligation (i.e. under the relevant enterprise bargaining agreement (EBA)) to provide notice prior to termination of employment (Notice Payment); and

(b) an amount in satisfaction of each Employee's leave entitlements.

The Bonus was expressed to be 'inclusive of all superannuation payments'.

Each Employee who was made redundant would receive:

(a) wages or salary owing to them;

(b) the Notice Payment (if applicable);

(c) Leave Payments, that is, unused annual or long service leave; and

(d) the Bonus.

A specific clause of the EBA provided that a contract of employment may be terminated by either the employee or the employer by provision of four weeks' written notice or by the payment of salary by the employer in lieu of notice.

As a result of the significant financial reward inherent in the Bonus and to ensure consistency amongst employees, it was decided that Continuing Site Y Employees would also receive a payment similar to the Bonus, calculated in the same manner, even though they would remain employed by the Employer following the Termination Date.

There was no separate Plan offered to the Continuing Site Y Employees to that which was offered those Employees whose employment was likely to be terminated (Terminating Site Y Employees).

Early in the subsequent income year a letter (Confirmation of Redundancy letter) was sent to the Terminating Site Y Employees confirming their positions would be made redundant. The letter stated:

(a) each Terminating Site Y Employee's employment would be terminated on the Termination date as a result of the sale of the asset;

(b) the Purchaser had provided written confirmation that each Terminating Site Y Employee's position was no longer required and accordingly each role had ceased to exist; and

(c) the Employer had no suitable roles within its organisation and accordingly each Terminating Site Y Employee's employment terminated on the Termination date.

The letter further provided that each Terminating Site Y Employee was entitled to:

(a) a severance payment, calculated by reference to the Employee's period of employment; and

(b) the Bonus,

which would be paid along with other outstanding entitlements (such as payments in lieu of unused annual leave and, where applicable, long service leave) on either:

(a) the Termination date; or

(b) such earlier date upon which the Employee's position became redundant.

Payment of the severance payment, the Bonus and other entitlements would be made directly to each Terminating Site Y Employee.

Details have been provided which show:

(a) the Site Y Employees whose employment was terminated (that is, the Terminating Site Y Employees);

(b) some Terminating Site Y Employees received the Bonus in the 2011-12 income year and some others received them in the 2012-13 income year; and

(c) the Bonus was also paid to Continuing Site Y Employees.

You state:

(a) each Terminating Site Y Employee was dismissed before he or she turned 65 years of age and before the date at which their employment would have terminated;

(b) the dismissals were at arm's length; and

(c) there is no arrangement between the Employer and the Terminating Site Y Employees, or the Employer and any other person, to employee the Terminating Site Y Employees after their dismissals.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 12-35 of Schedule 1

Income Tax Assessment Act 1997 Section 82-130

Income Tax Assessment Act 1997 Section 82-130(1)(a)

Income Tax Assessment Act 1997 Section 82-130(1)(b)

Income Tax Assessment Act 1997 Section 82-130(1)(c)

Income Tax Assessment Act 1997 Section 82-135

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

Income Tax Assessment Act 1997 Section 83-175

Reasons for decision

Summary

The Bonus payments made to the Employees under the Plan which was implemented by the Employer are not considered to be employment termination payments as they are not made in consequence of the Employees' termination of employment.

Consequently, as the Bonus is not made in consequence of termination or employment, it does satisfy one of the main requirements for it to be treated as a genuine redundancy payment.

Detailed reasoning

Employment termination payment

A payment made to an employee is an employment termination payment if the payment satisfies all the requirements in section 82-130 of the Income Tax Assessment Act 1997 (ITAA 1997) and is not specifically excluded under section 82-135.

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 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 the termination (but see subsection (4)); and

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

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

· payment for unused annual leave or unused long service leave;

· the tax-free part of a genuine redundancy payment or an early retirement scheme payment.

· reasonable capital payments for personal injury.

In consequence of the termination of your employment

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 of Taxation's (the Commissioner) 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 the 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. It should be noted that eligible termination payments ceased to exist from 1 July 2007 and were 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. (emphasis added)

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. (emphasis added)

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 Taxation¹ (Reseck) and the Full Federal Court in McIntosh v Federal Commissioner of Taxation² (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.

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.

