Edited version of private ruling

Authorisation Number: 1011492515799

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Ruling

Subject: Ordinary income

Question 1

Are the four receipts, totalling $X, assessable to Company A's ex-employee as employment termination payments (ETP's) as defined under subsection 82-130(1) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer:

No. The payments are assessable as ordinary income in the year that they were received.

Question 2

Should the amounts received by Company A's ex-employee be included on a payment summary for the 2008-09 income year?

Answer

No. The amounts must be recorded as assessable income in the year that they were received.

Question 3

Does Company A have a pay as you go (PAYG) withholding obligation or liability with respect to the amounts received by its ex-employee?

Answer

No.

Question 4

Is superannuation guarantee payable on the amounts received by Company A's ex-employee?

Answer

The Commissioner is unable to rule on this matter (see below).

This ruling applies for the following periods:

Year ended 30 June 2005

Year ended 30 June 2006

Year ended 30 June 2007

Year ended 30 June 2008

Year ended 30 June 2009

The scheme commences on:

1 July 2005

Relevant facts and circumstances

Company A's secretary manager resigned on date X.

Prior to this resignation, the employee allegedly withdrew the following amounts totalling $X from company A's landlords bank account:

When confronted about the allegations, the employee commenced an arbitration case against the company for unpaid overtime, holidays and termination pay.

The case went to arbitration but was thrown out.

However, the previous board of directors made a verbal deal with the ex-employee a number of months ago.

The verbal deal involved the ex-employee keeping the $X in lieu of any monies owing on the condition that he would not take any further action on the matter.

As such, Company A faces the problem of how to deal with the amounts totalling $X for taxation purposes.

As the amounts were an expense paid from the Company A's account for and on behalf of Company A, the amounts have been recorded in Company A's 200X book of accounts.

You have requested advice from the Commissioner on how the amount of $X should be treated for tax purposes with respect to the timing of payment for the ex-employee, how the amount should be reflected on a payment summary and PAYG withholding and superannuation guarantee obligations.

Relevant legislative provisions

Income Tax Assessment Act 1997 82-130(1),

Income Tax Assessment Act 1997 82-135,

Income Tax Assessment Act 1997 6-5,

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

Taxation Administration Act 1953 Sch1-6-10 and

Taxation Administration Act 1953 Sch 1-Div 359.

Reasons for decision

Employment termination payments

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

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 termination; and

(b) it is received no later than 12 months after the termination (but see subsection (4)); and

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

Section 82-135 of the ITAA 1997 provides that certain payments are not employment termination payments, including:

- payment for unused annual leave or unused long service leave;

- the tax-free part of a genuine redundancy payment or an early retirement scheme payment;

- reasonable capital payments for personal injury.

Therefore, it can be seen that three conditions need to be satisfied in order for the payment to be treated as an employment termination payment.

Failure to satisfy any of the three conditions will result in the payment not being considered an employment termination payment. Any termination payments received outside of the 12 months will be taxed as ordinary income at marginal tax rates.

Payment made in consequence of the termination of employment

The first condition subparagraph 82-130(1)(a)(i) of the ITAA 1997 requires that the payment received by your client is made in consequence of the termination of his employment.

The phrase 'in consequence of' is not defined in the ITAA 1997. However, the words have been interpreted by the courts in several cases.

Of note are the decisions made by the Full Bench of the High Court in Reseck v. Federal Commissioner of Taxation (1975) 49 ALJR 370; (1975) 6 ALR 642; (1975) 5 ATR 538; (1975) 75 ATC 4213; (1975) 133 CLR 45 (Reseck) and the Full Federal Court in McIntosh v Federal Commissioner of Taxation (1979) 25 ALR 557; (1979) 10 ATR 13; (1979) 45 FLR 279; (1979) 79 ATC 4325 (McIntosh).

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.

The Commissioner in Taxation Ruling TR 2003/13 considered the phrase 'in consequence of' as interpreted by the Courts. 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.

