Edited version of your private ruling

Authorisation Number: 1012463857729

Ruling

Subject: Employment payments

Question 1

Are the payments of long service leave and annual leave assessable income?

Answer

Yes.

Question 2

Are payments that are received on a weekly basis after cessation of employment for on going support of that past employee considered to be an employment termination payment?

Answer

No.

Question 3

When those payments are paid from one income tax exempt charity (ITEC) entity to another ITEC entity and distributed to that person through its exempt benefits account, are those payments considered to be an employment termination payment?

Answer

No.

Question 4

Are payments made for ongoing support of a retired practitioner assessable income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 2011

Relevant facts and circumstances

You were previously employed for over 20 years.

Whilst employed your remuneration package composed of a certain percentage of cash components for salary and wages and the balance as exempt benefits.

When your employment was terminated the employer deposited into an exempt benefits account the total gross amount for outstanding annual leave payments and long service leave (LSL).

You received group certificates from your ex-employer after you had lodged your income tax return.

You were to be provided on-going life-time support to you as the pioneers and founders of the organisation.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

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 83-10

Income Tax Assessment Act 1997 section 83-80

Income Tax Assessment Act 1997 section 995-1

Reasons for decision

Long service leave and annual leave payments

Section 83-10 and 83-80 of the ITAA 1997 provide that leave payments of unused annual leave payments and unused long service leave payments are assessable income.

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 weekly payments made to an account for the taxpayers by the employer is an employment termination payment, 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 the employer terminated your employment. You advised that the Board of Directors passed a resolution to provide you with on-going support as pioneers and founders of the organisation. Your employer advised that they intend to pay you a gross weekly payment until a certain amount was reached.

From the facts provided there is no requirement that the payment be made on the termination of employment. Although the payment coincided with or shortly followed the termination of your employment, the payment is not considered to be made in consequence of the termination of that employment. You advised that this was not to be payment for previous services rendered, but to ensure that you would be provided for in the future.

There is no causal connection between the termination and the payment. The weekly payments were not conditional on the termination of your employment. It cannot be said that the payments follow on as an effect or a result of the termination of employment. Therefore the weekly payments are not considered to be made in consequence of the termination of employment.

As the payments are not considered to be received by you in consequence of the termination of your employment, the requirement under subparagraph 82-130(1)(a)(i) of the ITAA 1997 has not been met.

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.

From the facts provided, the employer advised you in a letter that they intend to pay you a weekly amount. The letter also advised that the payment will continue until a certain amount was reached.

From the information provided your employer has made payments to you during the income year. Although that payment is made within 12 months after termination, it is considered that the condition under paragraph 82-130(1)(b) of the ITAA 1997 will not be met as that payment is a part of a total payment that will be made more than 12 months after your termination of employment.

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

Section 82-135 of the ITAA 1997 specifically excludes certain payments from being employment termination payments. Under paragraph 82-135(b) of the ITAA 1997, a payment of a pension or an annuity (whether or not the payment is a superannuation benefit) is specifically excluded from being employment termination payments.

From the facts provided the employer commenced making weekly payments to you. In a letter the employer advised you that they intend to pay you a weekly payment until a certain figure is reached.

The frequency and continuity of payments by the employer of a weekly amount paid over several years indicates that the payment is an employer pension.

Also it is noted that the employer referred to the weekly payment as a periodical payment in the bank statements of the accounts where the payment was deposited.

As the payment is considered to be a pension the payment is not excluded under section 82-135 of the ITAA 1997. Therefore the requirement under paragraph 82-130(1)(c) of the ITAA 1997 has not been met.

As mentioned above, all the conditions under subsection 82-130(1) of the ITAA 1997 must be satisfied before a payment is considered an employment termination payment. As it has been determined that all of the conditions under subsection 82-130(1) of the ITAA 1997 has not been met, the weekly payments are not considered to be an employment termination payment under subsection 82-130(1) of the ITAA 1997.

Ordinary income

Section 6-5 of the ITAA 1997 states that your assessable income includes income according to ordinary concepts, this is called ordinary income. Subsection 6-20(1) states ordinary income is exempt income if it is made exempt from income tax by a provision of this Act or another Commonwealth law and sections 11-5, 11-10 and 11-15 list income that is exempt.

The payments you receive are not employment termination payments and are not listed as exempt income and are considered to be ordinary income and assessable under section 6-5 of the ITAA 1997.

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