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Ruling

Subject: Long service payment

Question 1:

Will payments made be made in consequence of a termination of employment?
Answer
No.

Question 2:
Does subdivision 83-B of the Income Tax Assessment Act 1997 (ITAA 1997) apply to provide a tax offset for a payment received by an employee for unused long service leave?

Answer:

No.

Question 3:
Will the long service leave payment be taxed according to the marginal tax rates for a lump sum payment of unused long service leave?

Answer:

Yes

This ruling applies for the following period

Year ending 30 June 2012

The scheme commenced on

1 July 2011

Relevant facts and circumstances

An employer offers transition to retirement arrangements to its employees.

Employees are members of a defined benefits superannuation scheme (DBSS)

The DBSS governing rules do not permit payment of a benefit under a transition to retirement arrangement to contributing members.

In certain limited circumstances a member of the DBSS can cease their contributory membership and become entitled to payment of a transition to retirement benefit whilst remaining employed by the same employer.

Temporary part-time and casual memberships are not covered by the DBSS.

A member is able to cease their DBSS contributory membership if the member's employer allows them to change their employment conditions so that they are no longer eligible to contribute to the DBSS, that is, become a temporary part-time or causal employee.

A determination by the employer supports permanent employees who are a member of the DBSS to access, at their discretion, DBSS transition to retirement arrangement. The determination states that:

· subject to CEO approval, an employee who is a DBSS member may cease their permanent employment and may, provided that there is no break in service, be immediately re-employed in that job on a temporary contract on a part-time basis;

· the temporary contract may be up to five (5) years is renewable at the employees option;

· the selection of an employee in accordance with paragraph 1 will not be notified and not be subject to appeal;

· an employee covered by paragraph 1 may, pursuant to any Individual Flexible Working Arrangements provision enter into an individual flexibility arrangement to work in excess of the maximum number of hours specified in their Enterprise Agreement for a part-time employee;

· on commencing the fixed period of employment referred to in paragraph 1, are to apply in relation to the employment of the employee as if they were a permanent employee;

· an employee may elect to be paid accrued recreation and long service leave credits in lieu on ceasing to be a permanent employee; and

· subject to 6, any and all entitlements will continue as if there had been no change in employment status except that accrual will be in accordance with the part-time rate from the date the temporary employment commences.

An employee is required to complete an 'Election to change employment status form' to enter into a transition to retirement arrangement. This form includes an election by the employee to be paid out their accrued and pro-rata long service leave entitlement.

Relevant legislative provisions

Section 12-35 of Schedule 1 to the Taxation Administration Act 1953
Subdivision 83-B of the Income Tax Assessment Act 1997.

Reasons for decision

Detailed reasoning:

Unused long service leave payments

Subdivision 83-B of the ITAA 1997 provides a tax offset for certain unused long service leave payments received by a person in consequence of the termination of their employment.

These payments relate to long service leave payments that:

· are received when a person is made genuinely redundant, or

· accrued after 15 August 1978 and before 18 August 1993.

Unused long service leave payments that do not meet either of these criteria are included in an employee's assessable income is taxed at marginal rates.

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'.

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.

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.

Termination of employment

The question of whether an employee's employment has been terminated when a person's employment has been continued has arisen for determination in a number of cases.

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.

The question of whether an office has been terminated even though employment has been continued has arisen for determination in a number of cases.

In the Administrative Appeals Tribunal Case U84 (1987) 87 ATC 485; (1987) 18 ATR 3449, Senior Member Beddoe considered the distinction between terminating an office and terminating employment for the purposes of section 26AD of the Income Tax Assessment Act 1936, which has been replaced by subdivision 83-B of the ITAA 1997:

20. Although there could be no retirement from employment, the applicant being a partner in the firm, there was a retirement from an office, namely the position of manager of the firm. In this regard I rely on the following dicta in Case 9, 15 C.T.B.R. 74 (Vol. 4 C.T.B.R. reprint 238) at pp. 76-77:

The words 'office or employment' as they occur in the section are used in their ordinary sense. They are used disjunctively or alternatively. The word 'office' in the context as applied to the circumstances before us means, in my opinion, the particular post or position held by the taxpayer in the bank's service, namely, the post or position of bank manager. The word `employment' is, I think, used in a much wider sense - a sense wide enough to include a particular office in a general employment. In that sense it will not fit the circumstances of this case and must therefore be discarded; for the taxpayer did not lose his employment, he continued to be employed by the bank. But he did lose the office he held in that employment. The juxtaposition of the two words 'office' and 'employment' is significant. In my view a man may lose the one and retain the other and still be entitled to the relief the section provides.

A person who loses the office they held in that employment but who continues to be employed by the employer may be considered to have had their employment terminated where they are reemployed in a different position, with different duties and/or different powers. On the facts provided in this case, however, this situation will not arise for officeholders of the employer, as employees remain in the same position and/or office before and after the change from full-time to temporary employment.

The Commissioner has also considered the situation of whether there has been a termination of employment where a person continues with the same employer in Taxation Ruling IT 2525. Key to reaching this decision was whether there was an intention at the time a person ceases their office or employment with their employer of resuming that employment. In this regard, IT 2525 sets out in paragraph 9:

… for determining whether a retirement or termination had occurred, that test being "(a) that the taxpayer had in fact relinquished the office or employment, and (b) that at the time he relinquished it, he had no intention of ever resuming it" …

Based on the facts provided in this case, it is clear that payments made by the employer will not be made in consequence of the termination of employment.

The payments will not be made in consequence of the termination of employment as employees do not experience a break in their service. Employees will immediately be re-employed in their positions. Further, the employees in the circumstances described have no intention of leaving employment, but rather simply changing the terms of that employment.

The only change experienced by the employee is that they work on a temporary contract, on a part time basis. However, employees are able to then enter into an individual flexibility arrangement which allows them to work in excess of the maximum number of hours specified in their Enterprise Agreement for a part-time employee. This effectively permits an employee to work the number of hours that they worked prior to the change in their employment status.

In addition, the employer states that all entitlements of the employee will continue as if there had been no change in the employee's employment status except that any accruals will be in accordance with the employee's part-time rate.

From this it can be concluded that the employer itself does not consider that a genuine termination of employment has occurred. This is further reinforced by the fact that the form the employee fills out to enter into this arrangement is called an 'Election to change employment status form'.

Therefore it is considered that the payments to be made by the employer do not follow as an effect or result of a termination of employment. As payments will not be made in consequence of the termination of any employment the tax offset under subdivision 83-B of the ITAA 1997 will not apply.