Edited version of your private ruling

Authorisation Number: 1012527102089

Ruling

Subject: Payment on termination of contract for work

Questions:

1. Is Company A conducting a Personal Services Business (PSB)?

2. Will the payments received by Company A be attributed to the individual (the Individual) who provided the personal services?

3. Can Company A make payment to the Individual in accordance with subsection 86-15(4) of the Income Tax Assessment Act 1997 (the ITAA 1997)?

4. Are some or all of the payments received by Company A from Company B (the Principal) and another company (Company C) consideration for a taxable supply of a release by Company A to the Principal under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

5. Was the execution of the 'settlement and release agreement' (the Deed) by Company A a taxable supply made by Company A to the Principal under section 9-5 of the GST Act?

6. Are some or all of the payments received by Company A from the Principal and Company C consideration given by the Principal and Company C in return for a taxable supply made by Company A to them under section 9-5 of the GST Act?

7. Can Company A treat any part of the payments which it received under the Deed and made to the Individual as an employment termination payment under section 82-130 of the ITAA 1997?

8. Can Company A treat any part of the payments which it received under the Deed and made to the Individual as a genuine redundancy payment under section 83-175 of the ITAA 1997?

9. Can the Individual treat some or all of the payments which Company A received under the Deed and made to the Individual as:

(a) an employment termination payment under section 82-130 of the ITAA 1997; and

(b) a genuine redundancy payment under section 83-175 of the ITAA 1997?

Answers:

1. No.

2. Yes.

3. Yes.

4. No.

5. No.

6. Yes. The settlement payment is partly consideration given by the Principal in return for taxable supplies made by Company A to the Principal under section 9-5 of the GST Act.

The payment of the legal costs and filing fee of Company A and the Individual is not consideration given by Company C to Company A for a taxable supply made by Company A to the Principal or Company C under section 9-5 of the GST Act.

7. No.

8. No.

9. No.

This ruling applies for the following period:

Income year ended 30 June 2013

The scheme commences on:

Not applicable

Relevant facts and circumstances

In or around 2000 the Principal engaged Company A to provide company secretarial services. Company A is a private company established in 1999. Company A procured the Individual, its sole director and shareholder, to provide company secretarial services to the Principal.

There was no written contract between the Principal and Company A. According to the applicant of this private ruling (the Applicant), the terms of the arrangement under which the services required were provided to the Principal by Company A through the Individual were verbal, but both parties nevertheless considered the arrangement as ongoing without an expiry period.

The Individual is a professional person. Through Company A the Individual first worked as a casual for the Principal early in the 1999-2000 income year. Later in the same income year, through Company A and under the agreement between the Principal and Company A, the Individual provided full-time upper management services to the Principal. For a period of years up to the termination of the agreement, the Individual (through Company A) also provided other corporate services to the Principal. The Individual's engagement with the Principal encompassed various corporate services for both the Principal and other ventures which the Principal controlled or had interests in.

The Individual worked predominantly from the Principal's premises although the Individual did maintain a home office at their residence where they worked on occasions. The Principal provided the Individual with all the tools of trade they required to perform their duties.

The Individual was purportedly required to participate in procedures in a manner akin to a general employee. That is, there was an annual chart on which everyone put their leave.

The Individual was remunerated through Company A. Their remuneration comprised a fixed amount of 'monthly salary' paid wholly for their labour and an annual bonus from time to time. On a set day every month the Principal paid the fixed amount of 'monthly salary' to Company A. On behalf of Company A, the Individual would formalise the payment and receipt by issuing a tax invoice to the Principal with GST included.

If there were recoverable expenses for a particular month, the Principal would also pay for such expenses and the Individual would include such expenses in either the tax invoice for the fixed amount of 'monthly salary' or in a separate tax invoice. Company A did not, however, tax-invoice phone charges as they fell under the Principal's phone account, which the Principal settled directly with a telecommunication provider.

