Edited version of your written advice

Authorisation Number: 1013114833849

Date of advice: 11 November 2016

Ruling

Subject: Employment termination payment

Question

Is the payment for unused sick leave received by your client an employment termination payment under section 82-130 of the Income Tax Assessment Act 1997?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 201X

The scheme commences on:

1 July 201X

Relevant facts and circumstances

Your Client commenced employment with the Employer several years ago. Your Client has held various positions with the Employer including positions as Official A and Official B.

Several years ago changes were made to the wages and conditions of officials. An option was provided for an official or an employee that before a particular year, an official may opt to accept the superannuation and long service conditions in lieu of the payment of unused sick leave. That option meant that superannuation employer contributions would increase by a percentage.

During the 200X-0X income year, Your Client chose to transfer to the new conditions which meant that at that point their sick leave entitlements were frozen and from a specific date in the 200X-0X income year, they received super employer contributions.

During the 200X to 201X-1X income year, Your Client was an official (Official A) which had high levels of responsibility in respect of the financial affairs of the Employer. This included the finances of the office, all official correspondence and compliance documents including Audit reports and Fringe Benefits Tax returns. Your Client had a team of assistants that provided support and reported directly to their clients.

An extract provided from the Employer's rules and guidelines defines the role of Official A.

Your Client's terms of employment provided that he is entitled to be paid out for any unused sick leave accrued prior a specific date in the 200X-0X income year, upon ceasing to be an elected official of the employer.

A letter during the 200X-0X income year from the Employer to officials refers to employment conditions from a specific date in 200X for full-time officials. A note in the letter relating to Personal/Carer's Leave advised that some full time officials have an accumulation of sick leave prior to a specific date in 200X and have an entitlement to a payout of any unused part of this leave when they cease employment with the Employer.

In 201X Your Client made a decision that it was time for them to step aside from their position to allow for succession planning.

Your Client was appointed by the members as an official (Official B) during the 201X-1X income year, a position that they have previously held which significantly involved fewer responsibilities, a completely different set of daily tasks and a reduced salary. Your Client's accrued annual leave and long service leave entitlements will be rolled over to their new position. The new terms of employment do not provide for the payout of any unused sick leave entitlements.

An extract provided from the Employer's rules and guidelines defines the role of Official B.

Your Client is still currently employed as Official B.

A payment summary - employment termination payment from the Employer stated that an amount was paid to Your Client in the 201X-1X income year and there was an amount of tax withheld.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 80-5.

Income Tax Assessment Act 1997 Section 82-130.

Income Tax Assessment Act 1997 Subparagraph 82-130(a)(i).

Income Tax Assessment Act 1997 Section 82-135.

Income Tax Assessment Act 1997 Section 995-1

Reasons for decision

Summary

The payment for unused sick leave to be received by Your Client is an employment termination payment under section 82-130 of the ITAA 1997 as it is:

_ received by your client in consequence of the termination of holding an office;

_ it is received no later than 12 months after that termination; and

_ it is not a payment excluded from being an employment termination payment.

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.

Subsection 82-130(1) of the ITAA 1997 declares:

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

The above three conditions need to be satisfied in order for the payment to be treated as an employment termination payment.

Failure to satisfy any of the three conditions will result in the payment not being considered an employment termination payment.

Termination of employment

The first requirement under section 82-130 of ITAA 1997 is that the payment must be made in consequence of the termination of the employment.

For a termination of employment to be effective, the termination must be real and not merely illusory.

In Reseck v. Federal Commissioner of Taxation (1975) 49 ALJR 370; (1975) 6 ALR 642; (1975) 75 5ATR 538; (1975) 75 ATC 4213; (1975) 133 CLR 45 (Resecks Case), Justice Gibbs made the following comments:

In most cases in which a workman ceased his employment on a Friday and commenced employment again with the same employer on the following Monday it would be impossible to say that his employment had ever been terminated. If there were a contract agreement or arrangement whereby the employment of the workman was terminated and re-commenced it would no doubt be possible to invoke the provisions of s 260 of the Act, but even without the aid of that section in many cases when all the facts had been regarded the proper conclusion to be drawn would be that there had been no termination of the workman's employment at all.

Therefore, if a person purports to resign from their employment and is subsequently re-employed with the same employer the following working day then it would be considered unlikely that there was an effective termination of employment.

In the present case, Your Client's role up until the 201X-1X income year was as Official A with the Employer. Your Client's role as Official A was effectively terminated during the 201X-1X income year, and Your Client was re-employed by the same employer as Official B with the Employer. Based on Reseck's Case above, it would be unlikely that there was a termination of employment.

Holding an office

For the purposes of subparagraph 82-130(a)(i) of the ITAA 1997 stated above, section 80-5 extends the ordinary meaning of employment to include the holding of an office.

The Butterworths Australian Legal Dictionary states the following regarding the meaning of the term office:

1. A position of authority to which duties and functions are attached 2. In relation to income tax assessment, a position of defined authority in an organisation (for example, company director, president of a club, holder of a position with statutory powers) 3. A post or employment that is subsisting, permanent position existing independently of the person who fills it, and that goes on and is filled in succession by successive holder 4. In relation to corporations, reference is made to the office of director in Corporations Law ss 224, 227 (vacation of office, removal from office).

The term 'office' is not defined in the ITAA 1997 but it has been considered in a number of cases.

