Edited version of private ruling

Authorisation Number: 1011485381129

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Ruling

Subject: Income maintenance payments

Questions:

1. Are amounts paid by way of income maintenance to be considered employment termination payments?

2. Will any part of the amounts paid by way of income maintenance be exempt from tax as a genuine redundancy payment?

3. Are amounts paid by way of income maintenance treated as income under ordinary concepts?

Answers:

1. No

2. No

3. Yes

This ruling applies for the following period:

Year ended 30 June 2011

The scheme commenced on:

1 July 2010

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You were employed by the employer for a number of years.

Your last position with the employer was a managerial position in a particular division of the employer.

The division you had worked in has been the subject of reorganisation and merger other divisions within the employer. As a consequence, your position ceased early in the 2008-09 income year.

Your employer has been unable to identify a suitable position in which to redeploy you. As a result, you employment ceased by reason of redundancy.

The Enterprise Agreement (the EA) under which you were employed provides two alternative retrenchment benefits. Either:

(a) a lump sum payment equivalent to several weeks salary for each completed year of eligible service; or

(b) payment of income maintenance payments over a specified period. The amounts to be paid by way of income maintenance are calculated as follows:

(i) where the former employee is unemployed, payment will be at a rate equivalent to their salary at the date of termination less any amount received by way of unemployment relief.

(ii) where the former employee obtains employment outside the employer, payment (if any) will be at the rate necessary to bring their salary from that employment to the salary level at the date of termination.

(iii) where an employee accepts redeployment within the company to a position of lower classification than their substantive classification level, payment will be at the rate necessary to bring their salary up to the salary received immediately before the date of redeployment.

During the period of income maintenance recipients are required to provide a declaration to the employer, on a monthly basis, as evidence of income for that period to establish eligibility for income maintenance.

An employee who is retrenched will receive a lump sum payment calculated in accordance with the Agreement unless the officer elects to receive income maintenance as provided in one of the clauses of the EA.

Under the EA, if there are no redeployment opportunities and the redundancy is to proceed, the employee will be formally advised in writing.

A paragraph of the EA states that where formal advice is given before a specified date, employees who elect to take income maintenance option will be entitled to receive payments for a period that is more than 12 months but less than 24 months where that employee has more than a specified number of years service or is over a certain age. For other employees, they will be entitled to receive payments for a period that is less than 12 months.

The election must be in writing and be submitted to a senior executive or other Delegate.

You underwent mediation session with the employer to settle matters related to the termination of your employment in the beginning of the 2009-10 income year.

You have not accepted the employer's position regarding the tax treatment of income maintenance. Consequently, you have not applied for any income maintenance payments.

You entered into a Settlement Deed (the Deed) with the employer. Under a clause of the Deed it was agreed:

· that entitlements under the EA shall be paid in accordance with that EA and in accordance with another clause of the Deed upon termination of your employment;

· that your date of termination of employment was in the first quarter of the 2009-10 income year with notice commencing a month earlier; and

· that you have elected to receive income maintenance in accordance with the relevant clause of the EA.

There was no agreement to re-employ you on the termination of employment.

This ruling is given on the basis of the facts stated in the description of the scheme as set out above. Any material variation from these facts (including any matters not stated in the description above and any departure from these facts) will mean that the ruling will have no effect. No entity will then be able to rely on this ruling as the Commissioner will consider that the scheme has been implemented in a way that is materially different from the scheme described.

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 Section 82-135.

Income Tax Assessment Act 1997 Subsection 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 995-1(1).

Income Tax Assessment Act 1997 Subsection 6-5(2).

Reasons for decision

These reasons for decision accompany the Notice of private ruling.

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

Summary

Income maintenance payments paid after termination of employment are not employment termination payments but ordinary income. As the payments are income under ordinary concepts they are assessable as salary and wages.

Detailed reasoning

Employment termination payments made on or after 1 July 2007

From 1 July 2007, the taxation treatment of payments made in consequence of the termination of any employment of the taxpayer has changed. These payments were formerly known as eligible termination payments (ETPs).

The term 'employment termination payment' is defined in subsection 82-130(1) of the Income Tax Assessment Act 1997 (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);

(f) … (emphasis in 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.

In your particular situation, you were employed by the employer for a number of years. Your former position ceased due to reorganisation and mergers within the organisation. The employer has been unable to identify a suitable position in which to redeploy you. As a result, your employment was terminated by reason of redundancy.

