Edited version of private advice

Authorisation Number: 1052134612361

Date of advice: 30 June 2023

Ruling

Subject: Income maintenance payments

Question 1

Are payments made to terminated staff under Company A's income maintenance provisions for retrenched staff considered employment termination payments in accordance with section 82-130 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

Question 2

Are any parts of the payments made to terminated staff under Company A's income maintenance provisions for retrenched staff exempt from tax as a genuine redundancy payment (GRP) in accordance with section 83-175 of the ITAA 1997?

Answer

No.

Question 3

Are payments made to terminated staff under Company A's income maintenance provisions for retrenched staff considered to be income according to ordinary concepts pursuant to section 6-5 of the ITAA 1997?

Answer

Yes.

Question 4

Are payments made to terminated staff under Company A's income maintenance provisions for retrenched staff subject to pay as you go (PAYG) withholding pursuant to section 12-80 of Schedule 1 to the Taxation Administration Act 1953 (TAA)?

Answer

Yes.

This ruling applies for the following periods:

Income year ended 30 June 2022

Income year ending 30 June 2023

Income year ending 30 June 2024

Income year ending 30 June 2025

Income year ending 30 June 2026

Income year ending 30 June 2027

The scheme commences on:

1 July 2021

Relevant facts and circumstances

Company A's Enterprise Agreement (EA) provides two alternative retrenchment benefits for an eligible officer whose employment is terminated. An eligible officer who is retrenched can receive a lump sum payment calculated in accordance with the EA, or the officer can elect to receive payment of income maintenance as provided in the EA.

The income maintenance payments are calculated to bring the former employee's income up to the equivalent amount of the person's salary at the time of termination of employment. That is, the purpose of the income maintenance payment is to pay the former employee, on a regular basis, an amount equivalent to their salary at the date of termination of employment less any amount received by way of unemployment relief.

A former employee's salary at the date of termination of employment is calculated by including the payments as listed in the EA (e.g. payments for shift work or overtime etc).

Where a former employee has elected to receive income maintenance, they will be entitled to receive these payments for X months as stipulated in the EA depending on their years of service.

During the period of income maintenance, the former officers will be required to provide a declaration to Company A, on a monthly basis, as evidence of income for that period to establish eligibility for income maintenance.

Where there are no apparent redeployment opportunities and the redundancy is to proceed, the officer will be formally advised in writing as provided in the EA.

On the basis that the income maintenance payments are an income stream in the hands of the former officers, Company A withholds an amount from these payments using normal monthly pay as you go (PAYG) withholding rates.

Relevant legislative provisions

Acts Interpretation Act 1901 section 15AC

Income Tax Assessment Act 1997 section 1-3

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(b)

Income Tax Assessment Act 1997 subsection 83-175

Income Tax Assessment Act 1997 subsection 83-175(4)

Income Tax Assessment Act 1997 section 102-5

Income Tax Assessment Act 1997 subsection 995-1(1)

Income Tax Assessment Act 1997 subsection 6-5(2)

Taxation Administration Act 1953 section 12-80 of Schedule 1

Taxation Administration Act 1953 paragraph 12-80(b) of Schedule 1

Reasons for decision

Question 1

Summary

Payments made to terminated staff under Company A's income maintenance provisions for retrenched staff are not considered employment termination payments in accordance with section 82-130 of the Income Tax Assessment Act 1997 (ITAA 1997). This is because the payment does not satisfy all of the conditions to be treated as an employment termination payment.

Detailed reasoning

Employment termination payments made on or after 1 July 2007

From 1 July 2007, the law concerning the treatment of payments made in consequence of the termination of any employment of a taxpayer was changed. These payments, formerly known as 'eligible termination payments', are now known as 'employment termination payments'.

Notwithstanding the legislative changes use a different style and forms of words, it should be noted that this does not necessarily mean rewritten tax provisions are to be viewed differently to the old provisions where the ideas remain the same (section 15AC of the Acts Interpretation Act 1901 and section 1-3 of the ITAA 1997).

The term 'employment termination payment' is defined in subsection 82-130(1) of the ITAA 1997 which 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 states:

The following payments you receive are not employment termination payments:

(a) a superannuation benefit (see Divisions 301 to 307);

(b) a payment of a pension or an annuity (whether or not the payment is a superannuation benefit); and

(c) an unused annual leave payment (see Subdivision 83-A);

(d) an unused long service leave payment (see Subdivision 83-B);

(e) the part of a genuine redundancy payment or an early retirement scheme payment worked out under section 83-170 (see Subdivision 83-C);

....

