Edited version of your private ruling

Authorisation Number: 1012445382818

Ruling

Subject: Employment termination payment and genuine redundancy

Question 1

Is the retention bonus made on the termination of your employment, an employment termination payment as defined in section 82-130 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes, to the extent that the retention bonus does not include the tax-free part of a genuine redundancy payment.

Question 2

Is the scheme bonus made on the termination of your employment, an employment termination payment as defined in section 82-130 of the ITAA 1997?

Answer

No.

Question 3

If either payment is an employment termination payment, will any part of either payment be exempt from tax as a tax-free part of a genuine redundancy payment in accordance with section 83-170 of the ITAA 1997?

Answer

Only a part of the retention bonus is exempt from tax as a tax-free part of a genuine redundancy payment. No part of the scheme bonus is exempt from tax.

This ruling applies for the following period:

Year ending 30 June 2013.

The scheme commenced in:

The income year beginning 1 July 2011.

Relevant facts and circumstances:

You commenced employment with the employer in early 20XX. You entered into a contract of employment with the employer prior to starting your employment.

Under the employment contract, you were employed in a full-time position at a facility at a particular location (the facility).

Also in early 20XX you were invited to join the employer's enhanced performance scheme covering the period from the commencement of your employment until the end of 20YY.

You were informed about the terms of the scheme in a letter from the employer's parent company, including details of the payouts you were entitled to receive under the scheme. You agreed to participate in the scheme.

In late 20XX the employer informed you in a letter that:

(a) the employer had entered into discussions for the potential sale of the facility with an interested entity (the purchaser);

(b) redundancies could result as a consequence of the sale process;

(c) should a sale agreement be reached, the purchaser could require the employer to provide operational support in connection with the facility for a period of time after the sale; and

(d) in view of the uncertainty around the sale process, the employer had decided to implement a Plan which included a retention bonus.

In relation to the retention bonus it was stated in the letter that:

(a) if an agreement was signed for the sale of the facility to the purchaser and various conditions were satisfied you would be eligible to receive the retention bonus;

(b) the retention bonus, which is in addition to your normal salary, would be paid in accordance with a set formula;

(c) the retention bonus would be paid upon the date of your termination of employment (a date which was predetermined by the employer);

(d) if the agreement did not eventuate the retention bonus would not be paid and you would remain an employee of the employer; and

(e) if you terminated your employment prior to the termination date you would not receive the retention bonus.

In the letter it was further stated that the retention bonus is additional to any other amounts you would receive upon redundancy.

In relation to the scheme bonus it was also stated in the letter that:

(a) the Plan is in addition to the scheme;

(b) all the benefits of the scheme would remain as those previously advised to you;

(c) however should your employment be terminated prior to the termination date as a result of the sale process, you will be eligible for the same bonus payment under the scheme as if you had worked for the full period covered by the scheme subject to the terms of the scheme; and

(d) the scheme bonus would be paid upon the termination of your employment.

As required in the letter, you agreed to participate in the Plan.

In late 20YY, the employer confirmed in a letter:

(a) your employment would be terminated on the termination date as a result of the sale;

(b) the purchaser provided written confirmation that your position is no longer required and that your role will cease to exist; and

(c) the employer has no suitable roles within its organisation and accordingly your employment with the employer will end with effect from the termination date.

In the letter your entitlements were detailed and this included details of both the retention bonus and the scheme bonus you would receive. The letter also stated that the payments would be made to you shortly after the termination date.

You were over age 55 but under age 65 on the termination date. There was no date prior to your 65th birthday on which you were required to terminate your employment with the employer. The position you held with the employer was intended to a permanent position which would have continued if not for the sale of the facility to the purchaser.

You were party to no other agreement relating to continued or resumed employment. As at the termination date, there was no arrangement in existence between you and the employer, or between the employer and another person, to employ you after the termination of your employment. In addition, you were not a party to any business connection with either the previous or current owners. You are currently unemployed.

