Edited version of administratively binding advice

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Subject: Transfer payment - Employment termination payment

Question:

Are transfer payments to be made by Company A to transferring employees on the sale of Company B to Company C, employment termination payments under section 82-130 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Advice:

Answer: Yes

This administrative binding advice applies for the following period:

Year ended 30 June 2013

The scheme commenced on:

1 July 2012

Relevant facts and circumstances:

Company A currently owns and manages a specified location including the land on which the specified location is situated, the assets, and employees currently working in the specified location.

Company A intends to sell the businesses of the specified location.

In order to effect the transaction, Company A will create a new entity (Company B). Assets of Company A will be transferred into Company B. Third party purchasers (new owners) will then purchase 100% of the shares in Company B on the Transaction Date.

Company A employees who are required to run the businesses in Company B will be seconded to work for Company B knowing that it is Company A's intention to sell Company B to 'new owners'.

Once 'new owners' are identified and the Transaction Date is confirmed, Company A employees who were seconded to Company B will be given, prior to the Transaction Date, the choice of continuing employment with Company A or, upon transaction completion, terminating employment with Company A and commencing employment with Company B.

No employees will be forced to terminate their employment with Company A.

Payments will be made to employees whose employment with Company A is terminated and commence new employment with Company B following its sale to 'new owners'. The amount received by the terminating employee will depend on their years of service.

The transfer payment to be made to the transferring employee will be made by Company A.

Upon commencing employment with Company B, any accrued entitlements of an employee will be recognised by the 'new owner' of Company B, to the extent they were not cashed out when the employee terminated their employment with Company A.

Voluntary redundancies are not intended to be offered to employees terminating under the above arrangements.

'New owners' are to ensure that no employee employed by Company B, under the above arrangement, will be made forcibly redundant within an agreed period of time after commencing employment.

The name of 'new owners' is not yet known.

Employees who remain in employment with Company A and later take up employment with Company B outside of the sale transaction will not be entitled to receive the transfer payment.

The transfer payment will be paid at the earliest possible time after the Transaction Date and be received within 12 months of the termination of employment.

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 Section 82-135.

Income Tax Assessment Act 1997 Section 995-1.

Reasons for decision

Summary

The transfer payment is in consequence of the termination of employment. Unless the employee is covered by a determination exempting them form the 12 month rule, the payment must be received within 12 months of the employee's termination of employment to qualify as an employment termination payment.

Detailed reasoning

Employment termination payment

Section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997) states that an 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 that termination (but see subsection (4)); and

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

Section 82-135 of the ITAA 1997 lists payments that are not employment termination payments. These include (among others):

· superannuation benefits;

· unused annual leave or long service leave payments;

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

For a transfer payment to constitute an employment termination payment, all the conditions in section 82-130 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.

Terminating employment

Paragraph 9 of Taxation Ruling IT 2152 titled: 'Income Tax: retiring allowances paid to employees upon restructuring of a business' states:

Where a company or other employer ceases carrying on a business which has been transferred to an associated entity, it will be accepted that the employees of the company have had their employment terminated. This will apply in cases similar to the Paklan Case where it is clear that the business in question has been transferred to another entity and it is also clear that the employee's employment has, in fact, been terminated...

The facts in Paklan Pty Ltd and others v. Federal Comissioner of Taxation (1983) 67 FLR 328; (1983) 83 ATC 4456; (1983) 14 ATR 457 (Paklan) can be summarised as follows:

· The taxpayers were directors and shareholders of a company (the old company) which carried on business as consulting engineers.

· On 30 June 1977 the company ceased to carry on business and the next day sold the business to another company (the new company) also controlled by the taxpayers.

· The new company commenced carrying on the business from the same premises and subject to the same arrangements for occupancy as the old company.

· All the old company's employees, including the taxpayers, became employees of the new company.

· Six months later, it was decided to pay a lump sum to former directors. The payments were actually made a year after the company ceased business and out of outstanding fees received after the business had ceased.

The taxpayers in Paklan did not succeed in having the lump sums in question treated as a 'payment in consequence of termination' as they were paid under circumstances and at a time too remote to the termination. However, the Full Federal Court did not dispute the fact employment had terminated when the old company had ceased business on 1 July 1977.

The facts in Board of Review Case Q118 (1983) 83 ATC 610; (1983) 27 CTBR (NS) 312 were similar to those in Paklan and again involved the sale of a company's business as a going concern to a new company. All the employees of the old business were transferred across to the new company. The Board of Review (at 618), did not dispute the fact that employees of the old company had ceased to be employees of the old company immediately before taking up employment with the new company.

