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Ruling

Subject: Employment termination payment

Question

Are Special Leave payments made to employees within 12 month of termination of employment, employment termination payments for the purposes of section 82-130 of the Income Tax Assessment Act 1997?

Answer:

Yes

This ruling applies for the following period:

Year ended 30 June 2009

Year ended 30 June 2010

Year ended 30 June 2011

Year ended 30 June 2012

Year ended 30 June 2013

Year ended 30 June 2014

The scheme commenced on:

1 July 2008

Relevant facts:

The principal conditions of employment for employees of the employer working on the Project are prescribed by a Collective Agreement (the Agreement).

The Agreement includes a provision for an entitlement called 'Special Leave'.

The Special Leave is in essence a special rostered day off (RDO) system based on those developed and negotiated between the employers, the employees and their union representatives for work carried out in and around the employer's location.

The RDO arrangements are generally entered into by employers and employees in order to increase flexibility and encourage workers not to take unapproved leave.

Employees are to work standard Project Working Hours of ten hours per day, that is, 60 hours per week from Monday to Saturday.

Under the Agreement, on commencement of employment each employee will be placed on a specific week Work Cycle for the purposes of accruing Rest and Relaxation (R&R) leave entitlements and entitlements to special leave, in accordance with the standard employment award.

The Agreement specifies that employees including casual employees will accrue entitlements to Special Leave. Special Leave is described as an additional leave that accrues to an employee who works all project working hours (Monday through to Saturday) in their Work Cycle. Special leave does not accrue during a period of R&R leave.

The applicant states that the Special Leave is similar to an incentive payment to keep workers on the Project, encourage the workforce to follow dispute procedures and not to take industrial action and encourage workers not to take unapproved leave.

According to the Agreement, employees on unauthorised leave shall accrue Special Leave on a pro-rata basis with regard to those weeks where there was no unauthorised absence.

Special Leave accruals will not be affected for those employees on short absences from work that have received prior approval of the employer.

Special Leave does not accrue when a person is absent from work due to the following:

· workers compensation for longer than two weeks;

· receiving a benefit under Income Protection Insurance;

· long service leave;

· annual leave;

· jury service leave;

· parental leave; and

· approved unpaid leave greater than one day.

At anytime an employee may receive payment for Special Leave that they have accrued by choosing one of two options.

Any unused Special leave at the time of termination from the Project shall be paid to the employee no later than two working days after the date of termination.

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

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 Section 82-135

Income tax Assessment Act 1997 Section 82-140

Income tax Assessment Act 1997 Section 82-145

Income tax Assessment Act 1997 Section 82-155

Income tax Assessment Act 1997 Section 995-1

Reasons for decision

Summary

The Special Leave payments made within 12 months to terminating 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:

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 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.

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 special leave payments (the payments) are employment termination payments 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 payments not being considered employment termination payments.

Payments are made in consequence of the termination of employment

The first condition to be met is that the payments are 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:

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.

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 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 Justice Jacobs, in the same case, 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. 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.

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 Taxation [2002] FCA 1258; (2002) 124 FCR 53; (2002) 195 ALR 194; (2002) 2002 ATC 4907; (2002) 51 ATR 39 (Le Grand), where Goldberg J stated:

I am satisfied that there is a sufficient connection between the termination of the applicant's 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.

Goldberg J concluded that the test for determining when a payment is made in consequence of the termination of employment is that which was expressed by Gibbs J 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.

From the facts provided, the principal conditions of employment for employees of the employer working on a Project (the Project) are detailed in the employer's Collective Agreement (the Agreement). The Agreement includes a provision for an entitlement called 'Special Leave'. Under the Agreement any unused Special Leave at the time of termination from the Project will be paid to the employee.

The payment of unused Special Leave is made in consequence of the termination of employment as the payments follow on as an effect or a result of the termination of employment. The unused Special Leave is paid to employees when they terminate employment with the employer on the Project. In this case, there is a sufficient connection between the unused special leave payments and the termination of employment for the payments to be considered to be made in consequence of the termination of employment.

In view of the above, as the payments are in consequence of the termination of employment and are therefore employment termination payments, the condition under paragraph 82-130(1)(a) of the ITAA 1997 has been met.

The payments are made no later than 12 months after the termination of employment

The second condition for the payments to meet the criteria as employment termination payments under paragraph 82-130(1)(b), is that the employment termination payment was paid to the taxpayer no later than 12 months after their employment was terminated.

On the basis that the unused Special Leave payments will be made to employees within 12 months of the termination of employment from the Project the condition under paragraph 82-130(1)(b) of the ITAA 1997 has been met.

The payments are not payments specifically excluded under section 82-135

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

Section 82-135 provides that certain payments are not employment termination payments, including:

· superannuation benefits;

· payment for unused annual leave or unused long service leave (and any other similar leave);

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

· reasonable capital payments for personal injury.

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

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

Employment termination payments cannot be rolled over into a complying superannuation fund.

The payments constitute life benefit termination payments

Subsections 82-130(1) and 82-130(2) of the ITAA 1997, provide that where an employment termination payment is made during the life of a taxpayer, the payment is known as a life benefit termination payment (LBTP).

In particular, subsection 82-130(2) of the ITAA 1997 states:

A life benefit termination payment is an employment termination payment to which subparagraph (1)(a)(i) applies:

Because the payments are employment termination payments to which subparagraph 82-130(1)(a)(i) of the ITAA 1997 applies, the payments constitute LBTPs within the meaning of subsection 82-130(2) of the ITAA 1997.

Tax Treatment of the payment as LBTPs

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

Tax-free component - as provided in section 82-140 of the ITAA 1997, this includes an invalidity segment within the meaning of section 82-150 of the ITAA 1997 (if any) and/or a pre-July 83 segment within the meaning of section 82-155 of the ITAA 1997 (if any); and

Taxable component - the amount remaining after deducting the tax free component calculated in accordance with section 82-140 from the total payment, as prescribed in section 82-145 of the ITAA 1997.

The tax-free component is not assessable income and is not exempt income.

The taxable component is included, in full, as assessable income.

The taxable component is subject to tax, depending on the person's age when the payment is received.

For the 2011-12 and 2012-13 income years the ETP cap amount for the LBTP 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 you were born:

· before 1 July 1960 you can access your superannuation when you are 55.

· after 30 June 1960, your preservation age will be between 55 and 60.

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