(emphasis on paragraph (b) added)

As noted above, all of the conditions under subsection 82-130(1) of the ITAA 1997 need to be satisfied in order for the payment to be treated as an employment termination payment.

Accordingly, in order to determine whether a payment is an employment termination payment, the nature of the payment and facts of the case must be considered when applying the legislation.

Analysis of Company A's Enterprise Agreement (EA)

Company A's EA provides two alternative retrenchment benefits for an eligible officer whose employment is terminated. The two options provided are:

(a)          to receive a lump sum payment, or

(b)          elect to receive income maintenance.

The income maintenance payments are calculated to bring the former employee's income up to the equivalent amount of the person's salary at the time of termination of employment. That is, the purpose of the income maintenance payment is to pay the former employee, on a regular basis, an amount equivalent to their salary at the date of termination of employment less any amount received by way of unemployment relief.

Where the former employee has obtained new employment, the income maintenance payment is to top up the other income to make it equivalent to the former employee's salary at the date of termination of employment.

The Tax Office's view on income maintenance payments is stated in paragraph 23 of Tax Ruling IT 2168 Income tax: assessment of eligible termination payments (IT 2168) as follows:

Lump sum retrenchment payments under Determination 509 of 1977, under the Commonwealth Employees (Redeployment and Retirement) (Benefits) Regulations 1981 and under the involuntary retirement provisions of the Superannuation Act 1976 are eligible termination payments. Income maintenance payments to which employees are entitled under Determination 509 during periods of formal notice of redundancy - including periods subsequent to early termination - do not qualify as eligible termination payments but are fully assessable in the same way as ordinary salary or wages. (emphasis added)

Whilst the income maintenance payments will not be made under the Commonwealth Employees (Redeployment and Retirement) (Benefits) Regulation 1981 in Company A's circumstances, the income maintenance payments that former employee who elects this option will receive are not dissimilar to the payments made under those regulations.

Division 82 of the ITAA 1997 outlines how employment termination payments are treated for the purpose of income tax. It is noted that income stream payments, whether or not they are superannuation benefits, are specifically excluded from being employment termination payments under paragraph 82-135(b) of the ITAA 1997.

It is recognised that, in some circumstances, an employment termination payment that would otherwise be made as a single payment, may be payable in instalments. This does not overturn the characterisation of the total payment as an employment termination payment rather than ordinary income.

Where the amount of a lump sum payment may be calculated based in some way on the income of the recipient, that does not convert the payment to ordinary income. The former level of income of the recipient is used as a basis for calculating the quantum of the payment, but the amount paid is not paid periodically in the manner of the ordinary income that was paid before the termination of employment.

There is not a flowing on of the income stream from the period before termination into the period after termination. On the contrary, there is a clear disjunction between what is paid before under the normal arrangements of salaried employment and what is paid after as a payment in consequence of the termination of that employment.

Company A's EA states that income maintenance payments payable can also be made where an employee is redeployed at a lower classification within the Company A. The payments made will be at the rate necessary to bring their salary up to the salary received immediately before the date of redeployment.

The years of service lump sum payments is intended to compensate the retrenched employee for the loss of employment. The amount of lump sum payment to be received will not differ when the retrenched employee may be subsequently employed by a third party and receive salary and wages.

In the case of income maintenance payments, the income stream paid after the termination takes its character from the salary and wages paid before termination, both in the amount and method of payment. This is regardless of whether the income maintenance payments commenced before or after the termination of employment.

Further, it should be noted that even if payments take the form of a lump sum due to a back payment of income maintenance instalments, it does not alter the fact that they are considered to be assessable income according to ordinary concepts. This is because the lump sum payment takes on the characteristics of the loss it is replacing (Coward v. FC of T (1999) 99 ATC 2166; (1999) 41 ATR 1138, Sommer v. FC of T [2002] FCA 1205; (2002) 2002 ATC 4815; (2002) 51 ATR 102).

As income maintenance is designed to cover loss of income arising for the loss of a position, any lump sum payment would also be treated as assessable income under section 6-5 of the ITAA 1997.

