Edited version of your written advice

Authorisation Number: 1051355247358

Date of advice: 27 March 2018

Ruling

Subject: PAYG Withholding

Question 1

Are any of the gross payments received by the employee from your client classified as an employer termination payment (ETP) in accordance with section 82-130 of the Income Tax Assessment Act 1997?

Answer

Yes, the following payments are deemed to be ETPs:

● six months’ salary in lieu of notice; and

● both the standard and at-risk ex-gratia payments.

Question 2

Is the entity required to withhold PAYG withholding amounts on ETPs, ex-gratia payments and accrued leave payments under sections 12-85 and 12-90 of Schedule 1 to the Taxation Administration Act 1953 (TAA)?

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 employee tendered their resignation in the 2017 financial year.

A Deed of Separation and Release was executed, whereby the employee’s employment concluded at the end of 2017.

The employee’s position was not made redundant.

The employee has accepted another position with a different employer to begin in 2019.

The employee’s gross payments on termination consisted of the following:

● Six months’ salary in lieu of notice

● Ex-gratia (at risk payment)

● Ex-gratia payment

● Accrued annual leave component

The at-risk portion must be repaid if the employee triggers a clause of the Deed of Separation and Release, by commencing employment with another entity before mid-2018.

All payments were taxed at the employee’s marginal tax rates, excluding the portion of the ETP which was below the relevant cap.

The entity withheld tax on the payments totalling $X.

Relevant legislative provisions

Taxation Administration Act 1953 Section 12-85 of Schedule 1

Taxation Administration Act 1953 Section 12-90 of Schedule 1

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(c)

Reasons for decision

Question 1

Detailed reasoning

A payment received on termination from employment can be classified as an employment termination payment if it satisfies the following criteria set out in subsection 82-130(1) of the ITAA 1997:

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 (unless the payment is one covered under subsection (4)); and

c. it is not a payment mentioned in section 82-135.

Based on the information you provided to use in your application, the employee received the following payments from your client upon termination:

d. Six months’ salary in lieu of notice of

e. Ex-gratia (at-risk) payment of

f. Ex-gratia payment of

g. Accrued annual leave component

The application of the ETP criteria stated in subsection 82-130(1) to each form of payment will be discussed below.

Payment of six months’ salary in lieu of notice

This payment was made in consequence of the employee ceasing employment with your client and in accordance with the Deed. This was because the employee was paid by your client a gross sum in lieu of notice upon cessation (or termination).

This payment was received by the employee is less than 12 months after they terminated their employment with the entity.

This payment is not a form of payment listed in section 82-135 of the ITAA 1997.

In conclusion we can state that the six months’ salary in lieu is considered to be an employment termination payment as per section 82-130of the ITAA 1997.

Ex-gratia payments (both standard and at-risk)

These payments were made in consequence of the employee ceasing employment with your client and in accordance with clauses in of the Deed. This was because the employee on termination of employment received from your client ex-gratia tax-free payments. An amount was at risk in accordance with a clause of the Deed if the employee commenced employment with another entity before mid-2018.

These payments were received by the employee less than 12 months after they terminated their employment with the entity.

These payments aren’t any of the payment forms listed in section 82-135 of the ITAA 1997.

In conclusion we can state that the tax-free ex-gratia payments, which consist of the standard payment and the at-risk payment, are considered to be employment termination payments as per section 82-130 of the ITAA 1997.

Accrued (or unused) annual leave payment

This payment was made in consequence of the employee ceasing employment with your client and in accordance with a clause of the Deed. This was because the employee was paid by the entity their accrued, but unused leave entitlements which were calculated up to the date of termination.

This payment was received by the employee less than 12 months after they terminated their employment with the entity

However, this form of payment is mentioned in paragraph (c) of section 82-135 and hence we can state that this payment is not deemed to be an employment termination payment as per section 82-130 of the ITAA 1997.

Question 2

Detailed reasoning

PAYG withholding Employment Termination Payments

Section 12-85 of Schedule 1 of the TAA 1953 requires that an entity must withhold an amount from an ETP made to an individual.

As the payments made to the employee satisfy all of the conditions under subsection 82-130(1) of the ITAA 1997, the payments are ETPs for the purposes of section 82-130.

Accordingly, the payments made to the employee for salary in lieu of notice and the ex-gratia payments, will be subject to PAYG withholding under section 12-85 of Schedule 1 to the TAA 1953.

Section 82-135(c) of the ITAA 1997 states payments made for unused annual leave are not employment termination payments.

PAYG Withholding Annual Leave payment

Subsection 83-10(2) of the ITAA 1997 provides that a payment for unused annual leave is included in the recipient’s assessable income.

Unused annual leave includes amounts paid on termination for annual leave the recipient has not used.

The recipient received a payment for unused annual leave as a result of the termination of their employment. This income is included in their assessable income in accordance with subsection 83-10(2) of the ITAA 1997.

Section 12-90 of Schedule 1 to the TAA provides that an entity must withhold an amount from a payment you pay to an individual as an employee for an unused annual leave payment.

In this case, the payment is made for the employee’s accrued annual leave and you must withhold an amount from the payment as per section 12-90 of Schedule 1 of the TAA.

Further information for you to consider

The ETP cap is the lesser of the lifetime benefit cap and the whole of income cap.

The ETP cap amount for the 2017-18 income year is $200,000. The amount is indexed annually.

The whole-of-income cap amount for the 2017-18 income year and future years is $180,000. This amount is not indexed.

In order to calculate the correct amount of taxation for an individual employee in relation to ETPs, please see Schedule 11 – Tax table for employment termination payments. This information is available by going to ato.gov.au and searching for Quick Code QC 52077.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).