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Ruling

Subject: Employment termination payment

Questions

1. Is the payment, described as a gift, assessable as an employment termination payment?

2. Is the payment, described as a gift, assessable as income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997?)

Answers

1. No.

2. Yes.

This ruling applies for the following period:

Year ended 30 June 2012.

The scheme commenced on:

1 July 2011.

Relevant facts and circumstances:

Your client worked for an entity (Entity 1).

During the 2011-12 income year, another entity (Entity 2) acquired 100% of the shares in the Entity 1.

Entity 1 continued to operate as a separate business unit within the new group, retaining current staff and offices.

During the 2011-12 income year, your client received a bank cheque for the amount of X from Entity 1's founder.

The letter accompanying the bank cheque describes the payment as a gift resulting from your client's contribution to the sale of Entity 1 to Entity 2 and their consistent contribution to the success of the company.

The letter also states that the payment is to remain confidential as it was only offered to a limited set of people.

Your client has stated that they haven't ended their employment with Entity 1 and that there has been no status change to their role or otherwise. Further, there commencement date remains the same when they were transferred into Entity 2's human resources system.

Your client further stated that he did not sign a new contract when Entity 2 took over, nor did he change job title, manager, reporting line or staff.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 995-1

Income Tax Assessment Act 1997 Section 80-50.

Income Tax Assessment Act 1997 Section 82-130.

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

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

Income Tax Assessment Act 1997 Section 82-135

Income Tax (Transitional Provisions) Act 1997 Section 82-10.

Income Tax (Transitional Provisions) Act 1997 Subsection 82-10(1).

Income Tax (Transitional Provisions) Act 1997 Paragraph 82-10(1)(b)

Income Tax (Transitional Provisions) Act 1997 Subsection 82-10(3)

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Subsection 6-5(2)

Income Tax Assessment Act 1997 Section 6-10

Income Tax Assessment Act 1997 Section 15-2

Reasons for decision

Summary

As there was no termination of employment, not all of the conditions for a payment to be treated as an employment termination payment have been satisfied. As such, the gift is not an employment termination payment.

The money your client received was in relation to their income producing activity for the company therefore the gift your client received is assessable income.

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.

It is clear from the facts that no termination of employment has occurred. Whilst Entity 1 was in fact bought by Entity 2, there were no structural changes that resulted in the termination of your client's employment. Further, your client did not sign a new contract nor did his commencement date change when staff were transferred into Entity 2's payroll and human resources systems.

As not all of the conditions in Subsection 82-130(1) of the ITAA 1997 have been met, the payment of $X is not considered an employment termination payment.

Gift

Subsection 6-5(2) of the ITAA 1997 provides that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources during the income year.

Section 6-10 of the ITAA 1997 provides that amounts that are not ordinary income may be included in assessable income under another provision as statutory income. Section 15-2 of the ITAA 1997 provides that the value of all allowances, gratuities, compensation, benefits, bonuses and premiums given or granted in respect of employment or services rendered are included in assessable income.

Therefore, if a gift is considered to be ordinary income or an allowance, a gratuity, a bonus or a benefit under section 15-2 of the ITAA 1997, it will be assessable income.

Taxation Ruling IT 2674 deals specifically with the assessability of gifts received by church workers however the principles that apply in determining whether gifts received by church workers are assessable income are no different from those which apply in determining whether gifts received by taxpayers in other callings or occupations are assessable income.

The following paragraphs of IT 2674 detail when gifts are considered assessable income;

12. If a church worker receives a gift because of, in respect of, for, or in relation to any income-producing activity of the church worker, the gift is assessable income. The income-producing activity can arise from the church worker's office or occupation or some service rendered or to be rendered by the church worker. In other words, a gift (even if it is a receipt of a one-off nature) is assessable income if it is possible to:

(a) relate the receipt of the gift by the church worker to any income producing activity on his or her part; or

(b) point to any employment, personal exertion or other income-earning activity by the church worker of which the receipt of the gift is in a relevant sense a product or incident.

13. A gift received in these circumstances is assessable income even if:

(a) the donor is not legally obliged to make the gift; or

(b) gift is made by a family member, friend or fellow worker; or

(c) if the church worker is an employee, the gift comes not from the employer but from somebody else; or

(d) the gift is made so that the church worker can acquire a capital asset; or

(e) the gift is received in kind rather than in money; or

(f) the gift is received on a special occasion such as Christmas or a birthday (but see paragraph 21); or

(g) the church worker is not in any way motivated by the prospect of receiving the gift but is motivated only by a genuine commitment to religious beliefs.

14. Gifts are often made to church workers both as an expression of goodwill towards them personally and also as a reward for some income-producing activity of the church worker or in recognition of the church worker's calling or occupation. If a substantial reason - it does not have to be the dominant reason - a gift is received by a church worker is his or her occupation or some income-producing activity on his or her part, the gift is income, even though the gift is also received on personal grounds.

There have been several court cases that have determined when a gift is assessable income, notably these are;

(a) the Squatting Investment case 86 CLR at 633; 10 ATD at149; Hayes case 96 CLR at 54 and 57 ; 11 ATD at 72; Smith v. FC of T (1987) 164 CLR 513 at 526; 87 ATC 4883 at 4890; (1987) 19 ATR 274 at 282; where the gifts are received because of, in respect of, for, or in relation to any income-producing activity of the church worker (whether the church worker's office or occupation or some service rendered or to be rendered by the church worker):

(b) Hayes case 96 CLR at 57; 11 ATD at 73 where it is possible to relate the receipt of the gift to any income- producing activity on the part of the church worker:

In your client's circumstances, they were employed by a company and received an amount of money in thanks for their contribution over many years and for being a consistent contributor to the success of the company.

The money your client received was in relation to their income producing activity for the company therefore the gift your client received is assessable income.