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Authorisation Number: 1011753639832

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Ruling

Subject: employment termination payment

Question

Is the payment you received under a deed of release an employment termination payment?

Answer: Yes.

This ruling applies for the following period

Year ending 30 June 2011

The scheme commences on:

1 July 2010

Relevant facts and circumstances

You commenced employment with an employer (the Employer) in the relevant income year on a sessional capacity.

You were initially employed under a written contract (the contract) which you state specified your hours of work and the groups you were to teach.

Several years after you commenced employment you ascertained from your union (the Union) that the Employer was no longer required to issue written contracts to employees employed in a sessional capacity.

You state that your conditions of employment were set out in an Enterprise Bargaining Agreement (EBA) between the Employer and the Union.

Part of the EBA provides the definition of an Employee and it includes persons on a sessional capacity and a clause relating to termination of employment.

A subclause in the EBA details the notice of termination that the Employer is required to provide when it terminates the employment of full-time or part-time Employees.

Another subclause of the EBA states the notice of termination required to be given by an Employee is the same as that required of the Employer.

In relation to the terms of engagement with the Employer, they are found in another clause of the EBA as are the employment entitlements of employees in your category of employment. In this clause it is specifically stated that there is no entitlement to termination or severance pay.

You state that for a period of time prior to the 2010-11 income year you were subject to management abuses made by the Employer.

During the 2009-10 income year you ceased your employment with the Employer and withdrew your services by indicating that you were no longer available.

The only payments you received when your employment ceased were your normal wages and superannuation entitlements.

You did not receive any form of lump sum payment nor were you entitled to sick leave or long service leave.

Subsequent to ceasing your employment you were in communication with the Employer in relation to your claims for compensation and other issues which resulted in a mediation meeting held in the 2010-11 income year.

In the meeting you quantified your claims.

Subsequent to the meeting you signed a Deed of Release (the Deed) with the Employer.

In the Deed it was stated, amongst other matters, that:

you ceased employment with the Employer on a date during the 2009-10 income year;

you and the Employer agreed to resolve any and all actual all or potential Claims arising out of the dispute, the employment and the termination;

(c) the Claims to which the Deed relates are those arising from or in relation to

the dispute;

the employment;

the termination; and

any act or omission of the Employer during the employment;

(d) without admission of liability, the Employer would pay you a gross ex-gratia payment of $20,000 which would be subject to statutory tax.

In the 2010-11 income year the Employer paid you a lump sum payment from which tax was withheld. Further, a letter was provided to you with the payment confirming:

the Employer did not terminate your employment;

your employment ceased on a date during the 2009-10 income year ; and

the matters between you and the Employer are settled in accordance with the terms of the Deed.

You are over 55 years of age.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 82-10(2).

Income Tax Assessment Act 1997 Subsection 82-10(3).

Income Tax Assessment Act 1997 Section 82-130.

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

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

Income Tax Assessment Act 1997 Section 82-135.

Income Tax Assessment Act 1997 Section 1-3

Acts Interpretation Act 1901 Section 15AC

Taxation Administration Act 1953 Section 357-85 in Schedule 1

Reasons for decision

Summary

The payment made to you in accordance with the Deed of Release is an employment termination payment. The total amount is a taxable component to be included in your income tax return for the 2010-11 income year.

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 Income Tax Assessment Act 1997 (ITAA 1997)).

Further, a public or private ruling about a provision of the Income Tax Assessment Act 1936 is also taken to be a ruling about the corresponding provision of the ITAA 1997 so far as the provisions express the same ideas (section 357-85 in Schedule 1 to the Taxation Administration Act 1953).

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);

(f) …

To determine if the lump sum payment (the payment) that was paid to you constitutes an employment termination payment, all the conditions in section 82-130 of the ITAA 1997 must be satisfied.

Failure to satisfy any of the conditions will result in the payment not being considered an employment termination payment

In consequence of termination of employment

The first condition requires that the payment is received by the employee in consequence of the termination of his or her employment.

Though your termination was not instigated by the Employer it should be noted a termination of employment can also occur:

· at the instigation of the employee

· by mutual agreement

· on normal expiration of a contract period

· on death of the employee

· at the retirement age of the employee

It should also be noted that a termination of employment is not limited to the events listed above and that the main determinant in there being a termination of employment is that there is a cessation of employment.

In Platell v Federal Commissioner of Taxation (1992) 23 ATR 1011; AAT Case 7687; 93 ATC 2018 (Platell) a taxpayer, an employee, claimed he terminated his employment or retired from it.

In Platell, it was not disputed that an employee could terminate his or her employment, but it did adopt the comments of Board of Review Member Mr Nimmo in Case C103 (1953) 3 TBRD 62 that:

…to establish that a man has retired from an office or employment it must be proved that (a) the taxpayer has relinquished, in fact, his office or employment, and (b) at the time he relinquished it he had no intention of ever returning to it or resuming it.

In your case there was a 'termination of employment' as shown by:

· the withdrawal of your services with the Employer on a particular date in the 2009-10 income year;

· your no longer wanting to make your services available for the Employer when you ceased employment; and

· the Deed of Release and Settlement (the Deed) stating that you 'ceased employment on particular date in the 2009-10 income year.

The next issue to determine in relation to the first condition is whether the payment made to you was 'in consequence of' the termination of 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. The Commissioner has also issued Taxation Ruling TR 2003/13 (TR 2003/13) which discusses the meaning of the phrase.

Paragraph 5 of TR 2003/13 states:

the Commissioner considers that 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.

As further stated by the Commissioner in paragraph 6 of TR 2003/13, there must be:

… 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 also 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).

