Edited version of your written advice

Authorisation Number: 1012690952608

Ruling

Subject: Employment termination payments

Question

Will a payment be an employment termination payment (ETP) if the amount accrues during the period of employment but is only payable on termination of employment regardless of the reason for the termination of employment?

Answer

Yes

This ruling applies for the following periods

Income year ended 30 June 2014

Income year ending 30 June 2015

The scheme commenced on

1 July 2013.

Relevant facts and circumstances

You are a manager for the Company.

The Company employs individuals on fixed term contracts tied to specific projects. These project based employees work at sites where a site enterprise agreement applies.

You have provided a standard employment contract which refers to an enterprise agreement (the Agreement).

It is noted that the Agreement states an employee accrues a redundancy payment (the payment) on a certain basis for each completed week of service.

The Agreement specifies how the payment is determined. The payment is made for redundancy purposes and it is only made upon termination of employment.

You state that the amounts accruing are not held in the Company's accounts.

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.

Reasons for decision

Summary

A payment where the amount accrues during the period of employment but is only payable on termination of employment regardless of the reason for the termination of employment, does not preclude it from being an employment termination payment (ETP).

Notwithstanding the above, to be an ETP, a payment must also ensure other conditions for an ETP are satisfied.

Detailed reasoning

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

It is noted that the Agreement states an employee accrues a redundancy payment (the payment) on a certain basis for each completed week of service. The fact that the payment accrues over the period of employment does not preclude it being made 'in consequence of termination of employment'.

Reference in the Agreement to the payment accruing over an employee's period of service shows how the payment is determined. In relation to why the payment is made, it is clearly for redundancy purposes and it is only made upon termination of employment.

Accordingly, the facts show there is a direct causal connection between the payment and a termination of employment. If a termination of employment does not occur, then an employee is not entitled to the payment.

In this case, the payment under the Agreement would satisfy the first ETP condition as it is paid in connection with the termination of employment.

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 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.

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.

In this case, it should be noted that if the payment satisfies the genuine redundancy payment conditions in section 83-175 of the ITAA 1997, then only the amount in excess of the tax-free amount calculated under section 83-170 is an ETP.

Conclusion

If the payment satisfies all the conditions listed in subsection 82-130(1) of the ITAA 1997, then it would be considered an ETP, regardless of whether it accrues in accordance with an enterprise agreement.