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Subject: Employment termination payment

Question

Will the payment described as a 'Retention Bonus' that will be paid to you on the expiration of your fixed-term employment on completion of a project be treated as an employment termination payment?

Answer

No.

This ruling applies for the following period:

2011-12 income year

The scheme commences on:

1 July 2011

Relevant facts and circumstances

You were employed by a Recruitment company during the 2008-09 income year as a contract employee to work for the employer who were acting as agent for another company on their Project.

The employment by the Recruitment company was for the duration of the Project only. At the completion of the Project your contract with the Recruitment company was to end. Your employment on the Project terminated during the 2011-12 income year.

In an effort to retain staff until the completion of the Project, the employer implemented a Completion Bonus (Retention Bonus Scheme). The Bonus is calculated as a percentage of earnings for the first 12 months, and another percentage of earnings thereafter. The total value of your Bonus when you complete your contract will be an amount.

The Project Retention Bonus Scheme - Information Flyer states as follows:

Introduction

The application of this Retention Bonus Scheme is designed as an incentive for personnel to complete their project duties, …

The Bonus is not an ALLOWANCE but a DISCRETIONARY PAYMENT paid at the authorisation of the Senior Employer Project Representative. This payment is a once off lump sum payment at the end of the Project assignment, unless otherwise directed at the discretion of the Senior Employer Project Representative.

What will disqualify you from receiving the bonus payment?

If you resign from the Project before you are officially released, this will disqualify you from receiving a bonus payment. …

If you are dismissed for substandard work or for misconduct, this will also disqualify you from being considered for a bonus payment.

If you refuse to take on an assignment at any other Pluto Project operating centre where and when required, this will also disqualify you from being considered for a bonus payment.

Relevant legislative provisions

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

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

Income Tax Assessment Act 1997 Section 995-1

Reasons for decision

Summary:

The payment in respect of the Retention Bonus that is due to be paid to you by your employer is not an employment termination payment under subsection 82-130(1) of the Income Tax Assessment Act 1997 (ITAA 1997) as the payment is not considered to be made in consequence of the termination of your employment.

Detailed reasoning:

Employment termination payment

Section 995-1 of the ITAA 1997 states that:

employment termination payment has the meaning given by section 82-130 of the ITAA 1997.

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

A payment is an employment termination payment if:

· it is received by you:

· in consequence of the termination of your employment; or

· after another person's death, in consequence of the termination of the other person's employment; and

· it is received no later than 12 months after that termination (but see subsection (4)); and

· it is not a payment mentioned in section 82-135.

An employment termination payment, where the payment is made during the life of a taxpayer, is known as a life benefit termination payment (subsection 82-130(2) of the ITAA 1997).

To determine if the Retention Bonus Payment you received from your employer is an employment termination payment all the conditions in section 82-130 of the ITAA 1997 will need to be satisfied.

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

Paid as a consequence of the termination of employment

It should be noted that the phrase 'in consequence of the termination of your employment' is not defined in the legislation. However, both the Courts and the Commissioner have considered the meaning of this phrase.

In light of these decisions, the Commissioner discusses the meaning of the phrase in Taxation Ruling TR 2003/13 titled Income tax: eligible termination payments (ETP): payments made in consequence of the termination of any employment: meaning of the phrase 'in consequence of' (TR 2003/13).

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 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 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 in 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) 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. True it is that the payment was made not only to settle the applicant's claim for common law damages for breach of the employment agreement but also for statutory damages...

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 Full Federal Court in Dibb v. Federal Commissioner of Taxation FCAFC 126; (2004) 207 ALR 151; (2004) 2004 ATC 4555; (2004) 55 ATR 786, has applied the above decisions in finding that the payment received by the taxpayer under a Deed of Release to settle various causes of action against the employer following the termination of employment was an ETP.

Paragraph 31 of TR 2003/13 the Commissioner states:

It is clear from the decision in Le Grand, that when a payment is made to settle a claim brought by a taxpayer for wrongful dismissal or claims of a similar nature that arise as a result of an employer terminating the employment of the taxpayer, the payment will have a sufficient causal connection with the termination of the taxpayer's employment. The payment will be taken to have been made in consequence of the termination of employment because it would not have been made but for the termination.

The essence of this analysis is that if the payment follows as an effect or a result of 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. The termination of the payment need not be the sole or dominate cause of the payment.

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

In this case, the Retention Bonus is made by your employer as an incentive for employees to complete their project duties. The introduction to the Retention Bonus Scheme-Information Flyer stated that the 'Bonus is not an ALLOWANCE but a DISCRETIONARY PAYMENT paid at the discretion of the employer's Project Representative'. Under a specific clause of the Retention Bonus Scheme-Information Flyer, an employee will not receive the bonus payment if he/she

· resigns from the Project before being officially released;

· is dismissed for substandard work or for misconduct;

· refuses to take on an assignment at any other Project operating centre where and when required.

In this case you terminated employment on the Project during the 2011-12 income year and you will be paid the Retention Bonus during that period. Although the payment of the Retention Bonus will coincide with or shortly follow the termination of your fixed term employment on the Project, the payment is not being made in consequence of the termination of that employment. The Retention Bonus is only being paid to ensure that you will continue employment until the completion of your assignment on the Project. Also the Retention Bonus will not be paid under certain circumstances such as resignation from the Project, or dismissal for substandard work or for misconduct. There is no causal connection between the termination and the payment. It cannot be said that the Retention Bonus follows on as an effect or a result of the termination of employment. Therefore the Retention Bonus is not considered to be made in consequence of the termination of employment for the purposes of subparagraph 82-130(1)(a)(i) of the ITAA 1997.

As the payment is not considered to be received by you in consequence of the termination of your employment, the requirement under subparagraph 82-130(1)(a) of the ITAA 1997 has not been met.

As mentioned above all the conditions under subsection 82-130(1) of the ITAA 1997 must be satisfied before a payment is considered an employment termination payment. As it has been determined that one of the conditions under subsection 82-120(1) of the ITAA 1997 have not been met, it is not necessary to discuss the other conditions of subsection 82-130(1) of the ITAA 1997. Therefore the Retention Bonus is not considered to be an employment termination payment under subsection 82-130(1) of the ITAA 1997.