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Authorisation Number: 1011732744270

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Ruling

Subject: Employment termination payments

Question

Are the lump sum payments made to you in the 2009-10 and 2010-11 income years considered to be employment termination payments as defined in section 82-130 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer: Yes.

This ruling applies for the following period

Year ended 30 June 2010

Year ended 30 June 2011

The scheme commenced on

1 July 2009

Relevant facts

You made allegations against the employer and commenced proceedings with the Anti-Discrimination Board.

A meeting was held between you and your employer with a view to resolve all issues. Both parties agreed to settle all claims and all other employment related issues in the terms contained in a Settlement and Release Agreement (the Agreement).

You agreed to resign from employment and withdraw your action before the Anti-Discrimination Board.

The employer agreed to make a payment to you in lieu of notice in two equal instalments.

Your payroll advices show an amount was made to you with an amount of tax withheld.

The Anti-Discrimination Board advised that your complaint is terminated as your complaint has been settled or resolved by agreement and that the signing of the Deed of Release constitutes settlement of your matter at the Board.

The employer advised that you were not made redundant as your former position continues to exist and is filled by another staff member. Furthermore, you and your employer had conciliated a mutually agreeable separation arrangement that you resigned from employment.

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 Paragraph 82-130(1)(a).

Income Tax Assessment Act 1997 Paragraph 82-130(1)(b).

Income Tax Assessment Act 1997 Paragraph 82-130(1)(c).

Income Tax Assessment Act 1997 Subsection 82-130(2).

Income Tax Assessment Act 1997 Subsection 82-130(4).

Income Tax Assessment Act 1997 Section 82-135.

Income Tax Assessment Act 1997 Section 83-295

Income Tax Assessment Act 1997 Section 995-1.

Reasons for decision

Summary

The termination payments made to you in the 2009-10 and 2010-11 income years are employment termination payments as the payments were made in consequence of the termination of your employment. The total amounts are taxable components to be included in your income tax returns for each income year.

Detailed reasoning

Employment termination payment

From 1 July 2007 the taxation treatment of payments made in consequence of the termination of any employment of a taxpayer changed. These payments, formerly known as eligible termination payments, are now called employment termination payments. Where the payment is made during the life of a taxpayer the employment termination payment is known as a life benefit termination payment in accordance with subsection 82-130(2) of the Income Tax Assessment Act 1997 (ITAA 1997).

Section 995-1 of the ITAA 1997 states:

employment termination payment has the meaning given by section 82-130.

Subsection 82-130(1) of the ITAA 1997 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 persons death, in consequence of the termination of the other persons employment; 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.

To determine if a payment constitutes an employment termination payment, all the conditions in subsection 82-130(1) of the ITAA 1997 must be satisfied. Failure to satisfy any of the three conditions under subsection 82-130(1) will result in the payment not being considered an employment termination payment.

Even where all the conditions in subsection 82-130(1) of the ITAA 1997 have been satisfied, generally, to qualify as an employment termination payment, the payment must be received by the person within 12 months of termination (see paragraph 82-130(1)(b)). Generally, any termination payments received outside of the 12 months will be assessable at the person's marginal tax rates (section 83-295), unless the taxpayer is covered by a determination exempting them from the 12 month rule (see subsection 82-130(4)).

Payment is made in consequence of the termination of your employment

For a payment to be treated as an employment termination payment, the first condition that needs to be met is that there must be a payment that is made in consequence of the termination of employment of the taxpayer (see subparagraph 82-130(1)(a)(i)).

The phrase 'in consequence of' is not defined in the ITAA 1997. However, the courts have interpreted the phrase in a number of cases. Whilst the courts have divergent views on the meaning of this phrase, the Commissioner's view on the meaning and application of the 'in consequence of' test are set out in Taxation Ruling TR 2003/13 Income tax: eligible termination payments (ETP): payments made in consequence of the termination of any employment: meaning of the phrase in consequence of.

While TR 2003/13 considered the meaning of the phrase 'in consequence of' in the context of the eligible termination payments, TR 2003/13 can still be relied upon as both the former provision under the Income Tax Assessment Act 1936 and the current provision under the ITAA 1997 both use the term 'in consequence of' in the same manner. As previously noted, eligible termination payments ceased to exist from 1 July 2007 being replaced by employment termination payments.

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.

In paragraph 6 of TR 2003/13, the Commissioner recognises that:

The phrase requires a causal connection between the termination and the payment, although the termination need not be the dominant cause of the payment. The question of whether a payment is made in consequence of the termination of employment will be determined by the relevant facts and circumstances of each case.

