Edited version of your written advice

Authorisation Number: 1013032885578

Date of advice: 16 June 2016

Ruling

Subject: Employment termination payments

Question 1

Will the proposed 'transfer payment' to be made to the Taxpayer be an employment termination payment (ETP) in accordance with 82-130 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

This ruling applies for the following periods:

Income year ending 30 June 2016

The scheme commences on:

1 July 2015

Relevant facts and circumstances

The Employee has been employed by the Employer for a period of over 6 years.

The Employer is a State Owned Corporation. The NSW Government intends to sell a business division conducted by the Employer to a private sector entity.

The Employee's employment with the Employer will be terminated upon the sale of the business division to the private sector purchaser. The Employee will subsequently take up employment with the private sector purchaser.

Upon termination of their employment with the Employer, the Employee will receive a transfer payment based on their years of service.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 82-130(1).

Income Tax Assessment Act 1997 Subsection 82-130(4).

Income Tax Assessment Act 1997 Subsection 82-130(5).

Reasons for decision

Summary

The proposed transfer payment to be made in accordance with the scheme is an employment termination payment as it will be made to an employee in consequence of the termination of their employment.

Employment termination payment

A payment made to an employee is an employment termination payment if the payment satisfies all the requirements in section 82-130 of the Income Tax Assessment Act 1997 (ITAA 1997), and is not specifically excluded under section 82-135 of the ITAA 1997.

Section 995-1 of the ITAA 1997 states that an employment termination payment has the meaning given by section 82-130.

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.

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; and

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

The proposed transfer payment is not a payment mentioned in section 82-135 of the ITAA 1997.

For a transfer payment to constitute an employment termination payment, all the conditions in subsection 82-130(1) of the ITAA 1997 must be satisfied. Failure to satisfy any of the three conditions under subsection 82-130(1) will result in the payment not being considered an employment termination payment.

Even where all other conditions in subsection 82-130(1) of the ITAA 1997 have been satisfied, generally, to qualify as an employment termination payment, the payment must be received by the person within 12 months of termination (paragraph 82-130(1)(b)). Generally, any termination payments received outside of the 12 months will be assessable at the person's marginal tax rates (section 83-295), unless the person is covered by a determination exempting them from the 12 month rule (subsection 82-130(4)).

Is there a termination of employment?

Paragraph 9 of Taxation Ruling IT 2152 titled: 'Income tax: retiring allowances paid to employees upon restructuring of a business' states:

Where a company or other employer ceases carrying on a business which has been transferred to an associated entity, it will be accepted that the employees of the company have had their employment terminated. This will apply in cases similar to the Paklan Case where it is clear that the business in question has been transferred to another entity and it is also clear that the employee's employment has, in fact, been terminated...

Furthermore, at paragraph 2 of Taxation Determination TD 93/140 titled: Income tax: if a company ceases carrying on a business which has been transferred to an associated entity, will a payment made by that company to a former employee be an eligible termination payment as defined in subsection 27A(1) of the Income Tax Assessment Act 1936? confirms the view expressed in IT 2152 that employees of an entity ceasing business have had their employment terminated.

The facts in Paklan Pty Ltd and others v. Federal Commissioner of Taxation (Cth) (1983) 14 ATR 457; (1983) 67 FLR 238; (1983) 83 ATC 4456 (Paklan) can be summarised as follows:

• The taxpayers were directors and shareholders of a company (the old company) which carried on business as consulting engineers.

• On 30 June 1977, the old company ceased to carry on business and the next day sold the business to another company (the new company) also controlled by the taxpayers.

• The new company commenced carrying on the business from the same premises and subject to the same arrangements for occupancy as the old company.

• All the old company's employees, including the taxpayers, became employees of the new company.

• Six months later, it was decided to pay a lump sum to former directors. The payments were actually made a year after the company ceased business and out of outstanding fees received after the business had ceased.

The taxpayers in Paklan did not succeed in having the lump sums in question treated as 'payment in consequence of termination' as they were paid under circumstances and at a time too remote to the termination. However, the Full Federal Court did not dispute the fact that employment had terminated when the old company had ceased business on 1 July 1977.

