Edited version of your written advice

Authorisation Number: 1051479405338

Date of advice: 1 February 2019

Ruling

Subject: Employment termination payments

Question 1

Is the Allowance made by the Employer to an eligible employee (an employee) on termination of employment an employment termination payment (ETP) for the purposes of section 82-130 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer: No.

Question 2

If payment of the Allowance is an ETP, and it is made to an employee who is made redundant and is under 55 years of age, would the Allowance be considered a genuine redundancy payment for the purposes of section 83-175 of the ITAA 1997?

Answer: No, not an ETP.

Question 3

If payment of the Allowance is an ETP, and it is made to an employee whose position is made redundant and they are over 55 years of age, would the Allowance be considered a genuine redundancy payment for the purposes of section 83-175 of the ITAA 1997?

Answer: No, not an ETP.

Question 4

Where the Allowance is paid in instalments whilst an employee is employed, are any instalments received by the employee after termination of employment an ETP?

Answer: No.

Question 5

Where the Allowance is paid in instalments whilst an employee is employed, are the instalments subject to PAYG withholding obligations under the Taxation Administration Act 1953 (TAA) at the time of payment of each instalment?

Answer: Yes.

This ruling applies for the following periods:

Year ending 30 June 2019

Year ending 30 June 2020

Year ending 30 June 2021

Year ending 30 June 2022

The scheme commences on:

1 July 2018

Relevant facts and circumstances

The Employer currently employs in excess of 1,000 individuals.

The terms and conditions for a significant number of the Employer’s employees are set out in an Enterprise Agreement (the EA).

Pursuant to an Appendix (the Appendix) to the EA, employees who have been in continuous employment with the Employer since prior to a specified date (eligible employees) are entitled to an allowance (the Allowance).

The Allowance is calculated at x weeks service per completed year of the eligible employee’s service, which accrues progressively over time and is paid out at the employee’s ordinary rate of pay in their substantive role.

The conditions and timing for payment of the Allowance, as shown in the Appendix to the EA, show:

Cashing-out whilst employed

(a) An eligible employee may elect to cash-out their accrued Allowance entitlement at any time while they are an employee of the Employer during their period of employment.

(b) Where an eligible employee elects to cash-out their Allowance, the value of the employee’s entitlement crystallises and is fixed in monetary terms from the date of their first cash-out. No further entitlement to the Allowance will accrue after the election was made by the employee.

(c) An employee who elects to cash-out their Allowance has the option of receiving:

● their full entitlement in one payment; or

● spread their cashing-out over up to ‘y’ successive financial years, with one payment per financial year. The amount to be cashed –out must be spread equally across the cashing-out periods.

Cashing-out on termination of employment

An eligible employee, who does not elect to cash-out their Allowance during their period of employment with the Employer, will automatically receive payment of their Allowance in circumstances such as:

● retirement, where the employee is 55 years or older;

● retirement, where the employee is medically unfit to continue to perform the inherent requirements of their position;

● redundancy; or

● death of the employee whilst in the employ of the Employer.

In circumstances where eligible employees (those covered by a clause in the Appendix to the EA) who:

(a) have not elected to cash out the Allowance at any time prior to termination of their employment; and

(b) do not satisfy the circumstances for automatic payment on termination; and

(c) are not summarily dismissed from employment,

will, as the result of a policy decision the Employer intends to make, receive the same Allowance using the method of calculating their entitlement in accordance with a clause in the Appendix to the EA.

The Allowance was introduced by the Employer as a retention scheme to encourage eligible employees to remain with the Employer.

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 Section 82-135

Income Tax Assessment Act 1997 Section 83-175

Taxation Administration Act 1953 Section 12-35 of Schedule 1

Reasons for decision

Summary

The Allowance, which can be paid whilst an eligible employee (Employee) is still employed or upon termination of employment, is not an employment termination payment (ETP) as it is not conditional on termination of employment for it to be paid.

As the Allowance is not in consequence of termination of employment it does not meet one of the main requirements of a genuine redundancy payment.

The Allowance is subject to PAYG withholding tax obligations at the time of payment.

Detailed reasoning

Questions 1 and 4

Employment termination payment

A payment is an ETP 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 ETPs. 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 ETP, 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 ETP.

Paid as a consequence of the termination of employment

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. (emphasis added)

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 i.e. but for the termination of employment the payment would not have been made, 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 facts show Employees are entitled to the Allowance which is calculated at a particular number of weeks service per completed year of the Employee’s service. Employees, regardless of age, can elect for payment of the Allowance, as a lump sum or instalments, at any time and continue employment with the Employer. Evidently, a payment made subject to an election (the election) is not an ETP as there is no termination of employment nor is termination a condition for payment.