Company A made payments to the Individual from time to time, depending on its cashflow situation hence not necessarily on a set day. In other words, a payment by Company A to the Individual in relation to income it derived in a particular Pay-As-You-Go (PAYG) payment period (prescribed period) might not always be made before the end of the 14th day after the particular prescribed period. At the end of the income year, Company A issued a PAYG summary to the Individual.

On an annual basis, the Individual negotiated revised remuneration terms with the Principal. The revised remuneration terms were subject to approval by a 'remuneration committee' of the Principal that approved all employee remuneration changes and arrangements.

Throughout the entire period in which the Individual's service was engaged, no superannuation guarantee contributions were paid by the Principal for the benefit of the Individual. It was Company A that paid superannuation contributions for the benefit of the Individual.

According to the Applicant, neither the Principal nor Company A had maintained any leave record in respect of the Individual.

The Principal was the subsidiary of Company D. The trustee of a unit trust (the Unit Trust) was the sole shareholder of Company D. The Individual held a number of the units in the Unit Trust.

The Applicant considers Company A as a 'personal services entity' (PSE) since:

(a) 100% of its service income was from the Principal; and

(b) it did not satisfy any the tests under section 87-15 of the ITAA 1997.

In their tax returns for the past decade and more, the Individual reported their gross income and tax withheld under item 1 (main salary and wage) and quoted Company A's Australian Business Number (ABN) as the 'Payer ABN'.

In the latter part of the 2012-13 income year the Individual was advised that the Principal's business would be sold to Company C and that the service arrangement between the Principal and Company A would terminate because Company C had another person in a similar position. The service of a number of other employees of the Principal was also terminated at the same time.

The Principal proposed to pay Company A a specified amount of contract fee to compensate for the termination. However, the Individual considered that they were a common law employee, or an employee for industrial law purposes, who was made redundant. The Individual sought compensation for their accrued statutory entitlements and a termination payment.

The Individual claimed a specified period of pay, which comprised a number of weeks' pay in lieu of notice (per section 117 of the Fair Work Act 2009), a number of weeks long-service leave, a number of weeks' accrued annual leave and a number of weeks' severance pay (per section 119 of the Fair Work Act 2009) at the Individual's monthly pay rate.

Eventually, Company A, the Individual and the Principal executed the Deed, which acknowledged the following:

A. In or around 2000 [the Principal] engaged [Company A] to provide [certain corporate services] (Services Agreement). [Company A] procured [the Individual] to provide the [certain corporate services] to [the Principal] for the purpose of that engagement.

B. Between 2000 and [the latter part of the 2012-13 income year], [Company A] provided [certain corporate services] to [the Principal] pursuant to the terms of the Services Contract.

C. On [a date in the latter part of the 2012-13 income year], the Services Contract was terminated by [the Principal].

D. On [a later date in the latter part of the 2012-13 income year], [the Individual] issued a letter to [the Principal] alleging that [the Individual] should properly be considered as an employee of [the Principal] and demanded the equivalent of [a specified number] weeks paid for unpaid employment benefits (the Dispute).

The amount settled under the Deed, inclusive of GST, was based on a specified period of pay. The Deed does not, however, specify any component(s) that the amount settled might consist of. It merely states that:

[Company A] and the Individual each acknowledge that the payment under the Deed is paid in full satisfaction of all obligations of the Principal towards each of Company A and the Individual including all Claims

[Claims' is defined in the Deed as 'Includes all actions, claims… whether directly or indirectly from:

· the Services Contract

· the Termination and

· any act or omission of the Principal during the term of the Engagement

( and is made without any admission of liability by the Principal.]

The Principal paid Company A an amount less than the amount settled under the Deed, on the grounds that the balance was charges for international roaming data incurred by the Individual as the Individual had not been instructed, nor had they sought approval, to undertake any work whilst overseas. In a letter to Company A, the Principal's solicitor advised, among other things, that:

We put you on notice that in the event you commence any proceedings seeking our client pay the balance under the Deed we are instructed that our client will cross-claim your company and you for the full amount of the telephone bill for which our clients holds your company and you responsible.