The phrase 'in consequence of termination of employment' has been interpreted by the courts in several cases.

Of note are the decisions made by 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).

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.

Therefore, if the payment follows as an effect or a result from the termination of employment, the payment will be made in consequence of the termination of employment for the purposes of subparagraph 82-130(1)(a)(i) of the ITAA 1997. Hence the payment will be an employment termination payment unless the payment is specifically excluded under section 82-135.

There is also a broader view of the meaning of in consequence of the termination of employment. Paragraph 29 of TR 2003/13 provides that a payment will be in consequence of the termination of employment if the termination is either a cause of the payment or an antecedent event.

The question of whether a payment is made in consequence of the termination of employment will be determined by the relevant facts and circumstances of each case.

In the facts of this case, you made allegations against the employer and commenced proceedings with the Anti-Discrimination Board.

A meeting was held between you and your employer with a view to resolve all issues. Both parties agreed to settle all claims and all other employment related issues in the terms contained in the Agreement.

You agreed to resign from employment and withdraw your action before the Anti-Discrimination Board.

The employer agreed to make a payment to you in lieu of notice in two equal instalments.

Therefore, it was agreed that the employer would make a payment to you to settle all claims arising out of your employment or termination of employment.

It is clear from the facts provided that the termination payment being made to you is made as 'in consequence of the termination of employment'. Although the dominant cause of the payment was the claim brought by you against your former employer, there is still a causal connection between the termination and the payment. The claims, the termination and the payment are all intertwined and connected. Therefore the first requirement under subparagraph 82-130(1)(a)(i) of the ITAA 1997 has been satisfied.

The payment is received no later than 12 months after termination

The second condition for the payment to meet the criteria, as an employment termination payment is stated under paragraph 82-130(1)(b) of the ITAA 1997. The payment made under the Agreement must be received within 12 months of the taxpayer's termination of employment, unless they are covered by a determination exempting them from the 12 month rule. If the payment is received more than 12 months after termination of employment and the taxpayer is not covered by a determination exempting him from the 12 month rule, the payment will not be an employment termination payment.

As already noted in the facts, you terminated employment. The payment was to be made to you in two equal amounts. Both payments were made within the 12 months of your termination of employment with the employer.

Therefore, it is considered that the payment satisfies the requirements of paragraph 82-130(1)(b) of the ITAA 1997.

The final requirement under paragraph 82-130(1)(c) of the ITAA 1997 is that the payment is not a payment mentioned in section 82-135 of the ITAA 1997.

Exclusions under section 82-135 of the ITAA 1997

Certain payments made on termination of employment are excluded from being an employment termination payment under section 82-135 of the ITAA 1997. These payments include any accrued annual and long service leave and the tax-free parts of a genuine redundancy payment or an early retirement scheme payment as well as other types of payments which do not apply to an employment termination payment.

As stated above, the payment is considered to be a payment received in consequence of the termination of employment and is not a payment mentioned in section 82-135 of the ITAA 1997. Furthermore, the employer has confirmed the payment was not made to you as a redundancy payment and that your former position was not abolished.

Thus, the requirement in paragraph 82-130(1)(c) of the ITAA 1997 is satisfied in this instance.

Consequently, the payments made to you in the 2009-10 and 2010-11 income years are considered to be employment termination payments as they satisfy all the requirements in section 82-130 of the ITAA 1997, and are not specifically excluded under section 82-135 of the ITAA 1997.

An employment termination payment made after 1 July 2007 will be comprised of the following components:

Tax fee component this includes the post-June 1994 invalidity or pre-July 83 component (if any); and

Taxable component the amount remaining after deducting the tax free component from the total payment.

The taxable component is subject to tax, depending on the person's age, as follows:

* Preservation age is the age at which retirees can access their superannuation benefits. This will be 55 for persons born before 1 July 1960 and between 55 and 60 for persons born after 30 June 1960.

The $140,000 cap on concessionally taxed employment termination payments is indexed annually to average weekly ordinary time earnings. For the 2009-10 income year, the cap is $150,000. For the 2010-11 income year the cap is $160,000.

The taxable components of all life benefit employment termination payments received in an income year are counted towards this cap. Any tax-free amounts are not counted towards the cap.

In this case, you have reached preservation age on the last day of the income year in which the payments were made. The payments are taxable components of employment termination payments therefore this amount is to be included in your assessable income for the 2009-10 and 2010-11 income years.

As the payments are under the employment termination payment caps, you are entitled to a tax offset that ensures that the rate of income tax on the amount (for each year) does not exceed 15% in accordance with subsection 82-10(3) of the ITAA 1997. In addition, the Medicare levy may apply.