You dealt with the employer at arm's length, and that you had no connection with the employer prior to applying for your position and starting your employment.

A pay slip was issued to you by the employer. The pay slip shows that the scheme bonus and the retention bonus (less tax withheld by the employer in respect of these payments) were both credited to your bank account shortly after the termination date.

Neither of these bonus payments were made by the employer in lieu of superannuation benefits.

Relevant legislative provisions:

Income Tax Assessment Act 1936 Paragraph 26(d),

Income Tax Assessment Act 1997 Subsection 82-10(2),

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

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

Income Tax Assessment Act 1997 Paragraph 82-130(1)(b),

Income Tax Assessment Act 1997 Paragraph 82-130(1)(c),

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

Income Tax Assessment Act 1997 Section 82-135,

Income Tax Assessment Act 1997 Paragraph 82-135(e),

Income Tax Assessment Act 1997 Section 82-145,

Income Tax Assessment Act 1997 Section 83-165,

Income Tax Assessment Act 1997 Section 83-170,

Income Tax Assessment Act 1997 Subsection 83-170(2),

Income Tax Assessment Act 1997 Subsection 83-170(3),

Income Tax Assessment Act 1997 Section 83-175,.

Income Tax Assessment Act 1997 Subsection 83-175(1),

Income Tax Assessment Act 1997 Subsection 83-175(2),

Income Tax Assessment Act 1997 Paragraph 83-175(2)(a),

Income Tax Assessment Act 1997 Paragraph 83-175(2)(b),

Income Tax Assessment Act 1997 Paragraph 83-175(2)(c),

Income Tax Assessment Act 1997 Subsection 83-175(3),

Income Tax Assessment Act 1997 Subsection 83-175(4), and

Income Tax Assessment Act 1997 Subsection 995-1(1).

Reasons for decision

Summary

The retention bonus you received in consequence of the termination of your employment comprises:

· an employment termination payment, and

· a tax-free genuine redundancy payment.

The tax-free amount is not assessable income and is not exempt income in your hands, and is calculated on the basis of the period of service you completed with the employer.

The entire amount of the employment termination payment is a taxable component which is to be included in your assessable income for the relevant income year.

The scheme bonus you also received was not paid to you in consequence of the termination of your employment. Therefore the scheme bonus is not an employment termination payment.

In addition, the scheme bonus does not constitute a genuine redundancy payment and as such, no part of the bonus is exempt from tax. Rather, the scheme bonus is assessable income that is taxed as ordinary income at your marginal rate of tax. As such, the scheme bonus is to be included in your assessable income for the relevant income year.

Detailed reasoning

Employment termination payments

Employment termination payments are payments that are made in consequence of the termination of any employment of a taxpayer. Prior to 1 July 2007, these payments were known as eligible termination payments.

Subsection 995-1(1) of the Income Tax Assessment Act 1997 (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.

To determine if a payment constitutes an employment termination payment, all the conditions in subsection 82-130(1) of the ITAA 1997 must be satisfied.

Failure to satisfy any of the three conditions under subsection 82-130(1) will result in the payment not being considered an employment termination payment.

'In consequence of' the termination of your employment

The first condition in subparagraph 82-130(1)(a)(i) of the ITAA 1997 requires that a payment is received by you in consequence of the termination of your employment.

The phrase 'in consequence of' is not defined in the ITAA 1997. However, the courts have interpreted the phrase in a number of cases.

Whilst the courts have divergent views on the meaning of this phrase, the Commissioner's views on the meaning and application of the 'in consequence of' test are set out in Taxation Ruling TR 2003/13 (TR 2003/13) entitled Income tax: eligible termination payments (ETP): payments made in consequence of the termination of any employment: meaning of the phrase 'in consequence of'.

While TR 2003/13 considered the meaning of the phrase 'in consequence of' in the context of eligible termination payments, TR 2003/13 can still be relied upon as the former provision under the Income Tax Assessment Act 1936 (ITAA 1936) and the current provision under the ITAA 1997 both use the term 'in consequence of' in the same manner. As noted above, eligible termination payments ceased to exist from 1 July 2007, being replaced by employment termination payments.