The income maintenance payments are therefore income in nature. Even though the payments are paid under a redundancy clause, they are still periodic payments which are replacing salary and wages. The payments are an income stream paid regularly for X months to make up a former employee's income equivalent to their salary and wages at the time of their termination of employment from Company A.

As the payments are a regular income stream and not a single payment being paid in instalments, they are not employment termination payments and do not constitute a lump sum payment. The income maintenance payments represent income which is fully assessable in the same way as ordinary salary or wages.

Question 2

Summary

Payments made to terminated staff under Company A's income maintenance provisions for retrenched staff are not exempt from tax as a genuine redundancy payment (GRP) in accordance with section 83-175 of the Income Tax Assessment Act 1997 (ITAA 1997). This is because the payment is not paid as a GRP to the terminated staff as it does not satisfy all the criteria to be classified as a GRP.

Detailed reasoning

Genuine redundancy payment

A payment made to an employee, after 30 June 2007, is a GRP if it satisfies all the criteria set out in section 83-175 of the ITAA 1997.

Section 83-175 of the ITAA 1997 states:

83-175(1)

A genuine redundancy payment is so much of a payment received by an employee who is dismissed from employment because the employee's position is genuinely redundant as exceeds the amount that could reasonably be expected to be received by the employee in consequence of the voluntary termination of his or her employment at the time of the dismissal.

83-175(2)

A genuine redundancy payment must satisfy the following conditions:

(a) the employee is dismissed before the earlier of the following:

(i) the day the employee reached pension age;

(ii) if the employee's employment would have terminated when he or she reached a particular age or completed a particular period of service - the day he or she would reach the age or complete the period of service (as the case may be);

(b) if the dismissal was not at arm's length - the payment does not exceed the amount that could reasonably be expected to be made if the dismissal were at arm's length;

(c) at the time of the dismissal, there was no arrangement between the employee and the employer, or between the employer and another person, to employ the employee after the dismissal.

83-175(3)

However, a genuine redundancy payment does not include any part of a payment that was received by the employee in lieu of superannuation benefits to which the employee may have become entitled at the time the payment was received or at a later time.

Payments not covered

83-175(4)

A payment is not a genuine redundancy payment if it is a payment mentioned in section 82-135 (apart from paragraph 82-135(e)).

Subsection 83-175(4) of the ITAA 1997 states that a payment is not a GRP if it is a payment mentioned in section 82-135 of the ITAA 1997 (other than a GRP or early retirement scheme payment).

The Commissioner has issued Taxation Ruling TR 2009/2 Income Tax: genuine redundancy payments (TR 2009/2) in which he provides guidance on the factors to be considered in the interpretation of section 83-175 of the ITAA 1997.

The need for all conditions to be satisfied appears in paragraph 12 in TR 2009/2 which states:

The satisfaction of this requirement [the payment be in consequence of termination of employment due to a dismissal by way of redundancy] establishes the essential character of the payment. However, there are further conditions that must also be satisfied before a payment can be treated as genuine redundancy payment.

The income maintenance payments Company A pays to eligible retrenched officers represent an income stream payable for a specified period of time. Paragraph 82-135(b) of the ITAA 1997 specifically excludes income streams whether or not they are superannuation benefits.

Accordingly, subsection 83-175(4) of the ITAA 1997 will exclude the income maintenance payments from being GRPs. Consequently, it is not necessary to address the other conditions in that subsection.

As the payments are not GRPs, no part of the payments can be tax-free under section 83-175 of the ITAA 1997.

Question 3

Summary

Payments made to terminated staff under Company A's income maintenance provisions for retrenched staff are treated as income according to ordinary concepts pursuant to section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997).

Detailed reasoning

The assessable income of a taxpayer can consist of both ordinary income and statutory income.

Subsection 6-5(2) of the ITAA 1997 states that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources during the income year.

Ordinary income generally includes receipts that:

•                     are earned;

•                     are expected;

•                     are relied upon; and

•                     have an element of periodicity, recurrence or regularity.

It should be noted that amounts that are treated as ordinary income do not infer that the income has to arise from normal activities or events. Rather, the treatment reflects the nature and manner of the payment/s. Thus, payments made as a result of an event such as termination of employment may be treated as ordinary income if the payments possess the nature and characteristics of ordinary income, that is, income under ordinary concepts.

