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Ruling

Subject: Genuine redundancy payment

Question:

Are the 'Transitional Support Payments' to be made by an Agency employment termination payments?

Answer:

Yes

This ruling applies for the following period:

Year ended 30 June 2012

Year ended 30 June 2013

The scheme commenced on:

1 July 2011

Relevant facts:

A government contributed a sum of money to the Grantee to Administer and provide transitional support payments (TSPs) to assist workers who are directly impacted by a particular industry restructuring, including employees of contractors who are made redundant as their employer exited from the industry concerned.

A Deed was signed in the 2011-12 income year.

To be eligible for the TSPs under the scheme, the criteria on equity and efficiency are to be applied based on the following principles:

1. The payment should be proportional to past investment in skills acquisition over time by employees.

2. Persons in the same or similar situations must be treated equally irrespective of employees.

3. The mechanism proposed should use as far as practicable, objection measures of compliance and be administratively simple and open to audit.

4. Where administrative discretion is need, clear criteria should be articulated for its exercise.

The TSPs to be made to all workers who are directly impacted by the industry restructuring consequent of a company (the Company) exiting from the industry concerned. This is to include workers employed by contractors of the Company who are made redundant as a consequence of the exit. Eligible workers are those whose jobs were made redundant on or after a specific date.

There are four separate payments that are made under the scheme and eligibility for each payment is based on individual circumstances:

a. A specified number of weeks of ordinary pay at ordinary hours

Does not include overtime or penalty rates; each person considered eligible under the fund will receive this payment.

b. A number of weeks for ever year employed by the current employer (capped at a specific number of weeks)

This payment takes into account what the employee was paid by their employer for their redundancy. Redundancy payments usually contain an amount based on how long the employee worked there.

Example: John worked for XYZ for 10 years. His employer paid him 8 weeks redundancy. He would be eligible for (3 × 10) - 8 = 22 weeks pay (at ordinary hours and ordinary rate of pay).

c. 1 week for ever year over a specified age

This payment take into takes into account what the employer pays and is only applied to the length of time the person has worked for the employer, Redundancy payments usually take into account workers that are over the specified age.

Example: i.e. John is 10 years over the specified age and has worked for his current employer for 5 years; John will receive 5 weeks.

d. Long service leave

The fund will look after long service leave from 0 - a specified number of years and the employer must look after long service leave from the specified number of years onwards.

This payment is based on individual situations and will have to be worked out by the Accounts Manager.

All of the above payments in total for any one individual will have a financial limit.

Employees who have been made redundant will have their redundancy entitlements paid by their employers (based on Fair Work Australia National Employment Standards). The payments are in additional to standard redundancy and provide additional support to assist in the transition.

The payments are to be made within 18 months after the date of the signed Deed.

A private company will act as an Agent (the Agency) on behalf of eligible employers, both current and former in the industry to calculate and make the payments to eligible employees.

Eligible employees are defined as employees carrying out certain types of work and those whose jobs were made redundant on or after the signed Deed.

There are two mechanisms will be used to ensure that each worker receives the correct TSP as quickly as possible:

(1) The first approach is that payments will be made by the Agency to the employer and then passed on to eligible employees as part of their termination payment. This approach in particular will assist both larger and smaller employers who will not be able to cash flow payments to employees but will take a bit more time and introduces employer default risk. This risk can be minimised by ensuring payments are immediately passed on to eligible employees.

(2) The second approach does not rely upon an employer's participation and will be based on individual or group worker applications. This process would be slower and require greater administration by the Agency and would only be used when the employer was no longer available or not able to participate in the payment. All data regarding the worker is to be collected by the Agency via a worker claim/application form. The payments would be calculated made by the Agency directly to the eligible employees as part of their termination payment.

It is estimated that in respect to mechanism (2) above, less than a certain number of payments will be made to eligible employees under the scheme.

In the 2011-12 income year, the Agency has provided the following information regarding the recipients of the payments:

· The Company is the only employer that the Agency is making payment to (for them to pass on to their employees with their termination payments).

· All other payments will be made direct to employees who have been or are to be made redundant.

· Applications have come from workers who were originally employed by separate employers.

· The applicant has recently confirmed that the funding of the TSP has been fully utilised. Consequently, there will be no payments made more than 12 months after the termination of employment of effected employees.

Assumptions

None

Relevant legislative provisions:

Income tax Assessment Act 1997 Section 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 paragraph 82-130(1)(b)

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

Income tax Assessment Act 1997 Subsection 82-130(4)

Income tax Assessment Act 1997 sub-paragraph 82-130(4)(a)

Income tax Assessment Act 1997 subsection 82-130(5)

Income tax Assessment Act 1997 subsection 82-130(7)

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

Income tax Assessment Act 1997 Section 82-140

Income tax Assessment Act 1997 Section 82-145

Income tax Assessment Act 1997 Section 82-175

Income tax Assessment Act 1997 Section 995-1

Income tax Assessment Act 1997 Section 82-155

Taxation Administration Act 1953 Section 12-85

Reasons for decision

Summary

The transitional support payments (TSPs) received or to be received by eligible employees are employment termination payments.

