Edited version of your written advice

Authorisation Number: 1012736059126

Ruling

Subject: Employment termination payment

Question

Is a job search allowance paid by an employer to its redundant employees an employment termination payment (ETP) in accordance with section 82-130 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

This ruling applies for the following periods:

Income year ending 30 June 2015

The scheme commences on:

1 July 2014

Relevant facts and circumstances

An employer (the Employer) is subject to an Award.

A clause within the Award deals with Workplace Change and Redundancy and, as far as relevant, states:

A redundant employee shall be entitled to the payment of a job search allowance of up to $2,500 to meet expenses associated with seeking other employment subject to proof of expenditure or on production of an invoice, and/or other appropriate documentation….

The Employer is proposing to make a job search allowance payment to former employees in accordance with the Award.

The Employer states that the job search allowance will be paid only to employees who have been made genuinely redundant; it would not be paid to employees who terminate their employment under normal circumstances.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 82-130.

Income Tax Assessment Act 1997 Section 82-135.

Income Tax Assessment Act 1997 Subsection 82-130(1).

Income Tax Assessment Act 1997 Subsection 995-1(1)

Reasons for decision

Summary

Although, the payment of a job search allowance may be considered an ETP by reason that but for the termination of employment the payment would not be made, the termination of employment is too weak a cause for the payment to be considered to be made in consequence of termination.

Because the payment is conditional on an employee incurring expenditure in seeking other employment, the substantial reason for the payment is an intervening event. As such, the termination of employment is too remote from the payment of job allowance for the payment to be in consequence of the termination.

Therefore, job search allowance payments are not ETPs for the purposes of section 82-130 of the ITAA 1997.

Detailed reasoning

By virtue of subsection 995-1(1) of ITAA 1997, employment termination payments are 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 lists payments that are not employment termination payments. These include (among others):

• superannuation benefits;

• unused annual leave or long service leave payments; and

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

To determine if a payment is an ETP, all the conditions in subsection 82-130(1) of the ITAA 1997 must be satisfied. Failure to satisfy any one of the conditions under subsection 82-130(1) will result in the payment not being considered an employment termination payment.

Paid 'in consequence of' the termination of your employment

The phrase 'in consequence of' is not defined in the ITAA 1997. However, the courts have interpreted the phrase in a number of cases. Taking into account the courts decisions on the meaning of this phrase, the Commissioner's view on the meaning and application of the 'in consequence of' test are set out in Taxation Ruling TR 2003/13 (TR 2003/13).

While TR 2003/13 considers the meaning of the phrase 'in consequence of' in the context of the eligible termination payments, TR 2003/13 can still be relied upon as both the former provision under the Income Tax Assessment Act 1936 and the current provision under the ITAA 1997 use the term 'in consequence of' in the same manner.

In paragraph 5 of TR 2003/13, the Commissioner states:

… 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:

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.

While the connection need not be the dominant cause, it can still be too remote for the payment to qualify. As stated at paragraph 6 of TR 2003/13, a determination as to the degree or connection between a payment and termination is a question of fact of each case.

The Commissioner goes on to state at paragraph 7 of TR 2003/13 that a payment made a long time after a termination may be 'too remote' to be considered to be made in consequence of termination. Another circumstance where a payment would not be in consequence of termination is where there is an 'intervening event' between the termination and the payment, such as the obtaining a right to commute a pension after the termination of employment.

In this instance, the payment is made to an eligible employee after they have been made redundant only if they undertake job search activities. That is, to receive the payment, the employee must undertake the relevant activities. It is not until after the employee has been terminated that the undertaking occurs therefore, there is an intervening event between the termination of employment and the relevant payment. This intervening event makes the payment too removed from the termination for the payment to be in consequence of termination.

Although, the payment of job search allowance may be considered an ETP by reason that but for the termination of employment the payment would not have been made, the termination of employment is too weak a cause for the payment to be considered to be made in consequence of termination. Because the payment is conditional on an employee incurring expenditure in seeking other employment, the substantial reason for the payment is an intervening event.

It is therefore considered there is insufficient causal nexus between the making of the payment and the termination of employment to say that the payment was made in consequence of the termination of employment.

As the primary condition of subsection 82-130(1) of the ITAA 1997 has not been met in respect of the payment, it is not necessary to consider the other conditions specified in that provision.

Accordingly, the payment of a job search allowance made by the Employer to an eligible employee is not an ETP for the purposes of section 82-130 of the ITAA 1997.