Edited version of your written advice

Authorisation Number: 1012841630660

Date of advice: 17 July 2015

Ruling

Subject: Employment termination payment

Question 1

Is the retention payment received by your client considered to be an employment termination payment in accordance with section 82-130 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

Question 2

Is any part the retention payment received by your client a genuine redundancy payment in accordance with section 83-170 of the ITAA 1997?

Answer

No.

Question 3

Is the performance payment received by your client considered to be an employment termination payment in accordance with section 82-130 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

Question 4

Is any part the performance payment received by your client a genuine redundancy payment in accordance with section 83-170 of the ITAA 1997?

Answer

No.

This ruling applies for the following periods:

Year ended 30 June 20YY

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

During the 20XX-YY income year your client commenced a new position with their Employer.

During the 20XX-YY income year your client's employment was terminated.

Your client's role exclusively related to specific operations of the Employer's group, conducted under a separate legal entity.

You state that although your client was employed by the Employer, they supervised and managed the operations of the employees under the separate legal entity.

A letter from the Employer advises your client of a performance payment. It states that your client will be eligible for this payment based on their performance over a specified period of employment. This payment will be made at a specified date, or if your client resigns prior to this date then a payment based on the performance up to the last qualifying date of employment.

A second letter from the Employer advises your client of the potential sale of an asset and offered your client retention payments to continue their employment. If the sale was agreed to by a certain date then your client would be eligible for a retention payment. This payment will be paid on a specified date or earlier if your client's position was made redundant. If the sale was not agreed to by a certain date, your client will be eligible for a smaller retention payment. This payment will be made on a specified date.

The Employer describes the retention payments as incentive payments to ensure employees to continue to be motivated and committed to performing their duties during the sale discussions and for a period of time following the sale.

Following the sale of the asset, many employment positions ceased to exist.

Some of the Employer's positions were made redundant. Some of the positions continued as they had various other employment activities which did not exclusively relate to the specific operations of the Employer's group conducted under a separate legal entity.

Your client's position with the Employer was made redundant as their employment activities exclusively related specific operations of the Employer's group conducted under a separate legal entity.

A letter from the Employer confirms your client's redundancy. It states your client is entitled to a number of payments including the retention payment and performance payment.

A PAYG payment summary was provided which includes both the retention payment and performance payment.

In a letter, the Employer provided your client with a statement of service which states that they were employed by the Employer until the termination date and throughout their employment they were 100% assigned to specific operations of the Employer's group conducted under a separate legal entity.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 82-130.

Income Tax Assessment Act 1997 section 82-135.

Income Tax Assessment Act 1997 section 83-170.

Income Tax Assessment Act 1997 section 83-175.

Reasons for decision

Summary

The retention payment and the enhanced performance payment are not employment termination payments as they were not made in consequence of termination of employment.

As the payments are not in consequence of termination of employment they do not meet one of the main requirements of a genuine redundancy payment.

Detailed reasoning

Employment termination payment

A payment is an employment termination payment if it 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:

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 the 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 employer 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.

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

Paid as a 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.

In light of these decisions, the Commissioner discusses the meaning of the phrase in Taxation Ruling TR 2003/13 titled Income tax: eligible termination payments (ETP): payments made in consequence of the termination of any employment: meaning of the phrase 'in consequence of' (TR 2003/13).

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. (emphasis added)

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.

The phrase in consequence of termination of employment has been interpreted by the courts in several cases.

Of note are the decisions made by the High Court in Reseck v. Federal Commissioner of Taxation (1975) 49 ALJR 370; (1975) 6 ALR 642; (1975) 5 ATR 538; (1975) 75 ATC 4213; (1975) 133 CLR 45 (Reseck) and the Full Federal Court 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 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 in my opinion necessary that the termination of the services should be the dominant cause of the payment...(emphasis added).

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'.

In looking at the phrase 'in consequence of' the Full Federal Court in McIntosh considered the decision in Reseck. Justice Brennan considered the judgments of Justice Gibbs and Justice Jacobs in Reseck and concluded that their Honours were both saying that a causal nexus between the termination and payment was required, though it was not necessary for the termination to be the dominant cause of the payment.

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.

Furthermore, in Le Grand v. Federal Commissioner of Taxation [2002] FCA 1258; (2002) 124 FCR 53; (2002) 195 ALR 194; (2002) 2002 ATC 4907; (2002) 51 ATR 39 (Le Grand), the issue before the court was whether an amount received by the applicant as a result of accepting an offer of compromise in respect of claims brought by him against his former employer, in relation to the termination of his employment was in whole, or in part, an ETP. It was held that a settlement payment for litigation in relation to a taxpayer's dismissal was an ETP.