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.

In paragraph 6 of TR 2003/13, the Commissioner recognises that:

The phrase requires 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.

As noted above, the phrase 'in consequence of' the 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).

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.

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.

There is also a broader view of the meaning of 'in consequence of' the termination of employment.

Paragraph 29 of TR 2003/13 provides that a payment will be in consequence of the termination of employment if the termination is either a cause of the payment or an antecedent event.

Furthermore, in Case No M 101/1976 (1977) 77 ATC 475; (1977) 22 CTBR (NS) 41 (Case No M 101/1976) the No. 2 Board of Review considered whether a production completion bonus was made in consequence of termination of employment.

The facts of the case were that on the day he was retrenched, the taxpayer received a production completion bonus of $2,750 from his employer.

In a letter to the Deputy Commissioner, the taxpayer's former employer explained that the bonus payment was designed as an incentive to keep the employee on a particular project until he was no longer needed. Payment of the bonus was conditional on the employee remaining on the job until retrenched. The taxpayer gave evidence that had he resigned at any time before the retrenchment date he would have received no part of the bonus.

The No. 2 Board of Review held that the payment constituted an allowance or compensation paid in a lump sum in consequence of the termination of the taxpayer's employment within the meaning of former paragraph 26(d) of the ITAA 1936 (the precursor to the ETP provisions). In making the decision the judgement of the majority of the Full High Court in Reseck was followed.

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 retention bonus was paid 'in consequence of' the termination of your employment

In relation to the retention bonus you received shortly after the termination of your employment, the circumstances of your case are almost identical to those circumstances in Case No M 101/1976 considered by the No 2 Board of Review.

As noted in the facts, the employer, as part of the process for the sale of the facility to the purchaser, implemented a Plan to retain its employees during the sale and for a period after the sale process was completed.

In late 20XX the employer informed you in a letter that as part of the Plan a retention bonus' would be paid to employees who agreed to continue with their employment until a predetermined date or earlier upon their role with the employer becoming redundant. This bonus would be in addition to your redundancy and other bonus, leave and notice entitlements. Further the employer stated that if:

(i) an agreement was not signed for the sale; or

(ii) conditions precedent to the sale were not satisfied; or

(iii) title to the facility was not transferred prior to a specified date;

the retention bonus would not be paid and your employment contract would continue on its existing terms in support of the employer's continued ownership of the facility.

In this situation, you accepted the employer's offer to participate in the Plan. In late 20YY, the employer advised in a letter that as a result of the sale of the facility to the purchaser, your position will cease to exist and you will be made redundant.

The employer further advised in the letter the termination date of your employment. The letter also states that you are entitled to receive a retention bonus less tax deductions. The retention bonus (less tax withheld by the employer in respect of the payment) was credited to your bank account shortly after the termination date.

The facts show that the retention bonus was paid to you by the employer shortly after the termination of your employment on the termination date, and as a result of the employment termination. Therefore, the payment was made 'in consequence of' the termination of your employment. In this case, there is a direct causal connection between the termination of your employment and the making of this payment.

The termination of employment and the payment are all intertwined and connected.

If not for the termination of your employment on the termination date, the payment of the long retention bonus would not have been made. In particular, the payment of the bonus was conditional on you remaining in employment with the employer until the termination date.

Further in relation to the bonus, the employer had advocated the implementation of the Plan as a result of the sale process and the prospect that redundancies may be unavoidable.

It is considered that there is a sufficient causal nexus between the payment of the retention bonus and the termination of employment to say that the payment was made in consequence of the termination of your employment. Therefore, the requirement of subparagraph 82-130(1)(a)(i) of the ITAA 1997 has been satisfied.

The scheme bonus was not paid 'in consequence of' the termination of your employment

However, the facts also show that the scheme bonus you received shortly after the termination date was not paid to you by the employer 'in consequence of' the termination of your employment.

