Edited version of your written advice

Authorisation Number: 1012917670818

Date of advice: 26 November 2015

Ruling

Subject: Employment termination payment

Questions

Is the payment to be received by a person (Your Client) in the 2015-16 income year from their former employer (the Employer) an employment termination payment in accordance with section 82-130 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answers

Yes

This ruling applies for the following period

Income year ending 30 June 2016

The scheme commenced on

1 July 2015

Relevant facts and circumstances

Your Client was employed by the Employer overseas.

After commencing employment with the Employer, Your Client became a member of an Australian defined benefits superannuation fund (the Plan).

The Plan was wound up in the 20XX-XX income year and Your Client's entitlement in the Plan was transferred to another superannuation fund where it continued to accumulate.

As a result of the transfer, the Employer agreed to calculate the benefits Your Client would have received from the Plan on Your Client's termination of employment on the basis that the Plan was never closed in the 20XX-XX income year and continued to the present date. Once it was established what Your Client would have received, but for the closure of the Plan, the Employer would then look at the current balance of the funds they received from the Plan following its closure. The Employer would then pay Your Client the difference if the closure of the Plan had a negative effect on their superannuation investment.

In the 20YY-YY income year, Your Client retired. As a result, Your Client was paid a termination payment.

During the 20ZZ-ZZ income year, you, on behalf of Your Client, wrote to the Employer contending that Your Client's termination should have been treated as a redundancy and demanded the payment of their full redundancy entitlement. The Employer subsequently rejected the redundancy claim.

Several months later, the Employer advised Your Client that Your Client did not suffer any loss due to the closing of the Plan but, in fact, had a financial gain. Therefore, there was no shortfall in the balance of Your Client's superannuation account compared with their entitlement under the Plan.

Your Client disagreed with the Employer's advice and obtained an actuary's report stating that there was, in fact, a specified shortfall in respect of their entitlement under the Plan and informed the Employer accordingly.

The Employer disagreed with the specified shortfall and obtained an actuary's report stating that there was a shortfall in the balance of Your Client's superannuation account which was less than the amount in the report obtained by Your Client.

To settle the dispute with regard to the actual amount of the shortfall, Your Client advised the Employer that they would accept an amount of the shortfall which was between the amounts specified in two actuary's reports.

The Employer accepted the offer of settlement made by Your Client and to create a final settlement, the parties agreed to enter into a Deed of Release.

The settlement payment (the Settlement Sum) is to be paid within three weeks of this ruling.

Your Client is covered by a determination made by the Commissioner under subsection  82-135(5) of the ITAA 1997

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 Settlement Sum to be paid to Your Client by the Employer is an employment termination payment in accordance with section 82-130 of the ITAA 1997.

Detailed reasoning

Employment termination payment

A payment is an employment termination payment (ETP) if it satisfies all the requirements in section 82-130 of ITAA 1997.

Subsection 82-130(1) of the ITAA 1997 states that a payment is an ETP 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.

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

Payment is made '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. Whilst the courts have divergent views 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 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).

While TR 2003/13 contains references to repealed provisions, some of which may have been rewritten, the ruling still has effect as both the former provision under the Income Tax Assessment Act 1936 and the current provision under the ITAA 1997 both use the term 'in consequence of' in the same manner.

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

5. ...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 this case, it was agreed when the Plan was closed that a payment would be made on termination of Your Client's employment to ensure that Your Client was in the same position at termination that they would have been in if they did not change superannuation funds. However, after Your Client's employment was terminated, Your Client disagreed with the accuracy of the Employer's calculations of the amount of shortfall arising out of the agreement in respect of the payment of superannuation benefits. To settle the disagreement in relation to the calculation of the shortfall amount, the parties agreed to set a shortfall amount and to evidence the agreement in accordance with a Deed of Settlement.

Based on the above, the Settlement Sum is to be paid in consequence of the settlement of a dispute between Your Client and the Employer. As the event that caused the dispute was the termination of Your Client's employment, it can be said that the payment follows as an effect or result of the termination of Your Client's employment with the Employer. That is, there was a sequence of connected events following the termination which ultimately lead to the payment.

Therefore, the payment of the Settlement Sum is in consequence of the termination of Your Client's employment.

Payment is received no later than 12 months after that termination

In this case, Your Client's employment was terminated in the 20YY-YY income year and the Settlement Sum has not been received by Your Client to date, which means that payment will be received more than 12 months after the termination.

However, as Your Client is covered by a determination made by the Commissioner under subsection 82-130(5) of the ITAA 1997, the 12-month rule does not apply in this case.

Payments mentioned in section 82-135 of the ITAA 1997

Section 82-135 of the ITAA 1997 lists certain payments that are not ETPs. The Settlement Sum is not a payment mentioned in subsection 82-135 of the ITAA1997.

Conclusion

The Settlement Sum to be received by Your Client is an ETP in accordance with section 82-130 of the ITAA 1997