Justice Goldberg stated:

I am satisfied that there is a sufficient connection between the termination of the applicant's employment and the payment to warrant the finding that the payment was made 'in consequence of the termination' of the applicant's employment. I am satisfied that the payment was an effect or result of that termination in the sense that there was a sequence of events following the termination of the employment which had a relationship and connection which ultimately led to the payment. True it is that the payment was made not only to settle the applicant's claim for common law damages for breach of the employment agreement but also for statutory damages...

Justice Goldberg concluded that the test for determining when a payment is made in consequence of the termination of employment is that which was articulated by Justice Gibbs in Reseck. Thus, for the payment to have been made in consequence of the termination of employment, the payment must follow as an effect or result of the termination of employment. As earlier stated in paragraph 6 of TR 2003/13, there must be 'a causal connection between the termination and the payment even though the termination need not be the sole or dominant cause of the payment'.

The essence of this analysis is that if the payment follows as an effect or a result of 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.

The question of whether a payment is made in consequence of the termination of employment is determined by the relevant facts and circumstances of each case.

The retention payment

From the facts provided, the Employer offered your client retention payments to continue their employment due to the potential sale of an asset and the uncertainty surrounding that time.

The Employer offered to pay your client different retention payment amounts depending on whether the sale was agreed to by a certain date. In each scenario your client would still be paid a retention payment.

The Employer describes the retention payments as a plan to ensure all employees continue to be motivated and committed to performing their role during the sale discussions and for a period of time following the sale of the asset.

The retention payments offered were a financial incentive for your client to complete their duties as an employee for a specified period. The offer of the retention payments were conditional on your client remaining employed until the payment due date or an earlier date if his position ceased, and to continue diligently performing his role for that period. Further, your client was required to provide assistance and co-operation in respect of any requests made to him concerning the sale process.

In this case, while your client's eligibility for the retention payment coincided with the termination of employment, the payment was not made in consequence of the termination of your client's employment. Rather, the retention payment was made as a financial incentive to ensure that your client's employment continued for an agreed period until a specified date.

Further, certain conditions had to be satisfied to receive the retention payment. These conditions included your client remaining employed until the payment due date or an earlier date upon his/her position with the Employer ceasing, and continued to diligently perform his/her role until that specified time. There was no condition to terminate employment. As the facts show, the payment was made to redundant staff as well as continuing staff.

Accordingly, there is no causal connection between the termination and the payment. The retention payment was not conditional on the termination of your client's employment. It cannot be said that the retention payment followed on as an effect or a result of the termination of employment. Therefore, the retention payment is not considered to be made in consequence of the termination of employment.

Ultimately, a distinction has been made between the retention payment being paid as a consequence of retaining your client's employment as opposed to being paid as a consequence of the termination of that employment.

The retention payment is therefore not considered to be received in consequence of the termination of employment and hence does not satisfy the requirement under subparagraph 82-130(1)(a)(i) of the ITAA 1997.

As previously mentioned, all the conditions under subsection 82-130(1) of the ITAA 1997 must be satisfied before a payment is considered an employment termination payment. As the condition under subsection 82-130(1) has not been met, it is not necessary to discuss the other conditions to determine whether the retention payment is an employment termination 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. One of the main requirements of a genuine redundancy payment that must be satisfied (which is also discussed in Taxation Ruling TR 2009/02) is that the payment must be made in consequence of termination of employment.

In this case as the retention payment is not made in consequence of termination of employment, the payment cannot satisfy the requirements of a genuine redundancy payment.

The performance payment

From the facts provided, a letter from the Employer invited your client to a performance payment scheme covering a specified period. The conditions of the scheme were set out in the letter, and shows that the payment is linked to the performance of the employee over a specified period.

The payment will be made at a certain date. However, if your client resigns from their position before this date, they will receive a payment based on the points accrued up to the last qualifying day of employment.

Further, the letter from the Employer regarding the retention payments confirms that the performance scheme will remain as previously detailed and is not affected by the retention payments offered. However, should your client's employment be terminated on or prior to a certain date as a result of the sale process, your client will be eligible for the full service period payable, subject to certain conditions. Under these circumstances, the performance payment will be paid at the end of the notice period.

It is evident that the performance payment is an amount your client would have received had he continued employment beyond the termination date. The only effect of the termination of your client's employment was to bring forward the payment date.

Further, the payment was performance linked and subject to certain conditions which had to be satisfied. The payment was subject to conditions relating to performance, values and leadership. The fact that the payment date was brought forward does not change this. As the facts show, the payment would have been made whether employment continued or terminated.

As such, the performance payment is not considered to be received in consequence of the termination of employment and hence do not satisfy the requirement under subparagraph 82-130(1)(a)(i) of the ITAA 1997.

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

Genuine redundancy payment

As mentioned earlier, 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. One of the main requirements of a genuine redundancy payment that must be satisfied is that the payment must be made in consequence of termination of employment.

In this case as the performance payment is not made in consequence of termination of employment, the payment cannot satisfy the requirements of a genuine redundancy payment.