Detailed reasoning

Employment termination payment

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 Income Tax Assessment Act 1997 (ITAA 1997)).

Section 995-1 of the ITAA 1997 states:

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

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

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.

Therefore, it can be seen that a number of conditions need to be satisfied in order for the payment to be treated as an employment termination payment.

To determine if the TSPs are 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 TSP not being considered an employment termination payment.

Payment is made in consequence of the termination of employment

The first condition to be met is that the payment is received by the person in consequence of the termination of their 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 which discusses the meaning of the phrase.

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.

Also in paragraph 5 of TR 2003/13 the Commissioner notes that the Courts have considered the meaning of the words in consequence of in several cases.

Of note are the decisions made by the Full Bench of the High Court in Reseck v. Federal Commissioner of Taxation¹ (Reseck) and the Full Federal Court in McIntosh v Federal Commissioner of Taxation² (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 my opinion necessary that the termination of the services should be the dominant cause of the payment.

While Justice Jacobs, in the same case, 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. In doing so the Full Federal Court emphasised that a payment may be in consequence of the termination of employment even though the termination is not the dominant cause of the payment.

In particular, 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 to say, the view of both Courts was 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 phrase in consequence of and the decisions in Reseck and McIntosh were considered more recently by the Federal Court in Le Grand v Federal Commissioner of Taxation³ (Le Grand), where 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 applicants' 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.

Justice Goldberg concluded that the test for determining when a payment is made in consequence of the termination of employment is that which was expressed 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 noted in both paragraphs 6 and 28 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'.

Therefore if the 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 the payment is specifically excluded under section 82-135.

In the present case, the TSPs are payable only to the eligible employees whose jobs were made redundant on or after the signed Deed. The payment of the TSP follows as an effect or result of the termination and the payment would not have been made to the eligible employees but for the termination of their employment.

The TSP is only payable on the condition that eligible employees have had their employment terminated due to redundancy. No entitlement to the TSP arises prior to this event.

In view of the above, the payment of the TSP is made in consequence of the termination of employment and is therefore an employment termination payment under section 82-130 of the ITAA 1997.

The payment is made no later than 12 months after the termination of employment

The second requirement under section 82-130 of ITAA 1997 is that the payment be made within12 months of the termination of employment. Payments made outside 12 months will be taxed as ordinary income at marginal tax rates.

In the current case, the Agency has advised that the funding for making the payments has been fully utilised. Consequently, all the payments by the Agency will be made within 12 months of termination of employment.

Accordingly, the requirement under paragraph 82-130(1)(b) of ITAA 1997 will be satisfied.

The payment is not a payment specifically excluded under section 82-135

The third condition for the payment to meet the criteria, as an employment termination payment is stated under paragraph 82-130(1)(c) of the ITAA 1997, is that the payment must not be specifically excluded under section 82-135.

Section 82-135 of the ITAA 1997 provides that certain payments are not employment termination payments, including:

· superannuation benefits;

· payment for unused annual leave or unused long service leave (and any other similar leave);

· the tax-free part of a genuine redundancy payment or an early retirement scheme payment; and

· reasonable capital payments for personal injury.

On the basis of the information provided by the applicant, it is considered that the payments are not payments that are specifically excluded under section 82-135 of the ITAA 1997. Therefore the condition under paragraph 82-130(1)(c) has been met.

As the payments made or to be made to the eligible employees satisfy all the conditions under subsection 82-130(1) of the ITAA 1997, the payments are employment termination payments for the purposes of section 82-130.

It should be noted that an employment termination payment cannot be rolled over into a complying superannuation fund.

Taxation Treatment

An employment termination payment will be comprised of the following components:

· 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 (if any) and/or a pre-July 83 segment within the meaning of section 82-155 (if any); and

· Taxable component - the amount remaining after deducting the tax free component calculated in accordance with section 82-140 from the total payment, as prescribed in section 82-145.

· The tax free component is not assessable income and is not exempt income.

· The taxable component is included, in full, as assessable income.

· The taxable component is subject to tax, depending on the person's age when the payment is received.

PAYG Withholding

Section 12-85 of Schedule 1 of the Taxation Administration Act 1953 (TAA) states:

An entity must withhold an amount from any of the following payments it makes to an individual:

(a) a superannuation lump sum;

(b) an employment termination payment.

As shown above, the payment to be made to the eligible workers is an employment termination payment. Therefore, an amount must be withheld.

The amount to withhold depends on whether a Tax File Number (TFN) has been provided.

If a TFN has not been provided before the payment is made, tax must be withheld at the rate of 46.5% from the taxable component. This represents the top marginal rate plus Medicare levy.

If the payee has provided the employer with a TFN, tax must be withheld at the following rates:

For the 2011-12 and 2012-13 income years the ETP cap amount is $165,000 and $175,000 respectively.

Preservation age is the age at which retirees can access their superannuation benefits generally when they retire.

If employee was born:

· before 1 July 1960 they can access their superannuation when they are 55.

· after 30 June 1960, their preservation age will be between 55 and 60. This is because the preservation age will gradually increase from 55 to 60 between 2015 and 2025.

PAYG withholding Tax table for employment termination payments (NAT 70980) is enclosed for your reference.