Edited version of your private ruling

Authorisation Number: 1012493637968

Ruling

Subject: Employment termination payment

Question

Is the payment of $X under a 'Deed of Settlement and Release' an employment termination payment?

Answer

Yes.

This ruling applies for the following periods:

For the year ended 30 June 20WW

The scheme commences on:

1 July 2012

Relevant facts and circumstances

The Worker and the Principal entered into a verbal agreement (the Agreement) a few years ago.

The Agreement was for the supply of the Worker's personal services in relation to heavy vehicles.

The Worker did not provide a Tax File Number (TFN) declaration to the Principal on commencement.

The Worker was not registered for Goods and Services Tax (GST).

Under the Agreement, the Principal had control over broad timeframes and quality control in relation to the work performed by the Worker. However, daily work schedules and quality aspects were left to the Worker's discretion.

The Worker performed work for other businesses (retail, construction and general building maintenance) during the period of the contract activities with the Principal.

The Principal supplied the Worker with Y sets of work wear.

The Worker had the right to refuse a particular job or task. He/she exercised this right during mid 20ZZ when he/she advised he/she would not carry out repairs for a particular client.

The Worker did not have set hours where he/she was required to work for the Principal. The Worker worked the hours necessary to complete allocated tasks.

The Worker used a number of the Principal's assets to complete his/her allocated tasks. However, the Worker also provided his/her own tools to carry out his/her tasks.

In the case of work performance, the Worker was responsible for rectifying poor workmanship.

The Worker received gross payments on a weekly basis after submitting his/her invoices to the Principal.

The Worker was not paid any allowances, sick leave, annual leave or long service leave by the Principal.

The Worker was covered by the Principal for Workers Compensation but was responsible for any other insurances.

The Principal made employer contributions to a superannuation fund for the Worker.

The Principal has a detailed set of written policies and procedures dealing with Occupational Health and Safety Issues (Safety Rules) on Site are required to comply with the Safety Rules.

During a certain period in 20ZZ, the Worker breached the Safety Rules on various occasions which all represented serious breaches of the Safety Rules and constituted grounds for termination of the Agreement.

The Worker's Agreement was terminated in the early part of the 20WW financial year.

A copy of the termination letter issued by the Principal was provided.

A copy of the Worker's Application for Fair Work Act (FWA) to deal with a General Protections Dispute was provided.

A copy of the Deed of Release & Settlement (the Deed) was provided.

Relevant legislative provisions

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

Income Tax Assessment Act 1997 Section 995-1

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 Section 82-135

Income Tax Assessment Act 1997 Section 82-140

Income Tax Assessment Act 1997 Section 82-145

Income Tax Assessment Act 1997 Section 82-150

Superannuation Guarantee (Administration) Act 1992 Section 12

Superannuation Guarantee (Administration) Act 1992 Subsection 12(3)

Superannuation Guarantee (Administration) Act 1992 Subsection 12(11)

Reasons for decision

Summary

The Worker is engaged in activities that result in him/her being considered an 'employee' and the payment made under the 'Deed of Settlement and Release' is an employment termination payment.

As the Worker is under 55 years of age, and has not provided you with a tax file number and the employment termination payment is comprised wholly of a taxable component, you should withhold taxation at the rate of 48.5% (including Medicare levy).

Detailed reasoning

Under subsection 12(1) of the SGAA, if a person is an employee at common law, that person is an employee under the SGAA.

Where a common law employment relationship is not established, subsection 12(3) of the SGAA extents the definition to classify as an employee a person who works under contract that is wholly or principally for the labour of the person.

Whether a person is an employee is determined by examining the terms and circumstances of the contract, referring to the key indicators expressed in the relevant case law and examining a number of factors within the context of the relationship between the parties. No one indicator, of itself, is determinative and therefore, the totality of the relationship is considered.

Superannuation Guarantee Ruling SGR 2005/1 outlines the major indicators of a common law employment relationship to be:

· Control.

· Integration.

· Results.

· Delegation.

· Risk.

· Provision of tools and equipment and payment of business expenses.