In the Administrative Appeals Tribunal (AAT) decision AAT Case 8603 (1993) 93 ATC 148; (1993) 25 ATR 1082, Deputy President BJ McMahon dealt with a case of a woman who had been an Inspector of Schools and who became (when that position phased out) a Cluster Director. Paragraphs 14 and 15 read as follows:

14. The word “office” is a word that had been considered in many cases but no satisfactory definition has emerged. As was pointed out in Grealy's case [Grealy v. Commissioner of Taxation (1989) 24 FCR 405; (1989) 20 ATR 403; (1989) 89 ATC 4192] the word usually connotes a position of defined authority in an organisation, such as a director of a company, or a tertiary education body. Their Honours held (at 4197 column 2) that it was not a word normally applicable to a relatively low level employee, such as a university lecturer. As the court observed the applicant, like many holders of professional employment, is not made an office holder merely because her position has a name.

15. This view was consistently taken by the Boards of Review. For example, in Case K4, 78 ATC 29 [(1978) 22 CTBR (NS) 212], Mr Dempsey suggested that an office connotes something more than substantial, something more in the nature of a continuing executive position, the holder of which has distinct responsibilities. In Grealy's case itself, their Honours noted that the word “office” usually connoted a position of defined authority. [additional case citations added]

AAT Case 12,178 (1997) 97 ATC 407; (1997) 37 ATR 1174 concerned a taxpayer who received a payment in respect of unused sick leave when he resigned from his position as a Branch Manager after having successfully won a position of Division Director for the same employer (a local council). In determining the case, one of the issues raised was whether the taxpayer was the holder of an office and whether a retirement or termination had occurred. In that case, Senior Member J Block stated:

The test as to whether a position is an office will no doubt usually be one involving questions of fact and degree...

In his findings, Senior Member Block also referred to previous cases which looked at the issue of office and at (ATC) 421; (ATR) 1189, he made the following observation:

In Great Western Railway Co v. Bater [1920] 3 KB 266 Rowlett J had held that an office was “a subsisting, permanent, substantive position which had an existence independent of the person who filled it, which went on and was filled in succession by successive holders”.

I consider, with respect, that the meaning attributed to the term “office” by Deputy President Thompson in W31 [Case No VT 87/3438 (1989) 20 ATR 3509; (1989) 89 ATC 307] is for Australian purposes, correct. That test would require that it is a position to which “duties are attached, especially a place of trust, authority or service under constituted authority”. It is thus clear that the restricted UK view is narrow, when contrasted with the less restricted Australian approach. [bold emphasis and additional case citations added]

In the present case, Your Client was elected to the position of Official A in 200X. Your Client held that position from 200X to the 201X-1X income year.

It is clear from the information provided that the position of Official A is a subsisting, permanent substantive position which has an existence independent of the person who filled it, which will continue to be filled in succession by successive holders. This position was vested with high levels of responsibility and duties with the Employer.

Accordingly, it is considered that the position held by Your Client would constitute an office within the meaning of section 80-5 of the ITAA1997.

Paid as a consequence of the termination of employment

The phrase 'in consequence of termination of employment' in subparagraph 82-130(a)(i) of the ITAA 1997 is not defined in the legislation. However, the courts have considered the meaning of the words 'in consequence of' in relation to eligible termination payments (ETPs), the predecessor of employment termination payments.

Of note are the decisions made in Reseck's case 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's case)

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 Commissioner in Taxation Ruling TR 2003/13 considered the phrase 'in consequence of' as interpreted by the Courts. 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 noted above, the position of Official A is considered to be the holding of an office. Therefore, ceasing to hold the office would constitute a termination of employment for the purposes of subparagraph 82-130(a)(i) of the ITAA 1997.

Your client held the office of Official A from 2007 to the 201X-1X income year.

It is noted that your client, upon ceasing to hold the office, was elected into the position of Official B during the 201X-1X income year.

The new position engages your client in a different role with fewer responsibilities, a completely different set of daily tasks and a reduced salary

Notwithstanding that your client still holds an office with the Employer, it is accepted that by vacating their previous position your client has ceased to hold the office of Official A. As noted earlier, this would constitute a termination of employment for the purposes of subparagraph 82-130(a)(i) of the ITAA 1997

Under the terms of Your Client's employment, they are entitled to be paid out for any unused sick leave accrued prior to mid 200X upon ceasing employment with the Employer. Your Client ceased to hold the elected office of Official A, Your Client's unused sick leave was paid out.

As Your Client's unused sick leave payout follows as an effect, or a result, from the termination of employment, it is considered that the payment will be made in consequence of the termination of employment and will be an employment termination payment if it also satisfies the other requirements under section 82-130 of the ITAA 1997.

The payment is received no later than 12 months after termination

The second condition for the payment to meet the criteria, as an employment termination payment is stated under paragraph 82-130(1)(b) of the ITAA 1997. The payment must be received within 12 months of your termination of employment, unless you are covered by a determination exempting you from the 12 month rule.

As noted in the facts, the unused sick leave payout was made during the 201X-1X income year which is within 12 months after Your Client ceased to hold the office of Official A. Therefore, this requirement will be satisfied.

Exclusions under section 82-135 of the ITAA 1997

Certain payments made on termination of employment are excluded from being an employment termination payment under section 82-135 of the ITAA 1997. These payments include any accrued annual and long service leave and the tax-free parts of a genuine redundancy payment or an early retirement scheme payment as well as other types of payments which do not apply to an employment termination payment.

In this case, as unused sick leave is not a payment listed in section 82-135, this requirement is satisfied.

Conclusion

As the payout of Your Client's unused sick leave satisfies all the requirements under section 82-130 of the ITAA 1997, it is an employment termination payment