At or around the same time, Company A paid this amount to the Individual. The Individual then re-paid the entire amount back to Company A. According to the Applicant, this was to put on record that a payment was in fact made to the Individual to enable it to be categorised as a payment for termination of service.

Company A and the Individual then initiated legal proceedings against the Principal to recover the balance. The relief they sought from the court was:

1. An order that the defendant pay the plaintiff a specified amount being damages for breach of contract.

2. Cost.

3. An order that the defendant pay interest to the plaintiff pursuant to section 100 of the Civil Procedure Act 2005.

They claimed that under the Deed the defendant agreed to pay to Company A (as directed by the Individual) the settled amount inclusive of GST but, in paying Company A a lesser amount, the defendant was in breach of the Deed.

Before the end of the 2012-13 income year, Company C paid Company A the balance (inclusive of GST) plus legal costs and filing fees. Company A then paid the balance to the Individual, who then re-paid the entire amount back to Company A, for the same purpose as mentioned earlier.

Company A has not issued any tax invoice for any of the amounts it received from either the Principal or Company C.

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 Section 83-175

Income Tax Assessment Act 1997 Subsection 83-175(1)

Income Tax Assessment Act 1997 Subsection 83-175(2)

Income Tax Assessment Act 1997 Section 84-5

Income Tax Assessment Act 1997 Section 86-15

Income Tax Assessment Act 1997 Section 87-15

Income Tax Assessment Act 1997 Section 87-18

A New Tax System (Goods and Services Tax) Act 1999 Section 7-1

A New Tax System (Goods and Services Tax) Act 1999 Subsection 7-1(1)

A New Tax System (Goods and Services Tax) Act 1999 Section 9-5

A New Tax System (Goods and Services Tax) Act 1999 Section 9-10

A New Tax System (Goods and Services Tax) Act 1999 Section 9-15

A New Tax System (Goods and Services Tax) Act 1999 Section 9-40

Reasons for decision

Summary

Personal service income

As Company A was not conducting a PSB in relation to the income it received from the Principal, all the payments it received under the Deed were attributable to the Individual as the Individual's personal services income (PSI).

Goods and services tax

To the extent that the total settlement amount is payment of accrued annual leave and long service leave (or equivalent), it is consideration for supplies of services by Company A to the Principal. These supplies were taxable supplies because:

· these supplies were made for consideration;

· these supplies were made in the course or furtherance of an enterprise carried on by Company A;

· these supplies were connected with Australia;

· Company A is registered for GST; and

· these supplies are not GST-free or input taxed.

Therefore, to the extent that the total settlement amount is payment of accrued annual leave and long service leave (or equivalent), it is consideration for taxable supplies.

The remainder of the total settlement amount is compensation for damages and is not consideration for any supply. Therefore, to that extent the settlement amounts are not consideration for taxable supplies.

Employment termination payment and genuine redundancy payment

Neither Company A nor the Individual can treat any part of the payments Company A received under the Deed as an employment termination payment or a genuine redundancy payment.

Detailed reasoning

Personal Services Income

Question 1

Company A earns PSI through the personal services of the Individual. As Company A does not satisfy the results test and gets 80% or more of the PSI from one source, Company A does not operate a PSB.

Question 2

As Company A earns PSI and is not operating a PSB, the PSI rules apply to the income. When the PSI rules apply:

· the PSE cannot claim certain deductions against the PSI;

· the PSI (less relevant deductions) the PSE received will need to be attributed (treated as belonging) to each individual who performed the services - that is, the profits can't be retained in the business;

· the PSE needs to meet certain tax return obligations;

· the PSE may have additional pay as you go (PAYG) withholding obligations.

Therefore, the settlement payment received by Company A is attributable to the Individual.

Question 3

To avoid double taxation certain amounts paid promptly as salary and wages are deducted from the total amount attributable to an individual under the PSI rules. For this exception to apply the entity must pay the amount to the individual as an employee, as salary or wages and by the 14^th day after the PAYG payment period (the prescribed period).