Statutory income, on the other hand, is an amount that is not ordinary income but is specifically included as assessable income by a particular provision of either the Income Tax Assessment Act 1936 (ITAA 1936) or the ITAA 1997. A net capital gain that is included as assessable income under section 102-5 of the ITAA 1997 is an example of statutory income.

As stated in response to Question 1, the income maintenance payments are considered to be a replacement for salary and wages. The payments are regular periodic payments paid over X months and are therefore ordinary income assessable in the same way as ordinary salary and wages.

As the income maintenance payments constitute income according to ordinary concepts, they are assessable under subsection 6-5(2) of the ITAA 1997.

Question 4

Summary

Payments made to terminated staff under Company A's income maintenance provisions for retrenched staff are subject to pay as you go (PAYG) withholding pursuant to section 12-80 of Schedule 1 to the Taxation Administration Act 1953 (TAA).

Detailed reasoning

Section 12-80 of Schedule 1 to the TAA states:

An entity must withhold an amount from any of the following payments it makes to an individual:

(a) a superannuation income stream;

(b) an annuity.

The income maintenance payments are calculated to bring the former employee's income up to the equivalent amount of the person's salary at the time of termination of employment. That is, the purpose of the income maintenance payment is to pay the former employee, on a regular basis, an amount equivalent to their salary at the date of termination of employment less any amount received by way of unemployment relief.

In this case, it is necessary to consider whether the income maintenance payments constitute an 'annuity'.

Subsection 995-1(1) of the ITAA 1997 defines an 'annuity' as including:

(a) an annuity, within the meaning of the Superannuation Industry (Supervision) Act 1993; or

(b) a pension, within the meaning of the Retirement Savings Accounts Act 1997.

Section 10 of Superannuation Industry (Supervision) Act 1993 (SISA) defines an annuity as including:

...a benefit provided by a life insurance company or a registered organisation, if the benefit is taken, under the regulations, to be an annuity for the purposes of the Act.

This definition of annuity is not exhaustive. However, further guidance on the meaning and characteristics of an annuity are provided in Taxation Ruling IT 2480 Income Tax: Variable annuities (IT 2480) and various court cases.

Paragraph 8 of IT 2480 states there is no conclusive definition of an annuity in the tax legislation and that it is necessary to seek guidance from judicial authorities, many of which are referred to in IT 2480. One definition of an annuity, which legal dictionaries generally lead to, is that cited by Lord Hanworth, M.R in Perrin v. Dickson [1930] 1 KB 107 at page 116 which states:

...annuities means, that where the annuity may be purchased with money the capital is gone and ceases to exist, and consequently, the person to be charged (tax) is the person receiving the annuity that is the yearly sum, year by year...No capital is taxed there, because the principal has been converted into an annuity, and the annuity is chargeable (to tax).

As indicated above, one of the characteristics of an annuity is receipt of payments on a regular basis over a period of time. Further, it should be noted that, though an annuity is generally a fixed annual amount, an annuity can be paid instalments throughout a year as shown in Watkins v. Deputy Commissioner of Taxation (WA) (1946) 49 WALR 63; (1946) 3 AITR 263; (1946) 8 ATD 78 where monthly payments paid under an insurance policy were treated as annuities.

Whilst the case referred to in paragraph 8 of IT 2480 relates to a purchased annuity, it should be noted an annuity does not necessarily have to be purchased. An annuity can be derived under a will or a settlement (Levin v. Commissioner of Taxation (NZ) (1912) 31 NZLR 717; (1912) 14 GLR 604) or, as in Lady MR Ewing v. DFC of TR & McG (1928-1930) 46; Williamson v. Ough (1936) 20 TC at page 211), an annuity can be income even though it is paid out of corpus.

Apart from being a regular payment, other characteristics of an annuity are:

In the case of a purchased annuity the capital amount is transformed into income as stated in Egerton-Warburton v. D.F.C of T. (1934) 51 CLR 568 at page 573:

...in the ordinary case of the purchase of a life annuity for cash, the annuity is income into which capital laid out has been transformed.. An annuity means where an income is purchased with a sum of money, and the capital has ceased to exist, the principal having been converted into an annuity', (per Watson B, Foley v. Fletcher). 'An annuity means generally the purchase of an income and usually involves a change of capital into income, payable annually over a number of years'. (per Matthew LJ, Scoble v. Secretary of State in Council for India [1903] 1 KB 494 at p.504).