In early 20XX you were invited to join the employer's enhanced performance scheme covering the period from the commencement of your employment until the end of 20YY.

You were informed about the terms of the scheme in a letter from the employer's parent company.

The terms of the scheme were set out in this letter, which shows that the criteria for the payment of the bonus was based on performance and other performance-linked values throughout the period covered by the scheme.

In the letter you received from the employer in late 20XX, the employer stated that the Plan under which you received your retention bonus, is in addition to the scheme you had previously joined. The employer further advised that all the benefits of the scheme would remain as those previously advised to you. The difference was that if your employment was terminated on or prior to a predetermined date as a result of the sales process, you were eligible for the same bonus as if you had worked for the full earning period covered by the scheme. Further, the scheme bonus would be paid after the cessation of your employment on the termination date.

From the foregoing it is evident that the scheme bonus is an amount that you would have received had you continued in your employment with the employer after either the termination date or a predetermined date, and until the end of the period covered by the scheme.

The only effect of the termination of your employment on the termination date was to bring-forward the payment of the scheme bonus shortly after the termination date.

Further as noted above, the criteria for the payment of the bonus was based on your performance and other performance-linked values throughout the full earning period covered by the scheme.

This is evidenced by the statement in the letter from the employer that the payment of the bonus is subject to the provisions in the scheme relating to performance, values and leadership. The fact that the bonus payment was brought-forward as a result of the sales process does not change this.

It is evident that the scheme bonus was not paid to you in consequence of the termination of your employment. As such, the requirement of subparagraph 82-130(1)(a)(i) of the ITAA 1997 has not been satisfied in relation to this payment. Therefore, it is considered that the payment does not qualify as an employment termination payment under subsection 82-130(1) of the ITAA 1997.

Payment is received no later than 12 months after that termination

The second condition for the payment to meet the criteria as an employment termination payment requires that the payment in question must be received 'no later than 12 months after' that termination (paragraph 82-130(1)(b) of the ITAA 1997), unless the payment is covered by a determination exempting it the 12 month rule.

Your employment was terminated on the termination date, and as noted above, the retention bonus payment was made to you shortly after the termination date. Therefore the requirement in paragraph 82-130(1)(b) of the ITAA 1997 also has been satisfied.

Payments excluded from being employment termination payments

The retention bonus will be an employment termination payment unless the payment is specifically excluded under section 82-135 of the ITAA 1997. The requirement specified in paragraph 82-130(1)(c) of the ITAA 1997 is that the employment termination payment is not a payment mentioned in section 82-135.

Section 82-135 of the ITAA 1997 provides that certain payments are not employment termination payments. These payments include:

· superannuation benefits;

· payments for accrued annual leave or unused long service leave;

· capital payments for personal injury; and

· the tax-free part of a genuine redundancy payment (GRP) or an early retirement scheme payment.

Relevant to this case is whether any part of the retention bonus represents the tax-free part of a GRP. The facts show that this payment does not include any of the other payments listed in this section. However this consideration does not extend to the scheme bonus, for the reasons that are discussed below.

Life benefit termination payment

Subsection 82-130(2) of the ITAA 1997 provides that where an employment termination payment is made during the life of a taxpayer, the payment is a life benefit termination payment.

Subsection 82-130(2) of the ITAA 1997 states:

A life benefit termination payment is an employment termination payment to which subparagraph (1)(a)(i) applies.

As you received the retention bonus in consequence of the termination of your employment, the payment is a life benefit termination payment as defined under subsection 82-130(2) of the ITAA 1997, because as discussed above, it is an employment termination payment to which subparagraph 82-130(1)(a)(i) applies.

Genuine redundancy payment (GRP)

Consideration must now be given as to whether any portion of the retention bonus represents the tax-free part of a GRP. If it does, then that portion of the payment:

· will not be an employment termination payment under paragraph 82-135(e) of the ITAA 1997; and

· is not assessable income and is not exempt income.

Subsection 995-1(1) of the ITAA 1997 states:

genuine redundancy payment has the meaning given by section 83-175.