Control

Paragraph 33 of SGR 2005/1 states that a common law employee is told not only what work is to be done, but how and where it is to be done. It refers to the following statement made by Justice Dixon of the Full High Court in Humberstone v. Northern Timber Mills (1949) 79 CLR 389; (1949) 23 ALJ 584; [1950] VLR 44; [1949] ALR 985:

The question is not whether in practice the work was in fact done subject to a direction and control exercised by an actual supervision or whether an actual supervision was possible but whether ultimate authority over the man in the performance of his work resided in the employer so that he was subject to the latter's order and directions. …

The facts provided indicate that the Worker had some control over the manner in which his/her work is performed which included his/her daily work schedules and quality aspects. However, the Principal had control over the broad timeframes and quality control.

Whilst the facts indicate that the services performed by the Worker are to be approved by the Principal, according to paragraph 35 of SGR 2005/1, this does not necessarily imply an employment relationship has a high degree of direction and control is not uncommon in contracts for services.

Integration

Paragraph 39 of SGR 2005/1 distinguishes between an employee and an independent contractor by identifying the difference between a person serving their employer within their employer's business and a person who is carrying on a trade or business of their own.

Further, reference is made to the Full High Court decision in Hollis v. Vabu Pty Ltd [2001] HCA 44; (2001) 106 IR 80; (2001) 75 ALJR 1356; (2001) 181 ALR 263; (2001) 2001 ATC 4508; (2001) 33 MVR 399; (2001) 47 ATR 559; [2001] Aust Torts Reports 81-615; (2001) 50 AILR 4-476; (2001) 207 CLR 21 where the workers were found to be operating within their employer's business as they were not running their own business, nor did they have independence in the conduct of their operations.

Throughout the entirety of the engagement, the Worker was referred to as 'the Contractor' and has been classed as an independent contractor by the Principal.

The true nature of the integration indicator can be determined by acknowledging the intentions of both parties. In this case, it was stated that the Worker was to be engaged as a contractor for an indefinite period. As such, there is material evidence to suggest that the Principal had the intention of integrating the Worker into their business.

Results

Where the nature of the contract is for the worker to produce a given result, there is a strong indicator that they are a contractor. Paragraph 42 of SGR 2005/1 quotes Justice Sheller of the NSW Court of Appeals in World Book (Aust) Pty Ltd v. Federal Commissioner of Taxation (1992) 27 NSWLR 377; (1992) 46 IR 1; (1992) 108 ALR 510; (1992) 23 ATR 412; (1992) 92 ATC 4327 (World Book):

Undertaking the production for a given result has been considered to be a mark, if not the mark, of an independent contractor.

Paragraph 43 goes on to state:

The 'production of a given result' means the performance of a service by a person who is free to employ their own means (such as third party labour, plant and equipment) to achieve the contractually specified outcome. Satisfactory completion of the specified service is the 'result' for which the parties have bargained. The consideration is often a fixed sum on completion of the particular job as opposed to an amount paid by reference to hours worked. If remuneration is payable when, and only when, the contractual conditions have been fulfilled the remuneration is usually made for producing a given result.

According to the facts, whilst the Worker appeared to have a degree of flexibility in undertaking his/her services and completing his/her assigned work, his/her contract does not specify completion of a specific work or outcome and therefore a 'result'. Rather, the facts state that his/her work is to provide services to heavy vehicles which could indicate that he/she was engaged wholly or principally for his/her labour.

There is also no evidence to suggest that he/she is free to employ his/her own means to provide third party labour.

Consequently, this factor indicates that an employee-employer relationship exists.

Delegation

Paragraph 48 of SGR 2005/1 states that if a person is contractually required to personally perform the work, this is an indication that the person is an employee. If an employee has unlimited power to delegate the work to others (with or without approval or consent of the principal), this is a strong indication that the person is being engaged as an independent contractor.

The facts state that the Worker does not have authority to delegate or subcontract work to others. This suggests that the Worker is contractually required to personally perform the work.

Consequently, this factor indicates that an employee-employer relationship exists.