The settlement payment received by Company A was paid to the Individual as an employee, as salary or wages and was paid within the prescribed period. Therefore, the payment made by Company A to the Individual is in accordance with subsection 86-15(4) of the ITAA 1997.

Taxable Supply and Consideration

Questions 4, 5 and 6

You make a taxable supply where you satisfy the requirements of section 9-5 of the GST Act, which states:

You make a taxable supply if:

(a) you make the supply for *consideration; and

(b) the supply is made in the course or furtherance of an *enterprise that

(c) you *carry on; and

(d) the supply is *connected with Australia; and

(e) you are *registered, or *required to be registered.

However, the supply is not a *taxable supply to the extent that it is *GST-free or *input taxed.

*Denotes a term defined in section 195-1 of the GST Act.

Goods and Services Tax Ruling GSTR 2001/4 provides guidance on court and out-of-court settlements.

Paragraphs 45 to 47 of GSTR 2001/4 discuss earlier supplies. They state:

Earlier supply

45. Each and every supply is subject to GST provided the supply satisfies the requirements of a taxable supply. The GST Act does not prescribe any sequencing or hierarchy of supplies for taxing purposes. GST becomes payable on the relevant supply.

46. In these circumstances, where the subject of the dispute is an earlier transaction in which a supply was made involving the parties, that supply is referred to in this ruling as an 'earlier supply'.

Example - Earlier supply

47. Widget Company supplies toys to a retailer. A dispute between the parties over payment for the toys is subsequently resolved through an out-of-court settlement, with the retailer paying all monies owed. The supply of the toys, that is the subject of the dispute, is an earlier supply because it occurred before the dispute arose.

Paragraphs 71 to 73 of GSTR 2001/4 discuss damages. They state:

71. Disputes often arise over incidents that do not relate to a supply. Examples of such cases are claims for damages arising out of property damage, negligence causing loss of profits, wrongful use of trade name, breach of copyright, termination or breach of contract or personal injury.

72. When such a dispute arises, the aggrieved party will often assert its right to an appropriate remedy. Depending on the facts of each dispute a number of remedies may be pursued by the aggrieved party in order to ensure adequate compensation. Some of these remedies may be mutually exclusive but it is still open to the aggrieved party to plead them as separate heads of claim until such time as the matter is resolved by a court or through negotiation.

73. The most common form of remedy is a claim for damages arising out of the termination or breach of a contract or for some wrong or injury suffered. This damage, loss or injury, being the substance of the dispute, cannot in itself be characterised as a supply made by the aggrieved party. This is because the damage, loss, or injury, in itself does not constitute a supply under section 9-10 of the GST Act.

Paragraphs 148 and 149 of GSTR 2001/4 discuss reimbursement of legal costs. They state:

148. As we have seen for a supply to be a taxable supply the conditions under section 9-5 of the GST Act must be met. In the instance of the payment of costs under the court order or settlement there is no supply for consideration from the successful party to the unsuccessful party. This is essentially paying compensation for costs or losses incurred in the dispute and will be treated in the same manner as damages under paragraphs 110 and 111.

149. Accordingly, the payment of court ordered costs or costs negotiated in a settlement in the circumstances described will not be consideration for an earlier or current supply. It does not matter that the payment of the costs order or settled amount is made by an entity other than the unsuccessful party.

Paragraphs 50 to 55 and 109 of GSTR 2001/4 discuss discontinuance supplies. They state:

Supply related to discontinuance of action

50. Even where there is no earlier or current supply, the very wide range of things that can constitute a 'supply' means that one or more new supplies will probably crystallise on an out-of-court settlement being reached.

51. Generally (it is suggested in most if not all cases), the terms of a settlement, in finalising a dispute, will ensure no further legal action in relation to that dispute, provided that the terms of the settlement are complied with. This often takes the form of a plaintiff releasing a defendant from some (or all) of the existing claims and from further claims and obligations in relation to that dispute.

