Edited version of your private ruling

Authorisation Number: 1012495066309

Ruling

Subject: Employment termination payment

Questions

1. Is the payment of $X made under a deed of release an employment termination payment?

2. Is any part of the payment of $X made under a deed of release tax free?

Advice/Answers

1. No.

2. No.

This ruling applies for the following periods:

For the year ended 30 June 2013

The scheme commences on:

1 July 2012

Relevant facts and circumstances

The Employee commenced employment with the Company during the relevant year.

During late in the relevant year, the Company terminated the Employee's employment.

Early in the subsequent year, the Employee lodged a General Protections Dispute application in accordance with section 365 of the Fair Work Act 2009 (FWA 2009) against the company.

During the subsequent year, the Fair Work Commission conducted a conference to deal with the dispute and issued a Certificate under Section 369 and Recommendation certifying that all reasonable attempts to resolve the dispute have been, or likely to be unsuccessful. The Certificate enabled the Employee to lodge Federal Magistrates Court of Australia application for the matter to be heard.

During the subsequent year, the Company and Employee agreed to settle the dispute between them on the terms set out in a Deed of Release (the Deed).

In an email, the Employer contended that the gross sum of $X was to be paid as "salary" and not as an employment termination payment (ETP). The Employer issued the Employee a payment advice showing the payment being processed as "back pay" with tax charged at 31.5%. A copy of the payment advice has been provided

A copy of the termination of employment letter has been provided.

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 Paragraph 82-130(1)(c).

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 82-10.

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

Income Tax Assessment Act 1997 Subsection 82-10(3).

Income Tax Assessment Act 1997 Section 995-1.

Reasons for decision

Summary of decision

Based on the evidence provided, as the requirements under subsection 82-130(1) of the ITAA 1997 have not all been satisfied, the payment made to the Employee is not considered an employment termination payment.

The amount of $X should be included in the Employee's income tax return for the subsequent income year. The payment will be assessed at the marginal rate of tax as ordinary income under section 6-5 of the ITAA 1997.

Detailed reasoning

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 Employee 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 payment not being considered an employment termination payment.

In consequence of termination of employment

The first condition requires that the payment is received by the employee in consequence of the termination of his or her employment.

In this case, there was a 'termination of employment' as shown by:

· the letter the Employee received from the Company which stated that the Company had decided to terminate their contract of employment;

· the meeting that was held between the Employee and the Company during the subsequent year; and

· the PAYG payment summary - employment termination payment for year ending 30 June 20XX issued to the Employee made for 1 week in lieu of notice.

The next issue to determine in relation to the first condition is whether the payment made to the Employee was 'in consequence of' the termination of 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 present case, the Employee's employment was terminated during the relevant year.

Early in the subsequent year, the Employee made a General Protections Dispute Fair Work application against the Company, claiming adverse action in that his employment was unfairly terminated.

During the subsequent year, the Employee and Company agreed to settle the dispute between them in accordance with a Deed of Release (the Deed).

In the Deed, the Company agreed to pay a gross sum of $X being for lost wages, including reconciliation of overtime payments overpaid and underpaid during the period of employment.

From the above, it is evident that the payment of $X is not made in consequence of the termination of employment, but rather, represents payments for outstanding wages owed to the Employee for services performed during the period of their employment with the Company.

Therefore, the circumstance in which the payment was made show that the payment of $X was not made in consequence of termination of employment and is not an employment termination payment. Therefore, the first requirement under subparagraph 82-130(1)(a)(i) of the ITAA 1997 has not been satisfied.

As mentioned above all conditions under section 82-130(1) of the ITAA 1997 must be satisfied before the payment is considered to be an employment termination payment. As one condition has not been met, it is not necessary to discuss the other conditions under subsection 82-130(1) of the ITAA 1997.

Tax consequences

Section 6-5 of the ITAA 1997 provides that the assessable income of an Australian resident includes the ordinary income derived directly or indirectly from all sources, whether in or out of Australia during the income year. As the amount of $X is a payment for outstanding wages, the amount is assessable under section 6-5 of the ITAA 1997.

The amount of $X should be included in the Employee's income tax return for the subsequent income year. The payment will be assessed at the marginal rate of tax as ordinary income under section 6-5 of the ITAA 1997.