A payment made to an employee, after 30 June 2007, is a GRP if it satisfies all the conditions set out in section 83-175 of the ITAA 1997. Section 83-175 states:

(1) A genuine redundancy payment is so much of a payment received by an employee who is dismissed from employment because the employee's position is genuinely redundant as exceeds the amount that could reasonably be expected to be received by the employee in consequence of the voluntary termination of his or her employment at the time of dismissal.

(2) A genuine redundancy payment must satisfy the following conditions:

(a) the employee is dismissed before the earlier of the following:

(i) the day he or she turned 65;

(ii) if the employees employment would have terminated when he or she reached a particular age or completed a particular period of service the day he or she would reach the age or complete the period of service (as the case may be);

(b) if the dismissal was not at arm's length the payment does not exceed the amount that could reasonably be expected to be made if the dismissal were at arm's length;

(c) at the time of the dismissal, there was no arrangement between the employee and the employer, or between the employer and another person, to employ the employee after dismissal.

(3) However, a genuine redundancy payment does not include any part of a payment that was received by the employee in lieu of superannuation benefits to which the employee may have become entitled at the time the payment was received or at a later time.

Payments not covered

(4) A payment is not a genuine redundancy payment if it is a payment mentioned in section 82-135 (apart from paragraph 82-135(e)).

In addition to the basic genuine redundancy requirement that is specified in subsection 83-175(1) of the ITAA 1997, all of the other requirements of section 83-175 of the ITAA 1997 must be satisfied for a payment to qualify as a GRP.

The Commissioner has issued Taxation Ruling TR 2009/2 (TR 2009/2) entitled Income tax: genuine redundancy payments, which outlines the requirements to be satisfied before any payment made to a person whose employment is terminated qualifies for treatment as a GRP under section 83-175 of the ITAA 1997.

The basic genuine redundancy requirement in subsection 83-175(1)

The basic genuine redundancy requirement in subsection 83-175(1) of the ITAA 1997 has four necessary criteria:

· the payment is in consequence of the employee's termination of employment;

· the payment is received by an employee who is dismissed from employment;

· the employee is dismissed because the employee's position is genuinely redundant; and

· the payment exceeds the amount that could reasonably be expected to be received by the employee in consequence of the voluntary termination of his or her employment at the time of the dismissal.

Payment in consequence of termination

As stated in paragraph 13 of TR 2009/2, the Commissioner considers that any payment must be made 'in consequence of' the employee's termination of employment before it can be a genuine redundancy payment. Whether the retention bonus and the scheme bonus were each received by you in consequence of the termination of your employment was discussed above.

In relation to the retention bonus, it was determined that the payment was made to you in consequence of the termination of your employment. Therefore the payment satisfies the first criterion of the basic genuine redundancy requirement.

However in relation to the scheme bonus, it was determined that this payment was not made to you in consequence of the termination of your employment, and as such, the payment is not an employment termination payment.

Because the scheme bonus was not paid in consequence of a termination of employment, this payment does not satisfy the first criterion of the basic genuine redundancy requirement. Therefore the payment does not satisfy all of the requirements specified in subsection 83-175(1) of the ITAA 1997. As these requirements have not been satisfied, it is not necessary to consider whether the payment satisfies the other conditions set out in section 83-175 of the ITAA 1997.

Accordingly, it is considered that the scheme bonus does not constitute a GRP for the purposes of section 83-170 of the ITAA 1997. It follows, therefore, that no part of this bonus payment represents the tax-free part of a GRP.

Dismissal from employment

Dismissal from employment usually means that the termination of employment is involuntary on the part of the employee concerned and is instigated by the employer.

As noted previously, your employment was terminated with effect from the close of business on the termination date, as a result of the sale of the facility to the purchaser. The facts show that the termination of your employment arises from a dismissal which was instigated by the employer.

Further, the dismissal is not the result of any misbehaviour on your part but it arises from negotiations entered into by the employer with the purchaser to divest itself of an asset, that is, the facility.

