Edited version of private advice

Authorisation Number: 1012648738538

Ruling

Subject: Employment termination payment

Questions

1. Is any part of the payment in lieu of notice taxable as an employment termination payment?

2. Is the payment of in lieu of notice considered a genuine redundancy payment?

3. Is any part of the payment in lieu of notice subject to the 'whole- of- income' cap?

4 Is any part of the payment for unused annual leave subject to tax?

Answers

1. Yes.

2. No.

3. Yes.

4. Yes.

This ruling applies for the following period

Year ending 30 June 2014

The scheme commenced on

1 July 20XX

Relevant facts and circumstances

You were employed by the Employer in a senior executive position.

You contract of employment (the Contract) with the Employer commenced several years ago. The term of the Contract is for a fixed term, ending in the 2016-17 income year.

Your Contract was terminated by the employer on during the relevant income year (the termination date).

Under the Contract, the Employer is required to pay you all leave entitlements plus a specific number of weeks' in lieu of notice.

You advised that on termination of your employment you received the following payments:

_ ordinary earnings up the termination date;

_ unused annual leave; and

_ specified number of weeks written notice

In a letter from the Employer states that:

Your original termination payment was calculated using the same principles as previous situation, being based on a redundancy payment within the ETP Cap of $180K…

…

Following your enquiry regarding the payment of superannuation, further advice was obtained from both Company A and Company B. They have advised to changes to the way your termination payment should have been calculated. These are:

1. Company A have determined that the ETP $180K Cap is not applicable in this situation but rather that your payment should now be regarded as 'time in lieu' and you are to be taxed under the 'Whole of Income' cap; and

2. Company B have reviewed our calculations based on this 'Whole of Income' cap and have also determined that under this cap, no tax free limit thresholds apply.

The result being that you will be paid an amount of [amount] superannuation on your [amount] payment. However as your termination payment is now considered 'time in lieu' its associated tax treatment has now changed.

…

You are over 55 and under 60 years of age

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 Section 82-135.

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

Income Tax Assessment Act 1997 Subsection 82-10(4)

Income Tax Assessment Act 1997 Subsection 82-10(5).

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

Income Tax Assessment Act 1997 Section 83-10.

Income Tax Assessment Act 1997 Section 83-85.

Income Tax Assessment Act 1997 Section 83-175.

Reasons for decision

Summary

The lump sum termination payment made to you by the Employer is an employment termination payment as it was made in consequence of the termination of your employment.

However, the payment does not include a genuine redundancy payment as it is considered that the prevailing, or most influential, cause of the termination of your employment was not redundancy.

After taking into account your other assessable income, the whole-of-income cap is nil. Therefor the payment in lieu of notice will be subject to tax at the top marginal tax rate of 46.5% (Medicare levy included).

Your unused annual leave will be subject to your marginal rates of tax.

Detailed reasoning

Employment termination payment

A payment is an employment termination payment if the payment satisfies all the requirements in section 82-130 of the Income Tax Assessment Act 1997 (ITAA 1997) and is not specifically excluded under section 82-135.

Subsection 82-130(1) of the ITAA 1997 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.

Payment 'in consequence of' the termination of employment

In this case, you entered into a fixed term contract of employment with the Employer which commenced several years ago. The Contract was to expire in the 2016-17 income year. However, your Contract was terminated by the Employer during the relevant income year.

As a result you received all your leave entitlements and an amount representing a specified number of weeks' pay in lieu of notice.

It is evident that the payment in lieu of notice was made to you 'in consequence of' the termination of your contract of employment. There is a nexus between the termination of your employment and the lump sum payment made to you during the relevant income year. The payment would not have been made had there been no termination of employment. The termination of employment and the payment are all intertwined and connected. If not for the termination of employment, the issue of paying a lump sum would not have arisen.

Payment received more 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 settlement sum must be received within 12 months of the employees termination of employment, unless they are covered by a determination exempting them from the 12 month rule.

As already noted in the facts, your employment was terminated in the relevant income year and the payment was made within 12 months from the termination date. Therefore this condition is satisfied for this particular payment.

Not a payment mentioned in section 82-135 of the ITAA 1997

Section 82-135 of the ITAA 1997 lists payments that are not employment termination payments. These include (among others):

_ superannuation benefits;

_ unused annual leave or long service leave payments;

_ foreign termination payments covered under Subdivision 83-D of the ITAA 1997; and

_ the tax-free part of a genuine redundancy payment or an early retirement scheme payment.

Clearly the payment is not for unused annual leave as you received a separate amount for this type of payment. We will now consider if any of it is a tax free part of a genuine redundancy payment.

