Edited version of your written advice

Authorisation Number: 1012732537914

Ruling

Subject: Bonus payment from employer

Question

Is a performance bonus received on termination of employment an employment termination payment (ETP) in accordance with section 82-130 of the Income Tax Assessment Act 1997?

Answer

No

This ruling applies for the following period:

Year ending 30 June 2015

The scheme commences on:

1 July 2014

Relevant facts and circumstances

You commenced employment with the Employer less than 10 years ago.

In a letter dated in the 2013-14 income year, you were advised by your Employer that your position was at risk and was unlikely to continue after the 2014-15 income year.

In the 2014-15 income year your employment was terminated.

In your latest Enterprise Agreement (the EA) it provides details of your remuneration and a clause in relation to performance bonuses which states:

• an employee must comply with the requirements outlined in a particular clause in the EA.

• to be eligible for payment of a performance bonus an employee at least a specified period of continuous months service with the Employer during the relevant appraisal cycle and is still employed by Employer on by a particular date in that year.

• a bonus may be payable where an employee has met or exceeded all targets (or an equivalent standard, as determined by the Managing Director) during the appraisal cycle.

You have provided information that was published on the Employer's website in relation to frequently asked questions ('FAQ') regarding the cessation of employment. In regards to a pro-rated bonus payment it states:

• an employee who received a letter advising them that they occupy a position that was deemed at risk was eligible for the payment;

• how the pro-rated bonus is calculated; and

• when it is paid.

You have provided correspondence between you and the Employer. In relation to the bonus payment the Employer stated that the payment is, and has been, paid to employees whose positions were identified as 'at risk' and included those whose employment was not terminated.

You received the bonus payment after the termination of your 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 section 82-135

Income Tax Assessment Act 1997 paragraph 82-135(i)

Income Tax Assessment Act 1997 section 82-140

Income Tax Assessment Act 1997 paragraph 82-140(a)

Income Tax Assessment Act 1997 section 82-150

Income Tax Assessment Act 1997 subsection 82-150(1)

Income Tax Assessment Act 1997 paragraph 82-150(a)

Income Tax Assessment Act 1997 paragraph 82-150(b)

Income Tax Assessment Act 1997 paragraph 82-150(c)

Income Tax Assessment Act 1997 paragraph 82-150(d)

Reasons for decision

Summary

The bonus payment you received is not an employment termination payment as it is not a payment made in consequence of termination of employment.

Detailed reasoning

Subsection 82-130(1) of the Income Tax Assessment Act 1997 (ITAA 1997) states that a payment is an employment termination payment (ETP) 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.

To determine if a payment is an ETP, all the conditions in subsection 82-130(1) of the ITAA 1997 must be satisfied. Failure to satisfy any of the conditions under subsection 82-130(1) will result in the payment not being considered an ETP.

Furthermore, any termination payments received more than 12 months after the termination will be taxed as ordinary income at marginal tax rates, unless the taxpayer is covered by a determination exempting them from the 12 month rule.

Paid as a 'consequence of' the termination of your employment

For a payment to be treated as an ETP, the first condition that must be met is that the payment is made in 'consequence of' the termination of employment of the taxpayer.

The phrase 'in consequence of' is not defined in the ITAA 1997. However, the courts have interpreted the phrase in a number of cases. Taking into account the courts decisions on the meaning of the phrase, the Commissioner's view on the meaning and application of the 'in consequence of' test are set out in Taxation Ruling TR 2003/13 (TR 2003/13).

While TR 2003/13 considered the meaning of the phrase 'in consequence of' in the context of the 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.

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.

Accordingly, it must be demonstrated that, but for the termination of employment, the payment would not have been made.

In the present case, you were during the 2013-14 income year by your employer that your substantive position was 'at risk', and was unlikely to continue after the 2014-15 income year.

During the 2014-15 income year, you were terminated from employment and received a pro rata bonus payment (the bonus payment) from the Employer.

The Employer's website details the requirements to receive the bonus payment and shows that an employee who received a letter advising them that they occupy a position that was deemed at risk was eligible for the payment.

The letter you received during the 2013-14 income year shows that your position was deemed to be 'at risk'. Accordingly, you were eligible to receive the bonus payment.

The bonus payment was calculated differently to the calculation of your performance bonus under the EA.

The bonus payment was made to all employees who received a letter from the Employer that advised them that they were occupying a position that was deemed 'at risk'. This is supported by correspondence from the Employer during the 2014-15 income year which showed that the payment is, and has been, paid to employees whose positions were identified as 'at risk' and included those employees whose employment was not terminated.

From the information provided, the nature of the payment is for positions which were deemed at risk and paid to employees in those positions regardless of whether their employment was terminated. Accordingly, it cannot be said that, but for termination of your employment, you would not have received the bonus payment. In other words, you would have received the bonus payment, regardless of whether your employment was terminated or not.

The payment was not made to you 'in consequence of' the termination of employment. Therefore the payment is not an ETP as it does not satisfy one of the conditions of subsection 82-130(1) of the ITAA 1997.

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