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Ruling

Subject: Retention bonus paid on termination of casual employment.

Question

Will the payment described as a 'Retention Bonus' to be paid on the termination of your casual employment be treated as an employment termination payment?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 2012.

The scheme commences on:

1 July 2011.

Relevant facts and circumstances

You are over 60 years of age.

You are employed by an entity (Entity 1) as Casual Labour (rostered engagement) working on a project (Project 1).

Project completion is scheduled during the 2011-12 income year. Upon completion of the project, your casual employment will be terminated and you will be paid a one off lump sum retention bonus under Entity 1's Retention Bonus Scheme (RBS).

The RBS is designed as an 'incentive for personnel to complete their project duties, including circumstances where slippage in project schedule may require personnel to extend their contracted end date and where personnel are required to complete work at more than one Operating Centre over the term of the project.

The following has been taken from the RBS policy statement provided by you:

· The purpose of RBS is to retain personnel on Project 1 until such time that their services are no longer required;

· Where an Assignee (personnel) resigns before their assignment is completed, they will be ineligible to receive the Retention Bonus;

· Where an Assignee is terminated from the project as a result of misconduct, as deemed by Entity 1, they will be ineligible to receive the Retention Bonus. Termination for a reason other than misconduct may jeopardise the Assignees eligibility to receive the Retention Bonus; and.

· The Retention Bonus will be calculated on the gross salary or gross hourly rate.

You state you believe the Retention Bonus payment falls within the meaning of a gratuity or 'Golden Handshake' as you have been entitled to the payment as a consequence of meeting all the eligibility conditions.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 995-1

Income Tax Assessment Act 1997 Section 82-135

Income Tax Assessment Act 1997 Subsection 82-150(1)

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

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

Reasons for decision

Summary

Your Retention Bonus payment is not considered an employment termination payment (ETP) as not all of the requirements have been satisfied.

Detailed reasoning

Employment termination payment

Section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997) states that:

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

Subsection 82-130(1) of the ITAA 1997 declares:

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 the termination (but see subsection (4)); and

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

The above 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.

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; (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.

According to the facts, the payment of the Retention Bonus will coincide with, or shortly follow, the termination of your casual employment with Entity 1. However, according to Clause X of the RBS policy the purpose of the scheme is to retain personnel on Project 1 until such time that their services are no longer required.

Further, Clause Y of the policy makes reference to where the Assignee resigns before their assignment is completed, they will be ineligible to receive the Retention Bonus. Similarly, Clause Z of the policy makes reference to where an Assignee is terminated from the project as a result of misconduct they will be ineligible to receive the Retention Bonus and termination for any other reason may jeopardise the Assignees eligibility to receive the Retention Bonus.

Based on the abovementioned facts, together with the prior case analysis, the Retention Bonus payment is not made to you in consequence of the termination of your employment. Rather, it is being paid to ensure you will continue your employment until the completion of your assignment on Project 1. Ultimately, a distinction has been made between the Retention Bonus being paid as a consequence of employment as apposed to being paid as a consequence of the termination of that employment.

You have also stated that you believe the Retention Bonus payment falls within the meaning of a gratuity payment or 'golden handshake'.

Paragraph 30 of TR 2003/13 specifically mentions golden handshakes as an example of payment that follows as an effect or result of the termination:

Severance payments such as golden handshakes

30. A severance payment that is made in respect of a taxpayer by a former employer after the termination of the taxpayer's employment, such as a golden handshake, is a payment that follows as an effect or result of the termination. Accordingly, the payment is made in consequence of the termination of employment. In such circumstances there is a causal connection between the payment and the termination of employment in that the payment would not have been made to the taxpayer but for the termination of the employment.

As discussed previously, the Retention Bonus payment is not made in consequence of employment. As such, it does not fall within the meaning of a gratuity or golden handshake.

Conclusion

As stated previously, failure to satisfy any of the three conditions will result in the payment not being considered an employment termination payment. As the condition pursuant to subparagraph 82-130(a)(i) has not been satisfied, your Retention Bonus payment is not treated as an employment termination payment.