If an election is not made an Employee’s entitlement to the Allowance, in accordance with an Appendix to the EA, is automatically paid to them circumstances such as:

● retirement, where the Employee is 55 years or older;

● retirement, where the Employee is medically unfit to continue to perform the inherent requirements of their position;

● redundancy; or

● death of the Employee whilst in the employ of the Employer.

In circumstances where Employees who:

(a) have not elected to cash out the Allowance at any time prior to termination of their employment; and

(b) do not satisfy the circumstances listed in the Appendix to the EA for automatic payment on termination; and

(c) are not summarily dismissed from employment,

will, as the result of a policy decision the Employer intends to make, receive the same Allowance using the method of calculating their entitlement in accordance with a clause in the Appendix to the EA.

Though payment of the Allowance can coincide with a termination of employment this does not in itself indicate the payment is made in consequence of the termination of employment. As mentioned previously, it must be established that but for the termination of employment the payment would not have been made.

The facts show the Allowance is made to Employees regardless of whether they remain in employment or terminate employment. Further, it is also considered that the reason why the Employer introduced the Allowance and the quantum an Employee may receive would have a bearing on when an Employee decides to receive payment of their Allowance entitlement.

The Allowance was introduced by the Employer as a retention scheme to encourage Employees to remain with the Employer.

Though not linked to Employee work performance or the Employer’s financial performance, the Allowance acts as a bonus or incentive to ensure Employees remain with the Employer.

As the quantum paid to Employees is calculated on the basis of a particular number of weeks service per completed year of service it follows, the longer an Employee remains with the Employer the greater the amount the Employee will receive. Hence, where an Employee does not elect to receive their Allowance at any time during employment they are deferring payment of their entitlement to a later date; a date which could be when employment is terminated which results in a greater calculated amount being paid.

Accordingly, it is considered the Allowance being paid around the time of an Employee’s termination of employment is not in consequence of the termination of employment. Rather, it represents an Employee’s decision to defer receipt of their accrued entitlement to the Allowance, which could have been taken at any stage during their employment, to coincide with their termination of employment.

In view of the above the Allowance is not an ETP as it 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 ETP. 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 Allowance is an ETP.

Questions 2 and 3

Genuine redundancy payment

A payment made to an employee is a genuine redundancy payment if it satisfies all requirements 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 2009/2 Income tax: genuine redundancy payments (TR 2009/2)) is that the payment must be made in consequence of termination of employment.

In TR 2009/2 the Commissioner of Taxation considers that there are four necessary components within the termination requirement:

● The payment being tested must be received in consequence of an employee’s termination.

● That termination must involve the employee being dismissed from employment.

● That dismissal must be caused by the redundancy of the employee’s position.

● The redundancy payment must be made genuinely because of a redundancy.

As discussed earlier, the Allowance is not in consequence of termination of employment. Accordingly, the Allowance cannot be a genuine redundancy payment as it does not satisfy the in consequence of termination of employment requirement.

Question 5

PAYG withholding tax

Section 12-35 of Schedule 1 to the Taxation Administration Act 1953 (TAA) provides that you must withhold an amount from a payment of salary, wages, commission, bonuses or allowances you pay to an individual as an employee.

Section 11-5 (1) of Schedule 1 to the TAA states:

‘In working out whether an entity has paid an amount to another entity, and when the payment is made, the amount is taken to have been paid to the other entity when the first entity applies or deals with the amount in any way on the other 's behalf or as the other directs.’

The Employer’s offer within the EA to pay an eligible employee’s entitlement over a period of instalments does not apply or deal with the amount in any way that would have the effect of discharging or reducing the Employer’s liability to the employee.

It is considered that an Employee’s election to receive their allowance entitlement over a number of instalments will not constitute payment in accordance with section 11-5 (1) of Schedule 1 to the TAA as the unpaid instalments are not applied or dealt with on the employee’s behalf until the time they are physically paid to the employee.

This position is further clarified in Taxation Ruling TR 98/1 which states at paragraph 42:

‘Income from employment would normally be assessable on a receipts basis. Salary, wages or other employment remuneration are assessable on receipt even though they relate to a past or future income period.’

Therefore, the Employer will be required to withhold from payments under section 12-35 of the TAA at the time of payment of each instalment.