52. Sometimes, where a dispute involves counter claims, the terms of the settlement may provide for each party to release the other from such claims and obligations.

53. Where court proceedings have commenced, the filing of a notice of discontinuance pursuant to the relevant court rules may also be required to ensure the court is advised that a particular action will not proceed.

54. We consider that these conditions of settlement can create supplies for GST purposes. The supplies may be characterised as:

(i) surrendering a right to pursue further legal action [paragraph 9-10(2)(e)]; or

(ii) entering into an obligation to refrain from further legal action [paragraph 9-10(2)(g)]; or

(iii) releasing another party from further obligations in relation to the dispute [paragraph 9-10(2)(g)].

55. In this Ruling, we refer to supplies of these kinds as 'discontinuance supplies'. However, whether a discontinuance supply would be a taxable supply would then depend on the requirements of section 9-5 being met in relation to that supply.

…

109. We consider that a payment made under a settlement deed may have a nexus with a discontinuance supply only if there is overwhelming evidence that the claim which is the subject of the dispute is so lacking in substance that the payment could only have been made for the discontinuance supply.

Company A had a dispute with the Principal, which was settled out of court.

Company A supplied certain services to the Principal. These supplies were earlier supplies because they occurred before the dispute arose.

To the extent that a settlement payment is payment of accrued annual leave and long service leave, or the equivalent of such, the payment is consideration for the earlier supplies of services by Company A to the Principal during the period of engagement because accrued leave is an entitlement that an employee has as a result of the work they do and the Individual performed the services that Company A supplied.

Company A sought a specified period of pay in lieu of notice and another specified period of pay as severance pay. Payment of such amounts is not remuneration for services rendered. These payments are instead damages to compensate for termination of a contract. The payment of these amounts is not consideration for any supply.

To the extent that the payment from Company C is reimbursement of legal costs, it is not consideration for a supply.

To the extent that the settlement payments are consideration for supplies, they are consideration for taxable supplies made by Company A because:

· the supplies were made by Company A for consideration;

· the supplies were made in the course or furtherance of an enterprise that Company A carried on;

· the supplies were connected with Australia;

· Company A is registered for GST; and

· there are no provisions in the GST Act under which the supplies were GST-free or input taxed.

Therefore, to the extent that the total settlement amount is payment of accrued annual leave and long service leave (or equivalent), it is consideration for taxable supplies.

By executing the Deed, Company A released the Principal from further obligations in relation to the dispute. This release is a discontinuance supply. The claims which were the subjects of the dispute in this case were not so lacking in substance that the settlement payments could only have been made for the discontinuance supply. As explained above, the settlement payments were consideration for earlier supplies and payment of damages. Therefore, the settlement payments are not consideration for Company A's discontinuance supply. Hence, Company A did not make a taxable supply of a release and the execution of the Deed by Company A was not a taxable supply.

Apportionment

Paragraphs 115 to 119 of GSTR 2001/4 discuss apportionment of a court or out of court settlement payment between the heads of claim. They state:

115. Where payment made under a court order or out-of-court settlement has a sufficient nexus with more than one supply, with one or more supplies being taxable and one or more being GST-free or input taxed, the payment will be for each of the relevant parts. This will also be the case where the payment is partly for an item of damages which is not a supply.

116. Where a court order (issued in accordance with the court's judgment on the case) itself dissects and itemises the payment into the heads of claim relating to the individual supplies and / or item of damages, that itemisation will be accepted as representing the amounts of these relevant parts.

117. In the case of an out-of-court settlement, where the terms of the settlement include a dissection and itemisation of the payment into the heads of claim, that itemisation will be accepted as representing the amounts of these relevant parts to the extent that it is made on a reasonable basis.

118. Where no dissection is made, even though the payment has a sufficient nexus with more than one supply, or to a supply and an item of damages which is not a supply, the payment should be apportioned into amounts representing these relevant parts in order that the correct GST consequences result.