The employer's Enterprise Agreement (the EA) provides two alternative retrenchment benefits for an eligible officer whose employment is terminated. You had the option of receiving a lump sum payment or to receive income maintenance payments over a specified period.

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, if the person is unemployed for the purpose of the salary maintenance payment is to pay an amount equivalent to the person's salary at the date of termination of employment less any amount received by way of unemployment relief.

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

On termination of your employment, you have elected to receive income maintenance payments.

The Tax Office view on income maintenance payments is stated in Income Tax Ruling IT 2168 as follows:

23. 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.

Although clearly in your case the income maintenance payments will not be made under the Commonwealth Employees (Redeployment and Retirement) (Benefits) Regulations 1981, the income maintenance payments that you will receive are not dissimilar to the payments made under those regulations. In both cases the payments are characterised as income maintenance payments under an agreement and they are made on a periodic basis after termination, but with reference to the amounts payable to the persons as employees.

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. This clearly indicates that Division 82, which deals with how employment termination payments are treated for the purposes of income tax, only applies to lump sum payments.

Although 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 salary income that was paid before the termination of employment.

Thus 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.

In the present case, under the EA, a retrenched employee would be entitled to a lump sum payment of several weeks salary for each completed year of eligible service. The retrenched employee could, however, elect instead to receive income maintenance payments for a specified period - in this case, a period of more than 12 months but less than 24 months. The income maintenance payments would be reduced to reflect any income received from outside employment.

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

This clearly shows that the income maintenance payments are designed to compensate the redeployed or retrenched employee for the loss of income arising from the loss of their former position. This is evident from the fact that the amount of the income maintenance to be received is reduced by the amount of the current salary received.

On the other hand, the years of service lump sum payment is intended to compensate the retrenched employee for the loss of employment. The fact that the retrenched employee may be subsequently employed by a third party and receive salary or wages in respect of that subsequent employment, will not impact on the amount of the lump sum to be received.

In the case of income maintenance payments, the income stream paid after the termination takes its character precisely from that paid before termination, both in the amount and the method of payment.

Whether an amount is of an income or capital nature has been discussed in various cases by the courts. Some of these cases are:

· Federal Commissioner of Taxation v. Dixon (1952) 26 ALJ 505; [1953] ALR 17; (1952) 10 ATD 82; (1952) 86 CLR 540;

· Commissioner of Taxation v. Inkster (1989) 89 ALR 137; (1989) 89 ATC 5142; (1989) 20 ATR 1516; (1989) 24 FCR 53; and

· Tinkler v. Commissioner of Taxation 1979) 29 ALR 663; (1979) 79 ATC 4641; (1979) 10 ATR 411; (1979) 40 FLR 116.

The factors below decided by the courts have been considered in determining whether these payments have been correctly treated as assessable income under the ordinary concepts of income. The above mentioned cases support this conclusion.

A payment has the character of income in the hands of an employee where:

· an employee has a high expectation that the payments will be paid every fortnight or monthly for an arranged period of time;

· the payments are made in relation to the employee's employment;

· the payment represents a substitute or replacement of income to maintain the employee's level of income that applied at the time of retrenchment or a transfer to a lower classified position;

· the payment is likened to regular compensation payment for loss of income, which is considered to be income under ordinary concepts.

As noted above, the income maintenance payments are intended to ensure that, for a specified period, your level of income will be the same as that received prior to the termination of your employment. The amount payable is reduced by any amount that you receive by way of unemployment benefits or salary and wages through alternative employment during the specified period.

It is clear that the income maintenance payments do not represent a single lump sum amount paid in instalments.

The 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 specified period to make your income equivalent to your salary and wages at the time of your termination of employment from the employer.

As the payments are a regular income stream and are not a single payment being paid in instalments, they are not employment termination payments. As stated above, the payments take the character of what was being paid before termination and that is what they substitute, in this case, salary and wages.

Genuine redundancy payment

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

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

In your case, the income maintenance payments you are to receive 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.

Taxation of income maintenance payments:

Subsection 6-5(2) of the ITAA 1997 provides 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.

As already noted above the income maintenance payments are considered to be a replacement for salary and wages. The payments are regular periodic payments paid over the specified period and are therefore ordinary income assessable in the same way as ordinary salary and wages.

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