In Reseck Justice Gibbs stated:

Within the ordinary meaning of the words a sum is paid in consequence of the termination of employment when the payment follows as an effect or result of the termination… It is not my opinion necessary that the termination of the services should be the dominant cause of the payment.

While Justice Jacobs stated:

It was submitted that the words 'in consequence of' import a concept that the termination of the employment was the dominant cause of the payment. This cannot be so. A consequence in this context is not the same as a result. It does not import causation but rather a 'following on'.

In looking at the phrase 'in consequence of' the Full Federal Court in McIntosh considered the decision in Reseck.

Justice Brennan considered the judgments of Justice Gibbs and Justice Jacobs in Reseck and concluded that their Honours were both saying that a causal nexus between the termination and payment was required, though it was not necessary for the termination to be the dominant cause of the payment.

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.

Furthermore, in Le Grand v Federal Commissioner of Taxation [2002] FCA 1258; (2002) 124 FCR 53; (2002) 195 ALR 194; 2002 ATC 4907; (2002) 51 ATR 39 (Le Grand), the issue before the court was whether an amount received by the applicant as a result of accepting an offer of compromise in respect of claims brought by him against his former employer, in relation to the termination of his employment was in whole, or in part, an ETP. It was held that a settlement payment for litigation in relation to a taxpayer's dismissal was an ETP.

Justice Goldberg stated:

I am satisfied that there is a sufficient connection between the termination of the applicant's employment and the payment to warrant the finding that the payment was made "in consequence of the termination" of the applicant's employment. I am satisfied that the payment was an effect or result of that termination in the sense that there was a sequence of events following the termination of the employment which had a relationship and connection which ultimately led to the payment.

Justice Goldberg concluded that the test for determining when a payment is made in consequence of the termination of employment is that which was articulated by Justice Gibbs in Reseck. Thus, for the payment to have been made in consequence of the termination of employment, the payment must follow as an effect or result of the termination of employment. As earlier stated in paragraph 6 of TR 2003/13, there must be 'a causal connection between the termination and the payment even though the termination need not be the sole or dominant cause of the payment'.

The essence of this analysis is that 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 of the ITAA 1997.

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 your case, your employment was terminated on a particular date in the 2009-10 income year when you decided to cease employment.

Further, for a period to your termination of employment, you stated that you were subject to a series of unauthorised actions (the grievances).

Subsequent to your termination of employment you maintained communication with the Employer in relation to the grievances which culminated in a Deed of Release (the Deed) being made between you and the Employer.

In the Deed, which you signed in the 2010-11 income year, you agreed to a gross payment. The payment, as shown in the Deed, was made in relation to Claims: arising from or in relation to (whether directly or indirectly):

the Dispute;

the Employment;

(c) the Termination; and

any act or omission of the Employer during the Employment.

The above shows that there was a connection between the payment and the termination of your employment as the 'Termination' is included in the claims from which the payment arises.

Though you had quantified your grievances in the mediation it should be noted that there is nothing to show whether any part of the payment, which was an undissected lump sum, related to any of the grievances.

As stated in the letter that accompanied the payment, and reflected in the Deed, the matters between you and the Employer are settled in accordance with the terms of the Deed.

There is nothing in the Deed that states or indicates what amount of the payment, if any, relates to matters, for example, the grievances. However, as the Deed does make reference to termination of employment, it is considered that the payment is intertwined with your termination of employment.

In view of the above it is considered that the payment made to you under the Deed was made 'in consequence of the termination of employment' as there is a causal connection between the termination and the payment.

Therefore the first requirement under subparagraph 82-130(1)(a)(i) of the ITAA 1997 has been satisfied.

Payment received no later than 12 months after termination

In addition to meeting the other conditions for a payment to be an employment termination payment, paragraph 82-130(1)(b) of the ITAA 1997 specifies that the payment must be received within 12 months of the employee's termination of employment, unless they are covered by a determination exempting them from the '12 month rule'.

As shown in the facts, your employment was terminated in the 2009-10 income year and the payment was made in the 2010-11 income year.

Accordingly, as the payment was made within 12 months of the termination of your employment, the requirement in paragraph 82-130(1)(b) of the ITAA 1997 has been satisfied.

A payment mentioned in section 82-135 of the ITAA 1997

As previously mentioned, section 82-135 of the ITAA 1997 excludes certain payments from being employment termination payments. These payments include:

· a payment for unused annual leave

· a payment for unused long service leave

· capital payments for personal injury.

In your case, the facts provided show that the payment did not include any of the payments mentioned in section 82-135 of the ITAA 1997 which would preclude any part of the payment from being an employment termination payment.

Consequently, the payment is not of a type mentioned in section 82-135 of the ITAA 1997.

Conclusion:

The lump sum payment received by you is an employment termination payment.

An employment termination payment may comprise of a:

Tax free component - as provided in section 82-140 of the ITAA 1997, this includes an invalidity segment within the meaning of section 82-150 of the ITAA 1997 (if any) and/or a pre-July 83 segment within the meaning of section 82-155 of the ITAA 1997 (if any); and

Taxable component - the amount remaining after deducting the tax free component from the total payment, as prescribed in section 82-145 of the ITAA 1997.

As shown in the facts, the payment does not contain an invalidity segment within the meaning of section 82-150 of the ITAA 1997 and you commenced employment with the Employer in the relevant income year. Therefore, it is clear that payment is comprised wholly of a taxable component.

Subsection 82-10(2) of the ITAA 1997 provides that the taxable component of a life benefit termination payment (LBTP), which the payment in your case satisfies, is assessable income. Subsection 82-10(3) of the ITAA 1997 specifies that a taxable component is subject to tax and the rate applied depends on the recipient's age.

As you are over 55 years of age the payment is taxed at a maximum rate of 15% plus Medicare levy.