(i)            The annuity must be a sum certain, that is, there needs to be certainty of the payments to be received and a period for which they are to be received as reflected in FCT v. Knight (1983) 83 ATC 4096 (Knight's Case) at page 4106; 14 ATR 1 at pages 12-13 where Kelly J referred to the following words of Barton J in D.F.C of Land Tax, Sydney v. Hindmarsh (1912) 14 CLR 334 at page 338:

...According to Co.Litt., 144b, an annuity is a 'yearly payment of a certain sum of money granted to another in fee for life or years, charging the person of the grantor only'. Viner's Abridgment,m vol.II., p.504, repeats the definition, with further passages showing that the sum need not be payable each year if only it is a yearly sum. Bacon's Abridgment, vol.I., p.233, says that an annuity, strictly taken, is a yearly payment of a certain sum of money granted to another ...for life or years..., charging the person of the grantor only...

The textbooks generally adopt the definition in Co.Litt.; no case was found in which any other definition was offered; nor any case in which an indeterminate sum was held to be an annuity.

It is therefore a characteristic of an annuity that it be of a sum certain

In IT 2480, this characteristic is also detailed in paragraphs 18 and 19 which state:

18. The fundamental feature of an annuity is the certainty of the payments to be received under the contract. The contract must state what the annuitant's annual entitlement is and the period for which it is payable and, if that stated entitlement can be varied, the contract must state the basis on which variation can be made. A contract without this underlying feature cannot be accepted as an annuity.

19. The Courts have clearly indicated that the regular payments must arise from the annuity contract. It is also clear that the regular payments must be of a sum certain...

A variation of a sum certain can also be present in annuity as confirmed in Knight's Case at p 4106 where Kelly J stated:

The element of certainty in the sum pay able is sufficiently satisfied, I think, because by calculation and upon the happening of certain events it becomes certain even though it may vary from year to year. The basic figure is certain.

The above comments by Justice Kelly indicate variations of payments can occur and be accepted where the variation is calculated by application of a stated basis, for example, a formula, to the basic sum payable under a contract. An annuity indexed at a stated rate (e.g. the CPI rate) is an example of an acceptable variation.

(ii)           The instalment amounts, the payments, should not be merely a repayment of a capital sum. To determine what is being paid, that is, income or capital, the true nature of the transaction is required as highlighted by Sir Wilfrid Greene M.R in Sothern-Smith v. Clancy [1941] 1 KB 276 at page 282:

It is clear that an annuity or other annual payment falls to be struck with tax as being an 'annual profit or gain' and this is the reason why it becomes necessary to examine the nature of an annual payment in order to see whether it is in truth an income or a capital payment - a question which cannot be answered merely by pointing to the fact that it is annual. Questions of this kind are notoriously difficult and give rise to distinctions of a highly artificial character. The present case is no exception.

It is no doubt true to say that in order to answer the question the real nature of the transaction must be ascertained.

In the same case, Goddard LJ said, at p.293:

The fine distinction between an annuity properly so called for tax purposes and an annual payment which is in truth a capital payment, whether in discharge of a pre-existing debt or not, has repeatedly been emphasized, and no sure or simple test has or can be laid down for the solution of this problem. The only principle that I can deduce from the cases is that the court must have regard to the true nature of the transaction from which the annual payment arises and ascertain whether or not it is the purchase of an annual income in return for the surrender of capital.

In view of the above, the income maintenance payments payable to eligible employees are considered to possess the characteristics of an annuity as:

(i)            they are regular payments in that they are to be made monthly for a period of X months in accordance with the EA;

(ii)           the amounts to be paid are sums certain to the extent that they shall be calculated as specified in the EA; and

(iii)          the income maintenance payments do not represent a purchased annuity as there was no outlay of capital to create an income. The income maintenance payments, which arise with the EA, represents an income stream. Accordingly, these payments do not in any form represent instalments of a capital sum.

As the income maintenance payments are considered to be an annuity (that is, an income stream), Company A is required to withhold amounts from income maintenance payments paid to terminated staff pursuant to section 12-80 of Schedule 1 to the TAA.

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