The facts in Case Q118 (1983) 83 ATC 610; (1983) 27 CTBR (NS) 312 were similar to those in Paklan, and again involved the sale of a company's business as a going concern to a new company. All the employees of the old business were transferred across to the new company. The Board of Review (at 618), did not dispute the fact that employees of the old company had ceased to be employees of the old company immediately before taking up employment with the new company.

While Case K76 (1978) 78 ATC 703; (1978) 23 CTBR (NS) 24, where a taxpayer ceased work with a subsidiary company due to a corporate restructure and immediately re-commenced work with the parent company on the same terms and conditions, it was held the taxpayer's employment with the subsidiary company had been terminated.

The relevant facts in respect of the Employer indicate that employees who take up positions with the purchaser will cease employment with the Employer. Therefore, there is a termination of employment for the purposes of subsection 82-130(1) of the ITAA 1997.

Is the making of the transfer payment 'in consequence of the termination of employment'?

A payment can be considered to be in consequence of termination where it follows from the termination, or the termination is a condition precedent to the payment. In Reseck v. Federal Commissioner of Taxation (1975) 133 CLR 45; (1975) 75 ATC 4213; (1975) 5 ATR 538 (Reseck) Justice Gibbs said:

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.

In the same case, Justice Jacobs said that 'in consequence of' did not import causation but rather a 'following on'.

The decision in Reseck was considered by the Full Federal Court in McIntosh v. Federal Commissioner of Taxation (1979) 45 FLR 279; (1979) 79 ATC 4325; (1979) 10 ATR 13; (1979) 25 ALR 557 (McIntosh). The case concerned a taxpayer who became entitled to a payment subsequent to his retirement. In finding that the payment was in consequence of the taxpayer's termination, Justice Brennan said:

...if the payment is made to satisfy a payee's entitlement, the phrase 'in consequence of retirement' requires that the retirement be the occasion of, and a condition of, entitlement to the payment. A sufficient causal nexus between the payment and the retirement is thus established.

The phrase 'in consequence of' and the decisions in Reseck and McIntosh were also considered more recently by the Federal Court in Le Grand v. Federal Commissioner of Taxation [2002] FCA 1258; (2002) 124 FCR 53; (2002) 2002 ATC 4907; (2002) 51 ATR 139 (Le Grand).

Le Grand involved a payment by the taxpayer 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. The taxpayer had made claims for common law damages for breach of the employment agreement and for statutory damages for misleading and deceptive conduct to procure the taxpayer's employment with the employer. The payment was found to be in consequence of the taxpayer's termination. Justice Goldberg said:

I do not consider that the issue can simply be determined by seeking to identify the 'occasion' for the payment. The thrust of the judgments in Reseck and McIntosh is rather to the effect that payment is made 'in consequence' of a particular circumstance when the payment follows on from, and is an effect or result, in a causal sense, of the circumstance. ... there need not be identified only one circumstance which gives rise to a payment before it can be said that the payment is made 'in consequence' of that circumstance. ... it can be said that a payment may be made in consequence of a number of circumstances and that, for present purposes, it is not necessary that the termination of the employment be the dominant cause of the payment so long as the payment follows in the causal sense referred to in those judgments, as an effect or result of the termination.

The Commissioner of Taxation has issued 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 phase 'in consequence of'.

In paragraphs 5 and 6 of TR 2003/13, the Commissioner, after considering the above judgments, stated:

... 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. The phrase requires 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.

In the present case, the transfer payment is payable only on the condition that the Employee has terminated their employment with the Employer. The payment follows as an effect or result of the termination and the payment would not have been made to the Employee but for the termination of their employment with the Employer.

The following aspects of the arrangement reinforce the characterisation of the transfer payment as an employment termination payment (as distinct from, for example, a transfer or sign-on fee):

• the payment will be made by the Employer or by the State;

• the payment is calculated by reference to the Employee's years of service with the Employer; and

• there are no obligations imposed on the Employee to continue their employment with the purchaser for any particular period after the sale of the business.

In view of the above, the transfer payment is in consequence of the termination of employment and is therefore an employment termination payment under section 82-130 of the ITAA 1997. Unless the employee is covered by a determination exempting them from the 12 month rule, the payment must be received within 12 months of the employee's termination of employment to qualify as an employment termination payment under section 82-130.

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