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Ruling

Subject: Employment termination payment

Question:

Are the series of payments made over an extended period after the termination of your employment an employment termination payment?

Answer: Yes.

This ruling applies for the following periods

Year ended 30 June 2011

Year ending 30 June 2012

The scheme commenced on

1 July 2010

Relevant facts and circumstances

You commenced employment with your former employer (the Employer) in the 2006-07 income year.

Your employment was for a fixed period and when that period ended you entered into successive employment contacts with the Employer.

In the 2009-10 income year you entered into your final contract (the Contract) with the Employer and this contract was to operate past the 2013-14 income year.

During the 2010-12 income year the Employer, without providing you with any reason, terminated your contract of employment with immediate effect.

In the Contract there were provisions relating to resignation and termination of employment.

In one of the clauses in the Contract it stated that the Employer could terminate your employment upon giving you a specified period of notice or a payment in lieu of notice.

In another clause in the Contract it reinforced your entitlement to any period of notice or payment relating to that period.

In a meeting you had with the Employer and other communications it was confirmed that your employment was terminated and that the Employer was searching for someone to replace you.

The Employer did not pay you a lump sum termination payment but subsequent to your termination of employment you received periodic payments from the Employer for an extended period. These payments, the last of which was received by you in the 2011-12 income year, were not in relation to your accrued statutory entitlements.

Copies of the payslips for the extended period show the gross amounts as relating to the 2010-11 and 2011-12 income years.

You agree that part of a gross amount received in the 2010-11 income year relates to a period prior to your termination of employment.

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.

Reasons for decision

Summary

The payments which you received in the 2010-11 and 2011-12 income years respectively represent an employment termination payment.

Accordingly, as you are over 55 years of age and the employment termination payment is comprised wholly of a taxable component, the payments are taxed at a maximum rate of 15% plus Medicare levy.

Detailed reasoning

Employment termination payments made on or after 1 July 2007

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 payments made to you, which span a period covering the 2010-11 and 2011-12 income years, constitute 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 payments not being considered employment termination payments.

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.

In your case there was a 'termination of employment' as shown as evidenced by a meeting you had with the Employer and other communications from Employer which was confirmed that your employment was terminated and the Employer was searching for someone to replace you.

The next issue to determine in relation to the first condition is whether the payments made to you were '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.

Thus, if a 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 it 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 in the 2010-11 income year when the Employer terminated your contract of employment (the Contract) and hence your services.

In the Contract there were provisions relating to resignation and termination of employment.

In one of the clauses in the Contract (the Clause) it stated that the Employer could terminate your employment upon giving you a specified period of notice or a payment in lieu of notice.

As your employment was immediately terminated, and hence you were not provided with the specified period of notice, you were, according to the Contract, entitled to payment in lieu of notice for the specified period.

The facts show that subsequent to your termination of employment, the Employer did not make a payment in lieu of notice as a lump sum payment but paid you a series of periodic payments which spanned the specified period mentioned in the Clause.

Though payments in lieu of notice are usually made as a lump sum, it is considered the series of payments made to you represent the payment in lieu of notice to which you were entitled under Clause. This is particularly supported by the fact that:

(i) the payments were made subsequent to your termination of employment;

(ii) the payments were made in relation to a period which corresponds with the period stated in Clause; and

(iii) the effect of another clause in the Contract which reinforces your entitlement to a payment in lieu of notice.

In view of the above it is considered that the payments made to you, except for an amount which relates to salary and wages, were made 'in consequence of the termination of employment'.

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'.

It should also be noted that the word 'payment' in relation to termination payments does not necessarily mean that a termination payment must be paid as a single lump sum amount.

In Taxation Ruling TR 2009/2 Income tax: genuine redundancy payments (TR 2009/2), which also discusses matters relevant to termination payments in general, the following paragraphs provide support that it is conceivable for amounts paid in consequence of termination to be paid in instalments or as a series of payments:

332. The Commissioner's view is that, of their nature, termination payments,..are tied to the particular termination to which they relate. This relationship is embodied in the 'in consequence of' test.

333. Therefore, the treatment of all termination payments that are not specifically excluded from being either genuine redundancy payments or employment termination payments is determined by treating all amounts paid in consequence of the termination as a single bundle of payments referable to that termination. This is consistent with the legislatively enshrined principle of interpretation that the singular includes the plural unless the contrary intention appears.

334. The Commissioner considers the overall statutory context of Part 2-40 supports this approach. The need to cover a termination payment made in instalments was originally the basis on which the term 'payment' was used in the original eligible termination payment provisions. 'Payment' was then used in preference to 'lump sum'. The Commissioner considers that this evidences an intent that a series of termination payments that was not an annuity should be seen to form part of an overall payment on termination.

In view of the above, your entitlement to a payment in lieu of notice being paid as a series of payments is not a relevant factor in determining whether they represent an employment termination payment. Rather, the important issue is whether the payments were made within 12 months of your employment being terminated.

The facts provided show that your employment was terminated in the 2010-11 income year and the last payment that arose from the termination was made within a 12 month period.

Accordingly, as the payments were 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 payments 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 payments are not of a type mentioned in section 82-135 of the ITAA 1997. However, as mentioned previously, an amount which relates to salary and wages, is excluded from being part of a termination payment as that portion of the payment was not 'in consequence of the termination of employment'.

Conclusion:

The payments, excluding the amount which relates to salary and wages, received by you in the 2010-11 and 2011-12 income years respectively represent 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 payments do not contain an invalidity segment within the meaning of section 82-150 of the ITAA 1997 and you commenced employment with the Employer in 2007. Therefore, it is clear that the employment termination 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 payments are taxed at a maximum rate of 15% plus Medicare levy.