Edited version of private ruling

Authorisation Number: 1011891405347

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Ruling

Subject: Employment termination payment

Question:

Is the payment for unused sick leave to be received by your client an employment termination payment under section 82-130 of the Income Tax Assessment Tax 1997?

Answer:

Yes

This ruling applies for the following period:

Year ended 30 June 2012

The scheme commenced on:

1 July 2011

Relevant facts and circumstances

Your client was employed by Employer A a number of years ago.

A series of amalgamations occurred between Employer A and other entities which ultimately resulted in formation of a new entity (the employer). During this time your client was an elected in another position for the employer.

Sometime during the 1990s, your client was elected to a specific position of the employer.

At the beginning of the 2007-08 income year, your client was elected to this position with a standard term of X years.

This position has high levels of responsibility which you have outlined.

In your client's position, the client has a team of assistants that provide support and report directly to the client.

Prior to the 2007-08 income year, the employer terms of employment provided that specific positions similar to that of your client were entitled to be paid out for any unused sick leave entitlements upon ceasing in that position. From the beginning of the 2007-08 income year, the unused sick leave entitlements are forfeited upon cessation of a position with the employer.

Your client's contract provides that your client is entitled to be paid out for any unused sick leave accrued prior to the 2007-08 income year upon ceasing in that position. This includes entitlements accrued throughout the period of amalgamations with other entities dating back a number of years ago.

Since commencing the term of office in this position, your client has not been put forward for renewal for your client's current position. As such, your client will be terminated from the position when the specified term is expired.

Upon termination, your client has agreed to an employment contract for a lesser position within the employer. This new position will be that of an ordinary employee reporting to the new personnel who will possess your client's former position.

Your client's new position will have significantly less responsibility, a completely different set of daily tasks and a reduced salary. Your client's accrued annual leave and long service leave entitlements will be rolled over to your client's new position. The new employment contract will not provide for the payout of any unused sick leave entitlements.

Relevant legislative provisions:

Income Tax Assessment Act 1997 Section 80-5.

Income Tax Assessment Act 1997 Section 82-130.

Income Tax Assessment Act 1997 Subparagraph 82-130(a)(i).

Income Tax Assessment Act 1997 Section 82-135.

Income Tax (Transitional Provisions) Act 1997 Section 82-10.

Income Tax (Transitional Provisions) Act 1997 Subsection 82-10(1).

Income Tax (Transitional Provisions) Act 1997 Paragraph 82-10(1)(b).

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

Reasons for decision

Summary

The payment for unused sick leave to be received by your client is an employment termination payment as it is:

· received by your client in consequence of the termination of holding an office;

· it is received no later than 12 months after that termination; and

· it is not a payment excluded from being an employment termination payment.

Detailed reasoning

Employment termination payments

An employment termination payment is defined in section 82-130 of the Income Tax Assessment Act 1997 (ITAA 1997) as follows:

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.

Holding an office

For the purposes of subparagraph 82-130(a)(i) of the ITAA 1997 stated above, section 80-5 extends the ordinary meaning of employment to include the holding of an office.

The Butterworths Australian Legal Dictionary states the following regarding the meaning of the term office:

1. A position of authority to which duties and functions are attached

2. In relation to income tax assessment, a position of defined authority in an organisation (for example, company director, president of a club, holder of a position with statutory powers)

3. A post or employment that is subsisting, permanent position existing independently of the person who fills it, and that goes on and is filled in succession by successive holder

4. In relation to corporations, reference is made to the office of director in Corporations Law ss 224, 227 (vacation of office, removal from office).

The term 'office' is not defined in the ITAA 1997 but it has been considered in a number of cases.

Deputy President BJ McMahon of the Administrative Appeals Tribunal (AAT), in AAT Case 8603 (1993) 93 ATC 148 (AAT Case 8603), dealt with a case of a woman who had been an Inspector of Schools and who became (when that position phased out) a Cluster Director. Paragraphs 14 and 15 of the decision read as follows:

14. The word "office" is a word that had been considered in many cases but no satisfactory definition has emerged. As was pointed out in Grealy v. Commissioner of Taxation (1989) 24 FCR 405 (Grealy's case) the word usually connotes a position of defined authority in an organisation, such as a director of a company, or a tertiary education body. Their Honours held (at 4197 column 2) that it was not a word normally applicable to a relatively low level employee, such as a university lecturer. As the court observed the applicant, like many holders of professional employment, is not made an office holder merely because her position has a name.

