Edited version of your written advice

Authorisation Number: 1012723946078

Ruling

Subject: Employment termination payment

Question

Is the payment received by the taxpayer an employment termination payment in accordance with section 82-130 of the Income Tax Assessment Act 1997?

Answer

No.

This ruling applies for the following period:

Income year ended 30 June 2014

The scheme commences on:

1 July 2013

Relevant facts and circumstances

One of your employees (the Taxpayer) has been on workers' compensation for the past couple of years.

During the relevant income year, you issued a notice of termination to the Taxpayer. The notice of termination provided the Taxpayer with four weeks' notice.

Four weeks later, the Taxpayer's employment was terminated.

The Taxpayer was not able to attend work during the four week notice period due to their injury.

You have included the Taxpayer's workers' compensation payment for the four week notice period in their payment summary as salary and wages.

The Taxpayer contends that the payment for the four week notice period should be treated as a payment in lieu of notice as they were unable to work during the four week notice period. The Taxpayer thus believes that the payment should be classified as an employment termination payment (ETP) with an invalidity segment.

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 subparagraph 82-130(1)(a)(i)

Income Tax Assessment Act 1997 subsection 82-135

Income Tax Assessment Act 1997 section 995-1

Workers' Compensation and Injury Management Act (WA) 1981 subsection 84AB(1)

Workers' Compensation and Injury Management Act (WA) 1981 subsection 84AB(2)

Fair Work Act (Cth) 2009 paragraph 117(2)(b)

Reasons for decision

Summary

The payment received by the Taxpayer is not an employment termination payment in accordance with section 82-130 of the Income Tax Assessment Act 1997 as it was not received by the Taxpayer in consequence of the termination of the Taxpayer's employment.

Detailed reasoning

Employment termination payment

Section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997) states that:

employment termination payment has the meaning given by section 82-130 of the ITAA 1997.

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.

Section 82-135 of the ITAA 1997 provides that certain payments are not employment termination payments, including:

_ payments for unused annual leave or unused long service leave;

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

_ reasonable capital payments for personal injury.

In this case, particular consideration is required in relation to the condition under subparagraph 82-130(1)(a)(i) of the ITAA 1997, which states that an employment termination payment must be made to a person in consequence of the termination of their employment.

Paid in consequence of the termination of employment

It should be noted that the phrase 'in consequence of the termination of your employment' is not defined in the legislation. However, both the Courts and the Commissioner have considered the meaning of this phrase.

The High Court considered the expression 'in consequence of' in Reseck v. Federal Commissioner of Taxation (1975) 133 CLR 45; (1975) 6 ALR 642; (1975) 49 ALJR 370; (1975) 5 ATR 538; (1975) 75 ATC 4213 (Reseck).

In Reseck Justice Gibbs stated:

Within the ordinary meaning of the words a sum is paid in consequence of the termination of employment when the payment follows as an effect or result of the termination… It is not my opinion necessary that the termination of the services should be the dominant cause of the payment.

While Justice Jacobs stated:

It was submitted that the words 'in consequence of' import a concept that the termination of the employment was the dominant cause of the payment. This cannot be so. A consequence in this context is not the same as a result. It does not import causation but rather a 'following on'.

The Full Federal Court considered the decision in Reseck in McIntosh v. Federal Commissioner of Taxation (1979) 25 ALR 557; (1979) 10 ATR 13; (1979) 45 FLR 279; (1979) 79 ATC 4325 (McIntosh).

In McIntosh, Justice Brennan stated:

Though Jacobs J. speaks in different terms, his meaning may not be significantly different from the meaning of Gibbs J... His Honour denies the necessity to show that retirement is the dominant cause, but he does not allow a temporal sequence alone to suffice as the nexus. Though the language of causation often contains the seeds of confusion, I apprehend his Honour to hold the required nexus to be (at least) that the payment would not have been made but for the retirement.

Suffice it to say that 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.

The meaning of the phrase was also considered by the Commissioner 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.'

In paragraphs 5 and 6 of TR 2003/13 the Commissioner states:

5. The phrase 'in consequence of' is not defined in the ITAA 1936. However, the words have been interpreted by the courts in several cases. Whilst there are divergent views as to the correct interpretation of the phrase, 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.

6. 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.

In the facts of this case, the Taxpayer's termination occurred four weeks after they received the notice, that is, after the conclusion of the notice period. This is the case even though they were unable to work during the notice period. This is consistent with the operation of workers' compensation legislation in relation to dismissals in a state of Australia.

According to subsections 84AB(1) and (2) of the Workers' Compensation and Injury Management Act 1981:

(1) An employer must not dismiss a worker to whom section 84AA(1) applies unless the employer has given to the worker and to WorkCover in accordance with subsection (2) a notice of intention to dismiss the worker.

(2) A notice of intention to dismiss a worker -

(a) is to be given to the worker and to WorkCover not less than 28 days before the dismissal is to take effect; and

(b) is to be in or to the effect of the form prescribed and contain substantially the information sought in the form.

The legislation clearly indicates that dismissal is not to take effect until 28 days after the notice of termination was issued. This is especially the case since section 84AB of Workers' Compensation and Injury Management Act 1981, unlike paragraph 117(2)(b) of the Fair Work Act (Cth) 2009, does not specify an option which allows for the notice period to be disregarded.

Once it has been established that the Taxpayer was terminated after the conclusion of the four week period, it becomes clear that the payment received by the Taxpayer cannot be in consequence of the termination of their employment. The reason for this is that it is not possible for a payment for the four week period to follow as an effect or result of an event that does not occur until a future point in time. There is no causal connection between the termination and the payment for the four week period and it could not be said that but for the termination of employment the payment would not have been made.

Instead, the payment for the four week period is a part of the Taxpayer's workers' compensation payments. The Taxpayer's workers' compensation payments arose as a consequence of the Taxpayer's injury and not the termination of employment and these payments would continue to be paid to the Taxpayer regardless of whether they were terminated or not.

In view of the above, the payment received by the Taxpayer for the four week notice period does not satisfy the condition under subparagraph 82-130(1)(a)(i) of the ITAA 1997 and therefore cannot be an employment termination payment.