In this case, the employment termination involved you being dismissed by the employer from your employment. Therefore, the retention bonus payment satisfies the second criterion of the basic genuine redundancy requirement.

Dismissal caused by 'genuine redundancy'

As stated by the Commissioner in paragraph 23 of TR 2009/2, section 83-175 of the ITAA 1997 requires that the dismissal be caused by redundancy of the employee's position, and not for some other reason.

Redundancy is a situation where the dismissal of an employee is not caused by any consideration peculiar to the employee.

Redundancy does not extend to a situation where an employee is dismissed for personal or disciplinary reasons or because the employee was inefficient, but rather because an employer no longer requires employees to carry out work of a particular kind or to carry out work of a particular kind at the same location.

In paragraph 27 of TR 2009/2, the Commissioner makes the following comment:

27. …if an employer decides after downsizing or some other structural reorganisation to terminate an employee, the former position of the employee is redundant as long as the downsizing or reorganisation is the prevailing or most influential cause of the termination.

In this case, the facts show that your dismissal was not for any reasons such as inefficiency or misbehaviour but due to the employer reorganising its operations which involves the sale of the facility. As a result of the sale the employer no longer required that facility's crew of which you were a member.

Further as noted previously, in late 20YY, the employer confirmed in a letter that your position is no longer required. The employer also stated that that your role will cease to exist and you will be made redundant.

It is clearly evident that your dismissal was caused by the genuine redundancy of the position you occupied, and not by some other reason. Therefore your dismissal was for reasons of genuine redundancy.

In this instance, the retention bonus was paid to you as a result of your dismissal and the genuine redundancy of your position. Therefore the payment was made to you by reason of a genuine redundancy. Accordingly, it is considered that the payment satisfies the third criterion of the basic genuine redundancy requirement.

The payment exceeds what you would have received in consequence of the voluntary termination of your employment at the time of your dismissal

The retention bonus exceeds the amount that you could reasonably expect to receive if you had resigned or retired from your employment in the position you held at the time of the dismissal.

This is evidenced by the letter you received from the employer in late 20XX, which specifically states that the retention bonus is in addition to any other amounts you would receive upon redundancy. From the foregoing it is evident that the payment is in excess of what you would have received if had you voluntarily terminated your employment on the termination date.

Therefore in the context of paragraph 57 of TR 2009/2, the payment is specifically attributable to the fact that your employment was terminated because of redundancy.

As such, the last criterion of the basic genuine redundancy requirement is satisfied.

Conclusion in relation to the basic genuine redundancy requirement

The facts show that the retention bonus satisfies all of the criteria of the basic genuine redundancy requirement. Therefore, it is considered that this payment constitutes a GRP within the meaning of subsection 83-175(1) of the ITAA 1997.

However as noted above, the retention bonus must also satisfy the conditions specified in subsections 83-175(2) to 83-175(4) of the ITAA 1997.

The requirements under subsection 83-175(2) of the ITAA 1997

Paragraph 83-175(2)(a) of the ITAA 1997 prescribes that the employee must be dismissed before the earlier of:

Ÿ the day he or she turned age 65; or

Ÿ if the employee's employment would have terminated when he or she reached a particular age or completed a particular period of service - the day he or she would reach the age or complete the period of service (as applicable).

You were over age 55 but under age 65 at the time of your dismissal. The termination date was before your 65^th birthday. In addition, you have advised that there was no date prior to your 65^th birthday on which you were required to terminate your employment. Consequently, you have satisfied the requirements of paragraph 83-175(2)(a) of the ITAA 1997.

You dealt with the employer at arm's length, and you had no connection with the employer prior to applying for your position and starting your employment. Accordingly, it is accepted that all dealings between you and the employer were at arm's length. Therefore you have satisfied the requirement under paragraph 83-175(2)(b) of the ITAA 1997.

You were party to no other agreement relating to continued or resumed employment, and that you were not a party to any business connection with either the previous or current owners of the facility.

