Edited version of your written advice

Authorisation Number: 1012761549206

Ruling

Subject: Employment termination payment

Question

Is part of a payment received by your client under a Deed of Settlement an employment termination payment?

Answer

Yes

This ruling applies for the following period:

Year ended 30 June 2014

The scheme commences on:

1 July 2013

Relevant facts and circumstances

Your client commenced employment with the Employer during the 2010-11 income year.

During the 2013-14 income year your client's employment was terminated and a Deed of Settlement (the Deed) was entered into between your client and the Employer.

Relevant to this case, the Deed stated the entitlements payable to your client included a lump sum payment of $Z (the Payment) which was stated to be for commissions payable.

An Annexure was attached to the Deed which, in conjunction with the Deed, showed the basis for the calculation of commissions payable in certain circumstances, hereafter referred to as Type A, Type B and Type C payments.

A breakup of the amounts attributable to each Type of payment has been ascertained from the documentation provided i.e. the Payment of $Z comprises $W from Type A + $X from Type B + and $Y from Type C.

You have provided a copy of your client's Employment Contract. Relevant to this case is a schedule (the Schedule) to the Employment Contract which details the commission arrangements applicable to your client.

The Schedule shows that:

(a) During the course of employment the Employer pays commissions to an employee at a specified rate for sales negotiated and signed by the employee which reach settlement - this corresponds with Type A payments; and

(b) In the case of termination, an employee will be entitled to commissions at reduced rates where negotiations had been entered into but not yet confirmed at the time of termination. Further an employee would not be entitled to such payments unless the employee gave a notice of termination - this corresponds with Type B and Type C payments

Your client's request for a private ruling relates to whether any part of $Z of the Payment made under the Deed is an employment termination payment.

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 paragraph 82-130(1)(b)

Income Tax Assessment Act 1997 paragraph 82-130(1)(c)

Income Tax Assessment Act 1997 section 82-135

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

Income Tax Assessment Act 1997 section 955-1

Reasons for decision

Summary

A portion of the lump sum payment your client received under a Deed of Settlement is an employment termination payment.

Detailed reasoning

Employment termination payments

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, your client's employment was terminated during the 2013-14 income year.

As part of a Deed of Settlement (the Deed) your client received a payment based on commission amounts payable as set out in Annexure A to the Deed.

The Annexure, in conjunction with a clause in the Deed, shows the $Z payment can be dissected as comprising three types of payment referred to below as Type A, B and C.

The amount attributable to each type of payment is summarised as $W for Type A, $X for Type B and $Y for Type C.

It is proposed we look at each type of payment in turn to determine if they are paid 'in consequence' of the termination of your client's employment.

Type A payment

Your client received the Type A payment for sales which either settled or would settle by a specified date and where commissions had not yet been paid when your client's employment was terminated.

It is noted that the Type A payment and how it was calculated corresponds with the commission arrangements set out in a Schedule to your client's Employment Contract which stated that the Employer pays commissions to an employee at a specified rate for sales negotiated and signed by the employee which reach settlement.

In view of the above, the Type A payment amount represents unpaid commission owing at the time of the termination of your client's employment and is not 'in consequence of' the termination of your client's employment. In other words, this amount would have been paid to your client regardless of the termination of his employment.

As the Type A payment is not in consequence of the termination of your client's employment, it does not satisfy one of the conditions of subsection 82-130(1) of the ITAA 1997. Accordingly, this payment is not an ETP.

Type B and Type C payments

Your client received the Type B and Type C payments for sales which had not settled by a specified date.

As previously stated these payments correspond to clauses in the Schedule to the Employment Contract which relate to payments made on termination of employment.

From the information provided, your client was not entitled to receive the Type B or Type C payments unless your client had terminated employment with the Employer. In other words, but for the termination, the payment would not have been made to you client.

Therefore, it is considered that the Type B and Type C payments made to your client were 'in consequence of' the termination of his employment with the Employer.

Payment is received no later than 12 months after termination

Your client received the payment within 12 months after the termination of employment. Therefore, this condition is satisfied.

Payment is not a payment mentioned under section 82-135 of the ITAA 1997

Section 82-135 of the ITAA 1997 provides that certain payments are not employment termination payments, including:

_ a superannuation benefit;

_ a payment for unused annual leave or unused long service leave;

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

The facts provided show the Type B and Type C payments satisfy paragraph 82-130(c) of the ITAA 1997 as they not the types of payments excluded from being ETPs under section 82-135.

Conclusion

The Type B ($X) and C payments ($Y) satisfy all of the ETP conditions. Accordingly a portion of the payment received by your client is an ETP.

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