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Ruling

Subject: Employment termination payment

Questions

1. Is a payment to assist the Employee with expenses relating to ceasing employment with the Employer an employment termination payment under subsection 82-130(1) of the Income Tax Assessment Act 1997 (ITAA 1997)?

2. Is an incentive payment for the Employee to retire an employment termination payment under subsection 82-130(1) of the ITAA 1997?

3. Are payments made to the Employee, whilst they are completing studies, employment termination payments under subsection 82-130(1) of the ITAA 1997?

Advice/Answers

1. Yes.

2. Yes.

3. No

This ruling applies for the following period

Year ending 30 June 2014

The scheme commenced on

1 July 2012

Relevant facts and circumstances

The Employee worked for the Employer.

Circumstances arose that led to the Employee coming to the view that it was not possible for them to continue working with the Employer. The Employer agreed with this view.

In the 2012-13 income year a deed of settlement and release was made between the Employer and the Employee (the Deed) under which the Employee agreed to unconditionally resign from their employment.

The Deed embodies the entire understanding of the parties, and constitutes the entire terms agreed by the parties and supersedes any prior written or other agreement of the parties.

Under the Deed the Employee will be paid:

· a payment to assist the Employee with expenses relating to ceasing employment with the Employer (Payment 1);

· an incentive payment for the Employee to retire (Payment 2); and

· for full-time leave with pay until the date the Employee resigns from their employment.

The leave was neither annual leave or long service leave. The employee intends to use the leave to study. If employed by anyone else, this is no longer payable for the duration of that employment.

The payments will be received within 12 months of the Employee's 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 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 Subsection 82-135(e).

Income Tax Assessment Act 1997 Section 995-1.

Reasons for decision

Summary:

Both Payment 1 and Payment 2 are employment termination payments.

The Employee also has access to full-time leave with pay until the date the Employee resigns from their employment. These payments are not considered to be received by the Employee in consequence of the termination of their employment and, therefore, are not employment termination payments.

Detailed reasoning:

Employment termination payment

Section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997) states that:

employment termination payment has the meaning given by section 82-130 of the ITAA 1997.

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

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

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

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 ITAA 1997).

To determine if the payments made to the Employee by the Employer 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 payment not being considered an employment termination payment.

Paid as a consequence of the termination of employment

It should be noted that the phrase 'in consequence of the termination of your employment' is not defined in the legislation. However, both the Courts and the Commissioner have considered the meaning of this phrase.

In light of these decisions, the Commissioner discusses the meaning of the phrase in Taxation Ruling 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' (TR 2003/13).

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.

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

While Justice Jacobs 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. 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 it to say that 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.

Furthermore, 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), the issue before the court was whether an amount received by the applicant 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 was in whole, or in part, an ETP. It was held that a settlement payment for litigation in relation to a taxpayer's dismissal was an ETP.

Justice Goldberg 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 applicant's 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. True it is that the payment was made not only to settle the applicant's claim for common law damages for breach of the employment agreement but also for statutory damages...

Justice Goldberg concluded that the test for determining when a payment is made in consequence of the termination of employment is that which was articulated 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 earlier stated in paragraph 6 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'.

The Full Federal Court in Dibb v. Federal Commissioner of Taxation [2004] FCAFC 126; (2004) 207 ALR 151; (2004) 2004 ATC 4555; (2004) 55 ATR 786, has applied the above decisions in finding that the payment received by the taxpayer under a Deed of Release to settle various causes of action against the employer following the termination of employment was an ETP.

Paragraph 31 of TR 2003/13 the Commissioner states:

It is clear from the decision in Le Grand, that when a payment is made to settle a claim brought by a taxpayer for wrongful dismissal or claims of a similar nature that arise as a result of an employer terminating the employment of the taxpayer, the payment will have a sufficient causal connection with the termination of the taxpayer's employment. The payment will be taken to have been made in consequence of the termination of employment because it would not have been made but for the termination.

The essence of this analysis is that if the payment follows as an effect or a result of 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. The termination of the payment need not be the sole or dominate cause of the payment.

The question of whether a payment is made in consequence of the termination of employment is determined by the relevant facts and circumstances of each case.

In this case, circumstances arose that led the Employee to come to the view that it was not possible for them to continue working with the Employer. The Employer agreed.

In the 2012-13 income year a deed of settlement and release was made between the Employer and the Employee (the Deed) under which the Employee agreed to unconditionally resign from their employment.

Under the Deed the Employee will be paid:

· a payment to assist the Employee with expenses relating to ceasing employment with the Employer (Payment 1);

· an incentive payment for the Employee to retire (Payment 2); and

· for full-time leave with pay until the date the Employee resigns from their employment.

Payment 1 and Payment 2 in consequence of termination of employment

From the facts it is clear that Payment 1 and Payment 2 will be made in consequence of the termination of the Employee's employment. The termination of employment and the payments are intertwined and connected. If not for the termination of the Employee's employment the payments of would not have been made.

One of these payments is an inducement to retire, while the other is meant to assist the Employee in transitioning out of their employment.

Therefore, these payments are considered to be received by the Employee in consequence of the termination of their employment and the requirement under subparagraph 82-130(1)(a) of the ITAA 1997 has been met for this payment.

Leave payments not in consequence of termination of employment

Under the Deed the Employee has access to full-time leave with pay from until the date the Employee resigns from their employment.

These payments are made prior to the termination of the Employee's employment and are considered normal salary similar to those received by any other employee on paid study leave, or any other type of leave. These payments are a replacement, in whole or in part, for the Employee's normal salary and wages.

Consequently, these leave payments do not follow as an effect or result of the termination of the Employee's employment.

The discretionary leave payments are not considered to be received by the Employee in consequence of the termination of their employment and the requirement under subparagraph 82-130(1)(a) of the ITAA 1997 has not been met for this payment. As all conditions under subsection 82-130(1) have not been met the payments are not employment termination payments.

The payment is received no later than 12 months after termination

The second condition is stated under paragraph 82-130(1)(b) of the ITAA 1997. The payment must be received within 12 months of the employee's termination of employment, unless the payment is covered by a determination exempting them from the 12 month rule.

In this case, this condition is satisfied as Payment 1 and Payment 2 will be received within 12 months of the Employee's termination of employment.

Not a payment mentioned in section 82-135 of the ITAA 1997

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;

· foreign termination payments covered under Subdivision 83-D of the ITAA 1997; and

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

Payment 1 and Payment 2 are not payments that would be excluded from being an employment termination payment.

As Payment 1 and Payment 2 satisfy all the conditions in section 82-130 of the ITAA 1997 they are employment termination payments.

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