Thus if the payment follows as an effect or a result of the termination of employment, the payment will be made 'in consequence of' the termination of employment and will be an employment termination payment unless it fails to satisfy the other requirements of an employment termination payment under section 82-130 of the ITAA 1997.

Application to your circumstances

As detailed in the facts of this case, there was no termination of employment prior to the payments being received. The payments did not follow as an effect or a result of the termination of employment. Therefore, the payments were not paid in consequence of the termination of employment of Company A's ex-employee.

As noted above, for a payment to be considered an employment termination payment it must satisfy all three conditions set out in subsection 82-130(1) of the ITAA 1997. Consequently, as the first condition in subparagraph 82-130(1)(a)(i) has not been satisfied, it is not necessary to consider the other two requirements.

Therefore, the payments are not employment termination payments.

Salary and wage income and PAYG withholding

Section 6-5 of the ITAA 1997 provides that a taxpayer's assessable income includes income according to ordinary concepts, which is called ordinary income. Salary and wages income is regarded as ordinary income and is assessable under section 6-5 of the ITAA 1997. Salary and wages income is summarised in a PAYG payment summary provided to a payee at the end of the relevant financial year.

With respect to the timing of payments, section 6-5 of the ITAA 1997 requires an amount of ordinary income to be brought to account as assessable income at the time when it is derived. Taxation Ruling TR 98/1 considers the appropriate method of determining when income is derived under subsection 6-5(2) of the ITAA 1997 where income is earned in one tax year but received in another. Paragraph 42 of TR 98/1 states that salary and wages or other employment remuneration is assessable on a receipts basis. This is irrespective of whether that income relates to a past or future income period.

Section 6-10 of Schedule 1 to the Taxation Administration Act 1953 (TAA) entitles a taxpayer to a credit for the amounts of their income that are collected under the PAYG system. These amounts are shown on a payee's annual payment summary at the end of each income year.

Application to your circumstances

In your case, the a settlement was reached between Company A and the ex-employee in which following amounts, which were illegally attained from Company A's bank accounts on the dates advised, would be considered to be payment in lieu of ordinary income which the ex-employee claims they did not receive upon cessation of their employment.

These amounts, totalling $X, represented payment for such things as salary and wages income for overtime and holiday pay.

In your private ruling application you have suggested that Company A should amend the ex-employee's payment summary for the relevant income year to include the entire $X as assessable income. You have also questioned whether Company A has any PAYG withholding obligations in respect of this income.

As outlined in section 6-5 of the ITAA 1997 and TR 98/1, ordinary income is deemed to be assessable at the time of receipt. As such, the income derived by the ex-employee is assessable in the income years, when it was derived. In order to account for this, Company A should seek to amend the PAYG payment summaries issued to the ex-employee for these income years to include these amounts as ordinary salary and wage income. Company A should also amend their end of year payment summary statement and company tax returns for the corresponding income years.

As no tax was withheld from the payments derived by the ex-employee, Company A does not have any PAYG withholding reporting or payment liabilities in respect of these amounts.

Superannuation guarantee - Decline to rule

Division 359 of Schedule 1 to the TAA provides that a private ruling is a written statement of the Commissioner's opinion of how a relevant provision applies, or would apply, to a particular entity in relation to a specified scheme. The provisions that are relevant for rulings are those about the following:

(a) income tax

(b) Medicare levy

(c) fringe benefits tax

(d) franking tax

(e) withholding tax

(f) mining withholding tax

(g) the administration or collection of those taxes

(h) a grant or benefit mentioned in section 8 of the Product Grants and Benefits Administration Act 2000, or the administration or payment of such a grant or benefit.

Application to your circumstances

In your case, you have queried whether superannuation guarantee if payable on the amounts derived by Company A's ex-employee in the relevant income years. The question you have raised in your request for a private ruling relates to the application of the Superannuation Guarantee (Administration) Act 1992. This is not a relevant provision for the purposes of the TAA. Therefore, the Commissioner is unable to rule on this matter.