Genuine redundancy payment

A payment made to an employee is a genuine redundancy payment if it satisfies all criteria set out in section 83-175 of the ITAA 1997.

Under subsection 83-175(1) of the ITAA 1997, four criteria must be satisfied:

_ The payment must be received in consequence of a termination.

_ That termination must involve an employee being dismissed from employment.

_ That dismissal must be caused by the redundancy of the employee's position.

_ The redundancy payment must be made genuinely because of a redundancy.

As already noted above, it is evident that the payment in lieu of notice was made in consequence of the termination of your employment. Therefore, the first criterion has been met.

The termination of your employment was initiated by the Employer and not by yourself. Accordingly, you were dismissed from your employment and thus the second criterion has been met.

At the time of the termination of your employment you occupied a senior executive position. It is noted that this position is a continuing position that exists independently of the person who fills it.

In a news release issued by the Employer at the time of the termination of your employment it is stated that another person was appointed to the senior executive position.

In light of this, it is clear that your dismissal was not caused by the redundancy of your position, that is, the senior executive position. Accordingly, the third criterion has not been met.

As a consequence, it cannot be said that the payment in lieu of notice was made genuinely because of a redundancy. Accordingly, the fourth criterion has not been met.

As not all of the four criteria under subsection 83-175(1) of the ITAA 1997 have been met, the payment in lieu of notice will not qualify as a genuine redundancy payment. It therefore follows that no part of the payment in lieu of notice is a tax-free part of a genuine redundancy payment.

Whole-of-income cap

From 1 July 2012, employment termination payments may be subject to a non-indexed whole-of-income cap (subsection 82-10(4) of the ITAA 1997). This cap will apply with the existing employment termination payment cap rules on some employment termination payments.

Employment termination payments in excess of the whole-of-income cap are taxed at the top marginal tax rate (currently 46.5% including the Medicare levy).

The whole-of-income cap only applies to certain employment termination payments. These are called 'non-excluded employment termination payments'. Non-excluded employment termination payments include:

_ payments that do not qualify as genuine redundancy payments;

_ golden handshakes;

_ payment for rostered days off;

_ payment for unused sick leave;

_ gratuities.

The whole-of-income cap does not apply to 'excluded employment termination payments'. Excluded employment termination payments include:

_ payments that are genuine redundancy payments, or that would be genuine redundancy payments but for the age or retirement restriction; or

_ payments that are early retirement scheme payments; or

_ invalidity segments, or what would be invalidity segments included in such payments but for the last retirement day restriction; or

_ an employment termination payment which is paid principally to compensate a person for a genuine dispute arising out of personal injury, unfair dismissal, harassment or discrimination.

The whole-of-income cap is $180,000 reduced by any other taxable income earned in the income year either before or after receiving the employment termination payment. Other taxable income is simply assessable income minus deductions you are entitled to.

Taxable income includes:

_ salary or wage income (including payments for overtime);

_ bank interest;

_ bonuses;

_ accrued leave you may have been paid when your job was terminated;

_ taxable component of other employment termination payments received earlier in the same income year.

You advised that you received in the relevant income year the following:

_ salary or wage income up to date of termination

_ unused annual leave

_ payment in lieu of notice

As noted earlier, the $180,000 whole-of-income cap is reduced by the other taxable income you received in the income year. As the result is a negative amount, the whole-of-income cap is zero.

As whole-of-income cap is zero the payment in lieu of notice will be subject to tax at the top marginal tax rate of 46.5% (Medicare levy included).

Unused annual leave

Under subsection 83-10(3) of the ITAA 1997 a payment that is received in consequence of the termination of employment is an 'unused annual leave payment' if it is:

_ for annual leave that the person has not used; or

_ is a bonus or other additional payment for annual leave the person has not used; or

_ for annual leave, or is a bonus or other additional payment for annual leave, to which the person was not entitled just before the employment termination, but that would have been made available to the person at a later time if it were not for the employment termination.

Unused annual leave payments are included as assessable income under subsection 83-10(2) of the ITAA 1997.

A tax offset is available under section 83-15 of the ITAA 1997 to ensure that the rate of tax on an unused annual leave payment does not exceed 30% to the extent that:

_ the payment was made in connection with a payment that includes, or consists of, any of the following:

• a genuine redundancy payment;

• an early retirement scheme payment;

• the invalidity segment of an employment termination payment or superannuation benefit; or

_ the payment was made in respect of employment before 18 August 1993.

In your case, as the payment for unused annual leave was not made in connection with the payment types listed above, the tax offset under section 83-15 of the ITAA 1997 will not apply. Accordingly, your unused annual leave will be subject to the marginal rates of tax.