15. This view was consistently taken by the Boards of Review. For example, in Case K4 (1978) 78 ATC 29 (Case K4, 78 ATC 29), Mr Dempsey suggested that an office connotes something more than substantial, something more in the nature of a continuing executive position, the holder of which has distinct responsibilities. In Grealy's case itself, their Honours noted that the word "office" usually connoted a position of defined authority.

AAT Case 12,178 (1997) 97 ATC 407 (AAT Case 12,178) concerned a taxpayer who received a payment in respect of unused sick leave when he resigned from his position as a Branch Manager after having successfully won a position of Division Director for the same employer (a local council). In determining the case, one of the issues raised was whether the taxpayer was the holder of an office and whether a retirement or termination had occurred. In that case, Senior Member J Block stated:

The test as to whether a position is an office will no doubt usually be one involving questions of fact and degree...

In his findings, Senior Member Block also referred to a few previous cases which looked at the issue of office and at (ATC) 421; (ATR) 1189, he made the following observation:

In Great Western Railway Co v. Bater [1920] 3 KB 266 Rowlett J had held that an office was "a subsisting, permanent, substantive position which had an existence independent of the person who filled it, which went on and was filled in succession by successive holders".

I consider, with respect, that the meaning attributed to the term "office" by Deputy President Thompson in Case No VT 87/3438 (1989) 20 ATR 3509 (W31) is for Australian purposes, correct. That test would require that it is a position to which "duties are attached, especially a place of trust, authority or service under constituted authority". It is thus clear that the restricted UK view is narrow, when contrasted with the less restricted Australian approach. [bold emphasis added]

In the beginning of the 2007-08 income year, your client was elected to a specific position with a term of a X years. Prior to that your client had held a different position for a number of years.

It is clear from the information provided that the specified position is a subsisting, permanent, substantive position which had an existence independent of the person who filled it, which went on and was filled in succession by successive holders. The position was vested with high levels of responsibility, substantial powers and duties with the employer.

Accordingly, it is considered that the position held by your client would constitute an office within the meaning of section 80-5 of the ITAA 1997.

Paid as a consequence of the termination of employment

The phrase 'in consequence of termination of employment' in subparagraph 82-130(a)(i) of the ITAA 1997 above is not defined in the legislation. However, the courts have considered the meaning of the words 'in consequence of' in relation to eligible termination payments (ETPs), the predecessor of employment termination payments.

Of note are the decisions made by the Full High Court in Reseck v. Federal Commissioner of Taxation (1975) 49 ALJR 370 (Reseck) and the Full Federal Court in McIntosh v Federal Commissioner of Taxation (1979) 25 ALR 557 (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.

As noted above, the position of Branch Secretary is considered to be the holding of an office. Therefore, ceasing to hold the office would constitute a termination of employment for the purposes of subparagraph 82-130(a)(i) of the ITAA 1997.

Your client held the specified position for X years. As your client had not been put forward for renewal in this capacity, your client had to vacate the office their previous position so that the newly appointed personnel could undertake the duties and responsibilities of the office.

It is noted that your client, upon ceasing to hold the position, has entered into a new employment contract as an ordinary employee within the employer.

The new position engages your client in a lesser, substantially different role with less responsibility and a reduced salary. It also carries different terms and conditions from the former position.

Not withstanding that your client is still employed with the employer, it is accepted that by vacating your client's previous position your client has ceased to hold that former position. As noted earlier, this would constitute a termination of employment for the purposes of subparagraph 82-130(a)(i) of the ITAA 1997

Under the terms of your client's employment contract, your client is entitled to be paid out for any unused sick leave accrued prior to the 2007-08 income year upon ceasing to be in that specific role. Consequently, your client's unused sick leave was paid out.

As your client's unused sick leave payout follows as an effect, or a result, from the termination of employment, it is considered that the payment will be made in consequence of the termination of employment and will be an employment termination payment so long as it also satisfies the other requirements under section 82-130 of the ITAA 1997.

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 must be received within 12 months of your termination of employment, unless you are covered by a determination exempting you from the 12 month rule.

As noted in the facts, the unused sick leave payout is made within 12 months after your client ceased to hold the specified position. Therefore, this requirement will be satisfied.

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.

In this case, as unused sick leave is not a payment listed in section 82-135, this requirement is satisfied.

Conclusion

As the payout of your client's unused sick leave under the contract satisfies all the requirements under section 82-130 of the ITAA 1997, it is an employment termination payment

Employment termination payments cannot be rolled over into a complying superannuation fund, complying approved deposit fund (ADF) or to a retirement savings account (RSA) provider.