Risk

Paragraph 51 of SGR 2005/1 states that where a worker bears little or no risk of the costs arising out of injury or defect in carrying out their work, they are more likely to be an employee. An independent contractor often carries their own insurance and indemnity policies.

According to the facts, the Worker is required to carry his/her own insurances. This indicates that the Worker bears the risk of the costs arising out of injury or defect in carrying out his/her work. This suggests that the Worker is engaged as an independent contractor.

Provision of tools/equipment and payment of business expenses

Paragraph 52 of SGR 2005/1 states that the provision of assets, equipment and tools by an individual and the incurring of expenses and other overheads is an indicator that the individual is an independent contractor.

Paragraph 57 of SGR 2005/1 goes on to state that an employee, unlike a contractor, is often reimbursed for expenses incurred in the course of employment.

The facts state that the Worker provided his/her own tools and was not reimbursed for his/her expenses. This suggests that the Worker is engaged as an independent contractor.

Other indicators

Other indicators of whether an employment relationship exists have been variously stated and have been added to from time to time. These include the right to suspend or dismiss the person engaged, the right to exclusive services of the person engaged, compulsory uniforms, provision of benefits such as annual, sick and long service leave and the provisions of other benefits prescribed under an award for employees.

According to the facts, the Worker's contract does not contain leave provisions. Further, the Worker's contract can be terminated by the Principal, particularly when he/she has breached his/her obligations or failed to perform the services as required. Both these indicators suggest the Worker is engaged as an independent contractor.

Through the analysis of various indicators, SGR 2005/1 identifies when an individual is considered to be an employee under subsection 12(1) of the SGAA. In this case, the indicators of control, integration, results contract, delegation, risk and the provision of tools/equipment and payment of business expenses have been considered.

Whilst the control, risk, the provision of tools/equipment and other indicators suggest that the Worker is engaged as an independent contractor, integration, results and delegation indicators suggested that the Worker is contracted as an employee. As we have some contradicting indicator results, we will now consider the extended definition of an employee.

As stated previously subsection 12(3) of the SGAA extents the definition to classify as an employee a person who works under contract that is wholly or principally for the labour of the person. This was to take into account some independent contractors who principally provide their own labour to meet obligations under a contract and to include a person who may not be an employee in the normal sense but who is in fact not very distinguishable from an employee.

'Labour' includes mental and artistic effort as well as physical toil.

The words 'wholly or principally' are used to limit or restrict the types of contracts that will be covered by subsection 12(3) of the SGAA.

Paragraph 72 of SGR 2005/1 states that from the decisions reached in Neale (Deputy Commissioner of Taxation) v. Atlas Products (Vic) Pty Ltd (1955) 94 CLR 419; (1955) 29 ALJ 28; (1955) 10 ATD 460; [1955] ALR 426; [1955] HCA 18 and World Book, it is clear that a person who has 'a right to delegate work' (whether or not that right is exercised) does not work under a contract wholly or principally for his or her labour and that a contract for labour must be distinguished from 'a contract to produce a given result'.

The ATO view is that some contracts for services will be wholly or principally for the labour of the individual contracted even though the individual is not a common law employee.

Paragraph 78 of SGR 2005/1 goes on to state:

Where the terms of the contract in light of the subsequent conduct of the parties indicates that:

· the individual is remunerated (either wholly or principally) for their personal labour and skills;

· the individual must perform the contractual work personally (there is no right of delegation); and

· the individual is not paid to achieve a result.

· the contract is considered to be wholly or principally for the labour of the individual engaged and he or she will be an employee under subsection 12(3).

During the 'results' and 'delegation' indicator analysis, it was established that the contract does not specify completion of a specific work or outcome. Therefore, the Worker is not contracted to produce a given result. It was also established that the Worker is required to perform the work personally as he has no right of delegation.

As such, whilst the contract is detailed as a 'Contract for Services' and that the Worker is referred to as an independent contractor throughout his/her service period, the substance of the contract is one that is wholly or principally for his/her labour. In addition, given Fair Work Australia has chosen to be involved with the worker's case, would indicate he is an employee.