119. The apportionment should be determined by the parties on a reasonable basis. Where a payment is apportioned in a manner that cannot be justified in terms of reasonableness, the general anti-avoidance provisions of the GST Act may have application.

In accordance with paragraph 124 of GSTR 2001/4, it might be appropriate to use the relative proportions of the original heads of claim as the basis for dissecting a settlement payment.

The GST liability will be 1/11th of the part of the total settlement amount that is consideration for taxable supplies.

Employment termination payment and genuine redundancy payment

Question 7

Under subsection 82-130(1) of the ITAA 1997:

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) …

Following the termination by the Principal of the unwritten ongoing contract for service between Company A and the Principal and after some negotiations between the parties, the Deed was executed. In return for payment of the 'settlement sum', Company A and the Individual acknowledged that the payment was in full satisfaction of all obligations of the Principal towards Company A and the Individual, including all claims. Company A and the Individual also unconditionally released the Principal from all current and future claims they might have against the Principal.

Clearly the payment was made to Company A to settle all claims which Company A and the Individual might have against the Principal in relation to the termination of the contract for service. By its very nature, the payment was, therefore, not an employment termination payment. Indeed it cannot be since Company A was a contractor, not an employee of the Principal.

There is no indication that the Individual was in the employment of the Principal. The arrangement between company A and the Principal was for the Individual to provide certain services on behalf of Company A to the Principal in return for which Company A received the contractual payments. If there were an 'employer and employee' relationship in existence, it was between the Individual and Company A, not the Individual and the Principal.

Furthermore, even if it is accepted there was an 'employer and employee' relationship between Company A and the Individual, the fact that Company A has, at no time, terminated the Individual's employment removes any justification for Company A to treat any payment it made to the Individual as an employment termination payment.

As noted in the answer to question 2 above, any part of the payments which Company A received from the Principal and Company C under the Deed and made to the Individual is the Individual's PSI.

Question 8

Subsections 83-175(1) and (2) of the ITAA 1997 define what a genuine redundancy payment is and what conditions must be satisfied before a payment can be accepted as such. The subsections state that:

(1) A genuine redundancy payment is so much of a payment received by an employee who is dismissed from employment because the employee's position is genuinely redundant as exceeds the amount that could reasonably be expected to be received by the employee in consequence of the voluntary termination of his or her employment at the time of the dismissal.

(2) A genuine redundancy payment must satisfy the following conditions:

(a) the employee is dismissed before the earlier of the following:

(i) the day he or she turned 65;

(ii) if the employee's employment would have terminated when he or she reached a particular age or completed a particular period of service - the day he or she would reach the age or complete the period of service (as the case may be);

(b) if the dismissal was not at arm's length - the payment does not exceed the amount that could reasonably be expected to be made if the dismissal were at arm's length;

(c) at the time of the dismissal, there was no arrangement between the employee and the employer, or between the employer and another person, to employ the employee after the dismissal.

As noted in the answer to question 7 above:

(a) Company A was a contractor, not an employee, of the Principal; and

(b) it was the contract for service between Company A and the Principal that was terminated.

As subsection 83-175(1) of the ITAA 1997 clearly refers to a genuine redundancy payment as 'so much of a payment received by an employee who is dismissed from employment', and as Company A was not an employee of the Principal, the 'settlement sum' received by Company A under the Deed cannot be a genuine redundancy payment.

There is no indication of the Individual being employed by Company A. Even if there is, the fact that the Individual has at no time been dismissed by Company A because their position in Company A is genuinely redundant removes any justification for Company A to make a genuine redundancy payment to the Individual.

Furthermore, paragraph 83-175(2)(c) of the ITAA 1997 makes explicit reference to 'employer' and 'employee'. This point was discussed in paragraph 52 of Taxation Ruling TR 2009/2 which states that:

The Commissioner considers that the phrase 'arrangement... to employ' in paragraph 83-175(2)(c) refers to common law employment only. This condition does not contemplate a situation where there is an arrangement to engage the former employee as an independent contractor.