While in Board of Review Case K76 (1978) 78 ATC 703; (1978) 23 CTBR(NS) 24, where a taxpayer ceased work with a subsidiary company due to a corporate restructure and immediately re-commenced work with the parent company on the same terms and conditions, it was held the taxpayer's employment with the subsidiary company had been terminated.

The relevant facts in respect of the sale of Company B indicate that employees of Company A affected by the sale will be able to elect whether to remain employed with Company A or to transfer to the new purchaser of Company B on completion of the sale.

Employees who take up positions with the new purchaser of Company B will cease employment with Company A. Therefore, there is a termination of their employment with Company A.

Payment made 'in consequence of the termination of employment'

A payment can be considered to be in consequence of termination where it follows from the termination, or the termination is a condition precedent to the payment. In Reseck v. Federal Comissioner of Taxation (1975) 75 ATC 4213; (1975) 133 CLR 45; (1975) 49 ALJR 370; (1975) 6 ALR 642; (1975) 5 ATR 538; [1975] HCA 38 (Reseck) Justice Gibbs said:

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

In the same case, Justice Jacobs said that 'in consequence of' did not import causation but rather a 'following on'.

The decision in Reseck was considered by the Full Federal Court in McIntosh v. Federal Comissioner of Taxation (1979) 79 ATC 4325; (1979) 25 ALR 557; (1979) 45 FLR 279; (1979) 10 ATR 13 (McIntosh). The case concerned a taxpayer who became entitled to a payment subsequent to his retirement. In finding that the payment was in consequence of the taxpayer's termination, Justice Brennan said:

...if the payment is made to satisfy a payee's entitlement, the phrase "in consequence of retirement" requires that the retirement be the occasion of, and a condition of, entitlement to the payment. A sufficient causal nexus between the payment and the retirement is thus established.

The phrase 'in consequence of' and the decisions in Reseck and McIntosh were also considered more recently by the Federal Court in Le Grand v. Commissioner of Taxation (2002) 195 ALR 194; (2002) 2002 ATC 4907; (2002) 51 ATR 139; (2002) 124 FCR 53; [2002] FCA 1258 (Le Grand).

Le Grand involved a payment by the taxpayer 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. The taxpayer had made claims for common law damages for breach of the employment agreement and for statutory damages for misleading and deceptive conduct to procure the taxpayer's employment with the employer. The payment was found to be in consequence of the taxpayer's termination. Justice Goldberg said:

I do not consider that the issue can simply be determined by seeking to identify the 'occasion' for the payment. The thrust of the judgments in Reseck and McIntosh is rather to the effect that payment is made 'in consequence' of a particular circumstance when the payment follows on from, and is an effect or result, in a causal sense, of the circumstance. ... there need not be identified only one circumstance which gives rise to a payment before it can be said that the payment is made 'in consequence' of that circumstance. ... it can be said that a payment may be made in consequence of a number of circumstances and that, for present purposes, it is not necessary that the termination of the employment be the dominant cause of the payment so long as the payment follows in the causal sense referred to in those judgments, as an effect or result of the termination.

The Commissioner of Taxation has issued Taxation Ruling TR 2003/13 (TR 2003/13) titled Income tax: eligible termination payments (ETP): payments made in consequence of the termination of any employment: meaning of the phrase 'in consequence of'. Whilst 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. Eligible termination payments ceased to exist from 1 July 2007, being replaced by employment termination payments.

In paragraphs 5 and 6 of TR 2003/13, the Commissioner stated:

(5) … 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.

(6) 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.

In the present case, notwithstanding that the transfer payment is payable only to those employees of Company A who take up employment with the Company B, the transfer payment is payable only on the condition that employees have terminated their employment with Company A. The payment follows as an effect or result of the termination and the payment would not have been made to the employees but for the termination of their employment with Company A.

The following aspects of the arrangement reinforce the characterisation of the transfer payment as an employment termination payment (as distinct from, for example, a sign-on fee):

· the payment is made by Company A;

· the payment is to be calculated by reference to each employee's years of service with Company A; and

· there are no obligations imposed on the employees to continue their employment for any period after commencement of the employment with Company B.

Further, the transfer payment will be paid at the earliest possible time after completion of the sale of Company B and be received within 12 months of the termination of employment, unless the employee is covered by a determination exempting them from the 12 month rule. The timing of the payments further strengthens the connection between the transfer payments and the termination of employment.

The transfer payment is only payable on the condition that employees have terminated their employment with Company A. No entitlement to the payment arises prior to this event. Although the transfer payment is payable to those who take up employment with Company B, it more directly relates to the termination of employment with Company A.

In view of the above, the transfer payment is in consequence of the termination of employment. Unless the employee is covered by a determination exempting them form the 12 month rule, the payment must be received within 12 months of the employee's termination of employment to qualify as an employment termination payment under section 82-130 of the ITAA 1997.

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