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 101/1976³ 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). The decision of majority of the Full High Court in Reseck applied.

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 similar to a certain extent to those in Case No M 101/1976 considered by the No 2 Board of Review.

In this case, the Employer, as part of the sales process between the related entity and the Purchaser, implemented the Plan to retain its Employees during the sale and for a period after the sale process was completed. Further, it is noted the Plan also made reference to the possibility of there being redundancies if the sale was completed and the occurrence of certain conditions.

Though the negotiations involved the sale of an asset, and the Employer's Employees were located at Site Y (not where the asset was located), it is noted the Employer's workforce would be affected by the sale process as some of its Employees were employed in relation to the asset (Site Y Employees).

The Employer, as shown in a offer letter it sent to its Site Y Employees, stated that:

(a) the Plan was implemented to ensure all employees providing critical support continue to be motivated and committed to performing their role during the sales process of the asset and a period following the sale; and

(b) as part of the Plan the Bonus would be paid to Employees who agreed to continue with their employment until a specified date or earlier upon their role with the Employer becoming redundant.

Further the Employer stated that if:

(a) an agreement was not signed for the sale; or

(b) conditions precedent to the sale were not satisfied; or

(c) title to the asset was not transferred prior to a specified date;

the Bonus would not be paid and the Employees' contracts would continue on their existing terms in support of the Employer's continued ownership of the asset.

The facts provided show that the asset was sold and the Bonus was not only paid to Terminating Site Y Employees) but also to Continuing Site Y Employees.

You state that because of the significant financial reward inherent in the Bonus, and to ensure consistency amongst employees, the Employer decided Continuing Site Y Employees would also receive a payment similar to the Bonus, calculated in the same manner, to that received by the Terminating Site Y Employees.

It is considered however that the Bonus paid, regardless of whether paid to Terminating or Continuing Site Y Employees, arises from the same Plan and under the same conditions as:

(a) there was no separate Plan or arrangement provided for Continuing Site Y  Employees;

(b) the offer letters sent by the Employer to the Terminating Site Y Employees and the Continuing Site Y Employees were the same in relation to the implementation, operation, calculation and payment of the Bonus under the Plan; and

(c) there is nothing to distinguish a Bonus payment being made under the Plan to a Terminating Site Y  Employee and a Bonus paid to a Continuing Site Y Employee.

Notwithstanding some Bonus payments were made under the Plan to Terminating Site Y Employees, the facts show that Bonus paid under the Plan is the same regardless of whether they were made to an Employee whose employment was terminated or an Employee who was selected to continue employment with the Employer.

Accordingly, it is considered that the Bonus does not arise from a Plan under which a payment would not have been made but for the termination of employment. Therefore, it is considered that the Bonus made to the Employees is not in consequence of their termination of employment.

In view of the above, as the Bonus is not considered in these circumstances to be in consequence of termination of employment the condition under subparagraph 82-130(1)(a)(i) of the ITAA 1997 has not been satisfied.

As subparagraph 82-130(1)(a)(i) of the ITAA 1997 is one of the conditions which must be satisfied for an payment to be an employment termination payment, and all of the relevant conditions in section 82-130 must be satisfied to be an employment termination payment, it follows that the Bonus payments made by the Employer under the Plan are not employment termination payments.

In relation to whether any part of the Bonus represents a genuine redundancy payment under section 83-175 of the ITAA 1997 it should be noted that no part of the Bonus is a genuine redundancy payment.

As previously discussed the Bonus is not considered to be an employment termination payment as it is not in consequence of the termination of employment. Further, as shown in subsection 83-175 (1) of the ITAA 1997 and discussed in Taxation Ruling TR 2009/2, which outlines the Commissioner's view of the requirements to be satisfied for a payment to qualify as a genuine redundancy payment under section 83-175, one of those requirements is that the payment is in consequence of the employee's termination of employment.

Conclusion

The Bonus payments are not employment termination payments for the purposes of section 82-130 of the ITAA 1997 nor is any part of the Bonus payments a genuine redundancy payment for the purposes of section 83-175.

Accordingly, the Bonus constitutes a payment of salary for work or services which requires the Employer to withhold tax from the Bonus pursuant to section 12-35 of Schedule 1 of the ITAA 1997.

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