As noted in the answer to question 2 above, any part of the payments which Company A received from the Principal and Company C under the Deed and made to the Individual is the Individual's PSI, which the Individual must include in their assessable income.

Question 9

For the whole period during which the contract for service was in place, the Individual had been sent over by Company A, the Individual's own company, to provide the services Company A agreed to provide to the Principal. Company A tax-invoiced the Principal for the services provided, and the Principal remunerated Company A direct. As noted before, the relationship between Company A and the Principal was a 'contractor and principal' relationship.

Subdivision 12-B of the Taxation Administration Act 1953 (the TAA) imposes an obligation on entities making payments for work and services. In relation to payments made to employees section 12-35 of the TAA states that:

An entity must withhold an amount from salary, wages, commission, bonuses or allowances it pays to an individual as an employee (whether of that or another entity).

The Principal never paid the Individual salary or wages direct and never withheld an amount of tax as is required by section 12-35 of the TAA in the case of an individual being an employee. The Principal paid Company A the agreed amount of remuneration plus GST each month, and Company A issued a tax invoice to the Principal. This arrangement has not changed since day one. It is, therefore, difficult to see that the Principal has ever treated the Individual as its employee.

This is further evidenced by the fact that there was no indication of the Principal ever paying the Individual the normal benefits associated with employment, such as annual leave; long service leave; etc. Also, it is noted that payment of superannuation contributions was made by Company A and not by the Principal.

Company A made payments to the Individual independently of the Principal and at its own chosen timing. As already noted, Company A also made contributions to a superannuation fund for the Individual's benefit. Regardless of the role(s) the Individual might have been asked by the Principal to assume in, and for, the Principal's business operation, the fact remains that the Individual was a worker sent over by Company A, the contractor, to provide services to the Principal on behalf of Company A.

While the Individual may or may not be an employee of Company A, the Individual's own company, the Individual themself was certainly not in an employment relationship with the Principal in which the Individual was an employee and the Principal their employer.

When Company A was no longer required by the Principal to provide any further services, what was terminated, or discontinued, was the unwritten, ongoing contract between Company A and the Principal. It was not the case where the Individual's employment with the Principal was terminated since no such employment relationship ever existed between the Individual personally and the Principal.

The mere fact that Company A paid the same amounts it received from the Principal and Company C to the Individual does not turn the payment into an employment termination payment. For the payment to qualify as an employment termination payment, it must first be established that the relevant conditions stipulated in subsection 82-130(1) of the ITAA 1997 are satisfied. However, in this case they have not.

Further, it was advised that the Individual subsequently paid the monies back to Company A.

As regards the withholding of tax by a payer of an employment termination payment, section 12-85 of the TAA requires that:

An entity must withhold an amount from any of the following payments it makes to an individual:

(a) a superannuation lump sum;

(b) a payment that is an employment termination payment or would be one except that it is received more than 12 months after termination of employment.

The 'settlement sum' payable by the Principal under the Deed was inclusive of GST and was paid to Company A, even though no tax invoice was issued by Company A because purportedly the Principal did not request it. When making the payment, again the Principal did not withhold any tax as it would if the Individual were an employee of the Principal.

A mutually agreed 'contractor and principal' arrangement that has been in place for years and has not changed over the course of time cannot suddenly become an 'employee and employer' relationship in order to treat a payment made by a principal under a deed of settlement and release to a contractor as an employment termination payment by an employer to an employee.

Where no employment relationship can be established between the Individual and the Principal, the payments the Individual received from Company A were not consequent upon the termination of their employment. Hence the payments are not employment termination payments within the meaning of section 82-130 of the ITAA 1997. For the same reason, no part of the payments is a genuine redundancy payment under section 83-175 of the ITAA 1997.

As noted in the answer to question 2 above, any part of the payments which Company A received from the Principal and Company C under the Deed and made to the Individual is the Individual's PSI, which the Individual must include in their assessable income.

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