Based on the above analysis, the Worker is considered an employee under the extended definition pursuant to subsection 12(3) of the SGAA.

Employment termination payment

The term 'employment termination payment' is defined in subsection 82-130(1) of the ITAA 1997 which states that:

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 that termination (but see subsection (4)); and

(c) it is not a payment mentioned in section 82-135.

Section 82-135 of the ITAA 1997 states:

The following payments you receive are not employment termination payments:

(a) a superannuation benefit (see Divisions 301 to 307);

(b) a payment of a pension or an annuity (whether or not the payment is a superannuation benefit); and

(c) an unused annual leave payment (see Subdivision 83-A);

(d) an unused long service leave payment (see Subdivision 83-B);

(e) the part of a genuine redundancy payment or an early retirement scheme payment worked out under section 83-170 (see Subdivision 83-C);

(f) …

To determine if the payment made to the Worker constitutes an employment termination payment, all the conditions in section 82-130 of the ITAA 1997 must be satisfied.

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

In consequence of termination of employment

The first condition requires that the payment is received in consequence of the termination of his/her or her 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 (TR 2003/13) which discusses the meaning of the phrase.

Paragraph 5 of TR 2003/13 states:

the Commissioner considers that 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.

Thus, if a 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 it is specifically excluded under section 82-135 of the ITAA 1997.

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.

In the facts of this case, the Worker's contract was terminated during 20ZZ.

In early 20WW, the Worker made a General Protections Dispute Fair Work application against the Principal, claiming adverse action in that his/her employment was unfairly terminated.

The Worker and the Principal agreed to settle the dispute between them in accordance with a Deed of Release (the Deed). It was agreed by the Principal that a sum of $X will be paid to the Worker to settle the dispute.

It is clear from the facts provided that the payment made by the Principal is in consequence of the Worker's termination of employment in that the payment would not have been made had there not been a termination of employment. The legal action, the termination and the payment are all intertwined and connected.

Therefore the first requirement under subparagraph 82-130(1)(a)(i) of the ITAA 1997 has been satisfied.

Payment received no later than 12 months after termination

In addition to meeting the other conditions for a payment to be an employment termination payment, paragraph 82-130(1)(b) of the ITAA 1997 specifies that the payment must be received within 12 months of the employee's termination of employment, unless they are covered by a determination exempting them from the '12 month rule'.

The facts of this case show that the Worker's contract was terminated in the early part of the 20WW financial year and the employment termination payment was made during February 20WW.

The payment of $X was received within 12 months of the termination and therefore satisfies the requirements of paragraph 82-130(1)(b) of the ITAA 1997.

A payment mentioned in section 82-135 of the ITAA 1997

As previously mentioned, section 82-135 of the ITAA 1997 excludes certain payments from being employment termination payments. These payments include:

· a payment for unused annual leave

· a payment for unused long service leave

· capital payments for personal injury.

In the present case, the facts provided show that the payment did not include any of the payments mentioned in section 82-135 of the ITAA 1997 which would preclude any part of the payment from being an employment termination payment.

Accordingly, the whole amount payment made by the Principal that is, $X is considered to be an employment termination payment and paragraph 82-130(1)(c) of the ITAA 1997 is satisfied in this instance.

Conclusion:

The payment of $X received by the Worker in the 2012-13 income year represents an employment termination payment.

An employment termination payment may comprise of a:

· 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 of the ITAA 1997 (if any) and/or a pre-July 83 segment within the meaning of section 82-155 of the ITAA 1997 (if any); and

· Taxable component - the amount remaining after deducting the tax free component from the total payment, as prescribed in section 82-145 of the ITAA 1997.

As shown in the facts, the payment does not contain an invalidity segment within the meaning of section 82-150 of the ITAA 1997 and the Worker commenced employment with the Principal in 1999. Therefore, it is clear that the employment termination payment is comprised wholly of a taxable component.

As the Worker is under 55 years of age, has not provided you with a tax file number and the employment termination payment is comprised wholly of a taxable component, you should withhold taxation at the rate of 48.5% (including Medicare levy).