In addition, as at the termination date there was no arrangement in existence between your and the employer, or between the employer and another person, to employ you after the termination of your employment. As such, you have also satisfied the requirement under paragraph 83-175(2)(c) of the ITAA 1997.

The requirements under subsections 83-175(3) and 83-175(4) of the ITAA 1997

Subsection 83-175(3) of the ITAA 1997 provides that a GRP does not include any part of a payment that is received in lieu of superannuation benefits.

In this case, the long retention bonus was not paid in lieu of superannuation benefits. Therefore the requirement under subsection 83-175(3) of the ITAA 1997 is satisfied.

Subsection 83-175(4) of the ITAA 1997 provides that a payment is not a GRP if it is a payment mentioned in section 82-135 of the ITAA 1997 (apart from paragraph 82-135(e)). As noted above, section 82-135 provides that certain payments are not employment termination payments. These payments include superannuation benefits and any accrued annual and long service leave payments.

As already noted previously, the letter you received from the employer in late 20XX states that the retention bonus is a payment that is made in addition to any of your leave entitlements.

Accordingly, it is evident that the payment does not include any superannuation benefits, accrued annual and long service leave payments or any of the other payments listed in section 82-135. It follows, therefore, that you have satisfied the requirement in subsection 83-175(4) of the ITAA 1997 in this instance.

The retention bonus is a GRP under sections 83-170 and 83-175 of the ITAA 1997

An examination of the information you provided shows that in relation to the retention bonus, you have satisfied all of the relevant conditions set out in section 83-175 of the ITAA 1997.

Consequently it is considered that only this payment constitutes a GRP for the purposes of section 83-170 of the ITAA 1997.

Tax-free treatment of the GRP

The tax-free treatment of a GRP is determined under section 83-170 of the ITAA 1997. This section places a limit on the amount of a GRP that is eligible for concessional tax treatment.

Subsection 83-170(2) of the ITAA 1997 provides that so much of the GRP as does not exceed the amount worked out using the formula prescribed in subsection 83-170(3) of the ITAA 1997 is not assessable income and is not exempt income. Any amount in excess of the tax-free amount is taxable as an employment termination payment.

The formula for working out the tax-free amount is:

Base amount + (Service amount × Years of service),

where: ..

years of service means the number of whole years in the period, or sum of periods, of employment to which the payment relates.

For the purposes of subsection 83-170(3) of the ITAA 1997, the base amount for the relevant income year is $8,806 and the service amount is $4,404. Any amount that the taxpayer receives which falls within this limit will attract no tax, that is, such an amount will be tax-free.

In accordance with subsection 83-170(3) of the ITAA 1997, the tax-free part of a GRP you receive in the relevant income year can be calculated using this formula, taking into account the period of service you completed with the employer.

The tax-free amount is not assessable income and is not exempt income under subsection 83-170(2) of the ITAA 1997. In addition, paragraph 82-135(e) of the ITAA 1997 operates to exclude the tax-free amount from being an employment termination payment.

Taxation of the life benefit termination payment

The Commissioner states in paragraph 72 of TR 2009/2 that:

Any amount of a genuine redundancy payment in excess of the tax-free amount worked out under section 83-170 will be taxable as an employment termination payment.

Therefore the amount of the retention bonus in excess of the tax-free amount is an employment termination payment under subsection 82-130(1) of the ITAA 1997. As noted above, the payment is a life benefit termination payment in accordance with subsection 82-130(2) of the ITAA 1997.

Given the time at which your employment commenced, the balance of the retention bonus is the taxable component of a life benefit termination payment, which is assessable income in the relevant income year.

Taxation of the scheme bonus

As discussed above, the scheme bonus is not an employment termination payment. Further, the scheme bonus does not constitute a GRP and as such, no part of this bonus represents the tax-free part of a GRP. Accordingly, no part of the bonus is exempt from tax. Rather, the bonus is assessable income in the relevant income year that is taxed as ordinary income at the marginal rate of tax.