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Edited version of your written advice
Authorisation Number: 1051291446040
Date of advice: 6 October 2017
Ruling
Subject: PAYG Withholding – Service continuity and retention payments
Question 1
Is the entity required to withhold PAYG withholding amounts under section 12-35 of Schedule 1 to the Taxation Administration Act 1953 (TAA) from payments made to employees who take up redeployment in other sections of the organisation outside the town?
Answer
Yes
Question 2
Is the entity required to withhold PAYG withholding amounts under section 12-35 of Schedule 1 to the Taxation Administration Act 1953 (TAA) from payments made to employees who take up redeployment in other sections of the organisation within the town, or are redeployed to another part of the organisation?
Answer
Yes
Question 3
Are the payments made to employees who exit the organisation considered to be Employment Termination Payments?
Answer
No
Question 4
Is the entity required to withhold PAYG withholding amounts under section 12-35 of Schedule 1 to the Taxation Administration Act 1953 (TAA) from payments made to employees exit the organisation?
Answer
Yes
This ruling applies for the following period:
Year ended 30 June 2018
The scheme commences on:
1 July 2017
Relevant facts and circumstances
The entity manages a services facility (the facility) which is a care facility in a regional town. The Government has announced it will close the facility and develop new facilities across the state which will affect all staff.
The closure agreement sets out processes, arrangements and entitlements of staff who are impacted by the decision to close the facility.
The closure agreement addresses the service continuity and retention payments to be made to staff. Details of the closure agreement are as follows:
The payment is intended to encourage impacted employees to stay on until their exit date (noting that staff will be required to leave at different times as determined by the organisation). The payment is in consideration for their positive participation with all elements of the closure. The entitlement will vary for different categories of impacted employees. The payments are for full-time (pro-rata for part-time and casual based on average actual hours worked in the preceding twelve months).
Category 1: Employees who take up redeployment in the organisation outside of the town
(a) A payment at the date of redeployment or on the closure date whichever occurs first.
(b) An amount paid to an employee when they are ‘matched’ and confirmed as accepting redeployment to a section of the organisation outside of the town.
(c) An amount paid within 4 weeks of actual redeployment to the matched location.
(d) An amount paid on/or within 4 weeks of the six (6) month anniversary of redeployment.
(e) An amount paid on/or within 4 weeks of the twelve (12) month anniversary of deployment.
Category 2: Employees who take up redeployment in another section of the organisation within the town, or are redeployed to another part of the organisation.
(a) Payment of an amount; at the date of redeployment or on closure date whichever occurs first.
(b) Payment of an amount on/or within 4 weeks of the six (6) month anniversary of redeployment.
Category 3: Employees who exit the organisation
(a) Payment of an amount; at the date of exit or closure date whichever occurs first.
(b) An additional payment for long term employees with more than 15 years’ service who exit the organisation – this payment will increase incrementally.
The payment is in recognition of staff who are willing to commit to continue at the facility until the exit date nominated by the department but who otherwise would not be seeking alternative employment through this process. Specifically it is in further recognition that their many years of service at the facility and recognition that they may require additional support to transition to very different work environment.
The payment shall be made in accordance with the terms of the specific categories outlined above.
The exit date will be determined by the department.
Relevant legislative provisions
Taxation Administration Act 1953 Section 12-35 of Schedule 1
Income Tax Assessment Act 1997 subsection 82-130(1)
Detailed reasoning
Employment Termination payment
The Service Continuity and Retention Payments are not employment termination payments as they are not made in consequence of the termination of employment.
While the payments may coincide with the termination of the relevant employees’ employment, the payments are not made in consequence of the termination of that employment. Rather, these payments are made as a financial incentive to ensure that those employees remain employees of the organisation for a certain period of time.
A distinction has been made between the payments being made as a consequence of remaining in employment for a certain period of time as opposed to being paid as a consequence of the termination of that employment.
Therefore, the payments do not satisfy the requirement under subparagraph 82-130(1)(a)(i) of the Income Tax Assessment Act 1997 (ITAA 1997). All the conditions under subsection 82-130(1) of the ITAA 1997 must be satisfied before a payment is considered an employment termination payment.
PAYG Withholding
Section 12-35 of Schedule 1 to the TAA provides that you must withhold an amount from a payment of salary, wages, commission, bonuses or allowances you pay to an individual as an employee.
Paragraph 14 of Taxation Ruling TR 2005/16 states for the provision (Section 12-35 of Sch 1) to apply, there must be an employee, a payment of salary, wages etc. to an employee as a consequence of his/her employment and finally the payment must be made by an entity.
The organisation will make service continuity and retention payments to people who are either current or former employees of the entity. The payment is intended to encourage impacted employees to stay on with the residents at the care facility until their exit date. The payment is in consideration for their positive participation with all elements of the care facility closure. Therefore the payee must have been an employee in order to receive the payment.
In conclusion, the payments paid to employees are paid as a consequence of the employee’s employment. The payments are considered to be a part of salary and wages paid to an individual as an employee, and therefore there is an obligation to withhold from the payments under section 12-35 of Schedule 1 of the TAA.
Reasons for decision
Employment Termination payment
The payments are not employment termination payments as they are not made in consequence of the termination of employment.
While the payments may coincide with the termination of the relevant employees’ employment, the payments are not made in consequence of the termination of that employment. Rather, these payments are made as a financial incentive to ensure that those employees remain employees of the entity for a certain period of time.
A distinction has been made between the payments being made as a consequence of remaining in employment for a certain period of time as opposed to being paid as a consequence of the termination of that employment.
Therefore, the payments do not satisfy the requirement under subparagraph 82-130(1)(a)(i) of the Income Tax Assessment Act 1997 (ITAA 1997). All the conditions under subsection 82-130(1) of the ITAA 1997 must be satisfied before a payment is considered an employment termination payment.
PAYG Withholding
Section 12-35 of Schedule 1 to the TAA provides that you must withhold an amount from a payment of salary, wages, commission, bonuses or allowances you pay to an individual as an employee.
Paragraph 14 of Taxation Ruling TR 2005/16 states for the provision (Section 12-35 of Sch 1) to apply, there must be an employee, a payment of salary, wages etc. to an employee as a consequence of his/her employment and finally the payment must be made by an entity.
The entity will make payments to people who are either current or former employees of the entity. The payment is intended to encourage impacted employees to stay on at the facility until their exit date. The payment is in consideration for their positive participation with all elements of the closure of the facility. Therefore the payee must have been an employee in order to receive the payment.
In conclusion, the payments paid to employees are paid as a consequence of the employee’s employment. The payments are considered to be a part of salary and wages paid to an individual as an employee, and therefore there is an obligation to withhold from the payments under section 12-35 of Schedule 1 of the TAA.
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