Edited version of your written advice

Authorisation Number: 1013035579253

Date of advice: 20 June 2016

Ruling

Subject: Employment termination payment

Question

Is the payment received by the Taxpayer an employment termination payment in accordance with section 82-130 of the Income Tax Assessment Act 1997?

Answer

Yes

This ruling applies for the following period

Income year ended 30 June 2016

The scheme commenced on

1 July 2015

Relevant facts and circumstances

The Deceased's death terminated their employment with the Employer.

The Taxpayer is the spouse of the Deceased.

Both the Deceased and the Taxpayer are Australian tax residents.

The Employer wanted to recognise the Deceased's contribution and provide additional support to the Taxpayer as a result of the termination of the Deceased's employment.

The Employer made an ex-gratia payment based on compassionate grounds to the Taxpayer by way of additional support.

The Taxpayer is not associated with the Employer in any way, and has never been an employee, shareholder or director.

The amount has been determined in light of the Deceased's period of service as well as their contribution to the business by way of management and earnings. The amount has been calculated on this basis allowing for the financial capacity of the business to make the payment in addition to providing assistance to the Taxpayer.

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 Subsection 82-130(4)

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

Income Tax Assessment Act 1997 section 82-135

Reasons for decision

Summary

The payment received by the Taxpayer is an employment termination payment (ETP).

Employment termination payment

A payment made to an employee is an employment termination payment (ETP) if it satisfies all the conditions set out in section 82-130 of the Income Tax Assessment Act 1997 (ITAA 1997).  This section states:

(1) 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.

(4) Paragraph (1)(b) does not apply to you if:

(a)  you are covered by a determination under subsection (5) or (7); or

(b)  the payment is a * genuine redundancy payment or an * early retirement scheme payment.

Note: The part of a genuine redundancy payment or an early retirement scheme payment worked out under section 83-170 is not an employment termination payment: see section 82-135.

(5) The Commissioner may determine, in writing, that paragraph (1)(b) does not apply to you if the Commissioner considers the time between the employment termination and the payment to be reasonable, having regard to the following:

(a)  the circumstances of the employment termination, including any dispute in relation to the termination;

(b)  the circumstances of the payment;

(c)  the circumstances of the person making the payment;

(d)  any other relevant circumstances.

To determine if a payment constitutes an ETP, all the conditions in section 82-130 of the ITAA 1997 must be satisfied.

Paid as a consequence of the termination of employment

For a payment to be treated as an ETP, the first condition that needs to be met is that there must be a payment that is made in consequence of the termination of employment of the taxpayer (see subparagraph 82 130(1)(a)(i) of the ITAA 1997).

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 this 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 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).

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.

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) 133 CLR 45 (Reseck) and the Full Federal Court in McIntosh v. Federal Commissioner of Taxation (1979) 45 FLR 279 (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 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) 195 ALR 194 (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 employment termination payment. It was held that a settlement payment for litigation in relation to a taxpayer's dismissal was an employment termination payment.

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.

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'.

Therefore if the payment follows as an effect or a result from 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. Hence the payment will be an ETP unless the payment is specifically excluded under section 82-135 of the ITAA 1997.

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 a letter, the Employer outlined the basis of the 'ex-gratia payment' to the Taxpayer as being in recognition of the Deceased's contribution to the success of the investment and to provide additional support to them as a result of the Deceased's employment being terminated.

Therefore based on the principles stated in Reseck and other cases, and the Commissioner's views expressed in TR 2003/13, the facts presented demonstrate that a clear connection exists between the termination of Deceased's employment and the payment. The Taxpayer would not otherwise have received the payment except for the termination of the Deceased's spouse's employment upon death.

Payment is received no later than 12 months after termination

In this case, the payment was made to the Taxpayer was not within 12 months of the Deceased's termination.

Therefore, as the compensation payment was made 12 months after the termination date this condition is not satisfied.

Determination under section 82-130(5) of the ITAA 1997

In this light, subsection 82-130(5) of the ITAA 1997 authorises the Commissioner to determine in writing that the '12 month rule' does not apply if the Commissioner considers the time between the employment termination and the payment to be reasonable having regard to the following:

a) The circumstances of the employment termination, including any dispute in relation to the termination;

b) The circumstances of the payment;

c) The circumstances of the person making the payment; and

d) Any other relevant circumstances.

The following are considered the relevant circumstances for this case:

• There is no question over the nature of the employment termination, which occurred as a result of the Deceased's death.

• The payment was made from the realisation of the investment venture, which occurred 12 months after the Deceased died.

• The recipient had no control or influence over the timing of the payment. They have not been able to manipulate the timing to maximise the taxation advantages.

• The payment is intended to provide additional support to assist the Deceased's spouse.

• There would be no undermining of the objectives of the legislation. There is no mischief at work in the timing of the payment that has been provided.

Based on the above, the Commissioner has determined that the time taken between the termination of the Deceased's employment and the payment made to the taxpayer is reasonable. Therefore, the 12 month rule under paragraph 82-13091)(b) of the ITAA 1997 will not apply to the payment.

Exclusions under section 82-135 of the ITAA 1997

Certain payments made on termination of employment are excluded from being an ETP under section 82-135 of the ITAA 1997. These payments, among others, include:

• Accrued annual leave and long service leave payments which are covered by Subdivision 83-A and Subdivision 83-B of the ITAA 1997 respectively;

• Superannuation benefits which are covered by Divisions 301 to 307 of the ITAA 1997;

• The tax-tree parts of a genuine redundancy payment or an early retirement scheme payment worked out under section 83-170 of the ITAA 1997; and

• Certain capital payments for personal injury

The payment does not fall within the various exclusions under section 82-135 of the ITAA 1997.

As the payment to the Taxpayer satisfies the requirements under paragraph 82-130(1)(a) and paragraph 82-130(1)(c) of the ITAA 1997, and as the Commissioner has determined that the 12 month rule does not apply to the payment, the payment received by the Taxpayer is an ETP.

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