Edited version of private advice

Authorisation Number: 1051522786059

Date of advice: 29 May 2019

Ruling

Subject: Employment termination payment

Question 1

Is the payment made under section 37 of the Public Service Act 1999 an employment termination payment (ETP) under subsection 82-130(1) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

Question 2

Is the payment made under section 37 of the Public Service Act 1999 a genuine redundancy under subsection 83-175 of the ITAA 1997?

Answer

No

This ruling applies for the following period:

Income year ended 30 June 2019

The scheme commences on:

1 July 2018

Relevant facts and circumstances

1.     You were employed by the Employer, an agency of the Australian Public Service (APS), as a Senior Executive Service (SES) officer.

2.     Your total period of service with the APS was from DDMMYY to DDMMYY.

3.     Your employment as an SES officer with the Employer was terminated on DDMMYY when you accepted an incentive to retire under section 37 of the Public Service Act 1999.

4.     You state the reason you were offered an incentive to retire was due to losing the necessary skills to perform the role and would be replaced with a person who had those skills to meet the changing requirements of the role.

5.     On DDMMYY the written notice confirming that you have retired involuntarily, under section 37 of the Public Service Act 1999, was signed by the General Manager of the Employer.

6.     On DDMMYY you received correspondence from the Commonwealth Superannuation Corporation in response to your application for a Public Sector Superannuation Scheme benefit. The letter confirms your superannuation pension entitlement commencing DDMMYY.

7.     On DDMMYY you lodged a private binding ruling with the ATO, seeking the Commissioner make a decision in respect of the tax treatment of the payment made to you under section 37 of the Public Service Act 1999, and whether the payment meets the criteria of a bona fide redundancy.

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 Subparagraph82-130(1)(a)(i)

Income Tax Assessment Act 1997 Section 82-135

Income Tax Assessment Act 1997 Section 83-175

Income Tax Assessment Act 1997 Subsection 83-175(1)

Income Tax Assessment Act 1997 Section 995-1

Public Service Act 1999 Section 37

Public Service Act 1999 Subsection 37(1)

Public Service Act 1999 Subsection 37(2)

Reasons for decision

Summary

8.     The incentive to retire payment made under section 37 of the Public Service Act 1999 is an ETP as it was made in consequence of the termination of your employment.

9.     The incentive to retire payment made under section 37 of the Public Service Act 1999 does not form part of a genuine redundancy payment and does not qualify for concessional tax treatment up to the allowed redundancy payment cap amount.

Detailed reasoning

10.  Section 995-1 of the ITAA 1997 states that:

employment termination payment has the meaning given by section 82-130 of the ITAA 1997.

11.  Subsection 82-130(1) of the ITAA 1997 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.

12.  Section 82-135 of the ITAA 1997 provides that certain payments are not employment termination payments, including:

a.     a payment for unused annual leave or unused long service leave

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

13.  To determine if a payment constitutes an ETP, all the conditions in section 82-130 of the ITAA 1997 must be satisfied.

14.  Failure to satisfy any of the conditions under subsection 82-130(1) of the ITAA 1997 will result in the payment not being considered an employment termination payment. Furthermore, any termination payments received outside of the 12 months will be taxed as ordinary income at marginal tax rates, unless the taxpayer is covered by a determination exempting them from the 12 month rule.

Paid as a consequence of the termination of your employment

15.  For a payment to be treated as an ETP, the first condition that needs to be met is that there must be a payment that is made in consequence of the termination of employment of the taxpayer (see subparagraph 82-130(1)(a)(i) of the ITAA 1997).

16.  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 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).

17.  While TR 2003/13 considered 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 both use the term 'in consequence of' in the same manner.

18.  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.

19.  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.

20.  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.

21.  In your case, you were employed by the Employer as an SES officer. Your employment as an SES officer was terminated on DDMMYY when you accepted an incentive to retire under section 37 of the Public Service Act 1999.

22.  You state the reason you were offered an incentive to retire was due to losing the necessary skills to perform the role and would be replaced with a person who had those skills to meet the changing requirements of the role.

23.  A written notice confirming you have retired involuntarily was signed by the General Manager of the Employer. As stated under subsection 37(1) of the Public Service Act 1999, it was agreed that the Employer would make the following payments to you:

a.     Gross normal salary

b.     Lump sum A (annual leave)

c.      Lump sum A (long service leave)

d.     ETP

24.  The payment was made under section 37 of the Public Service Act 1999 which states:

Section 37 Incentive to retire

(1) An Agency Head may give a notice in writing to an SES employee in the Agency, stating that the employee will become entitled to a payment of a specified amount if the employee retires within a period specified in the notice.

(2) If the employee retires within the specified period, by notice in writing to the Agency Head:

(a) the employee is entitled to be paid the specified amount; and

(b) the employee is taken, for all purposes, to have been compulsorily retired from the APS.

Payments under the Public Service Act in consequence of termination of employment

25.  From the facts it is clear that the payment of $X, pursuant to section 37 of the Public Service Act 1999 will be made in consequence of the termination of the your employment. The termination of employment and the payment are intertwined and connected. If not for the termination of the employment the payment would not have been made.

26.  The payment is an inducement to retire.

27.  Therefore, the payment is considered to be received by you in consequence of the termination of your employment and the requirement under subparagraph 82-130(1)(a) of the ITAA 1997 has been met for this payment.

Payment is received no later than 12 months after termination

28.  In this case, your employment was terminated on DDMMYY and the payment (less tax) was made to you within 12 months of your termination.

29.  Therefore, this condition is satisfied.

Payment is not a payment mentioned under section 82-135

30.  The payment was made to you as an incentive to retire under section 37 of the Public Service Act 1999. It is not a payment for unused annual leave, unused long service leave, the tax-free part of a genuine redundancy payment or an early retirement scheme payment, or any other payment listed in that section.

31.  Therefore, this condition is satisfied.

Taxation of ETP

32.  The tax payable on the ETP depends on your age when your employment is terminated. If you have reached preservation age in the income year your employment is terminated, a maximum rate of 17% (including the Medicare levy) applies on payments up to the ETP cap amount. If you have not reached preservation age in the income year, a maximum rate of 32% (including the Medicare levy) applies to the ETP up to this cap. This is referred to as receiving concessional tax treatment.

33.  As your date of birth is after 1964, you have not reached your preservation age of 60 years in the income year in which you were terminated. The ETP cap amount for the 2018-19 income year is $205,000. As the ETP of is below the ETP cap amount for the 2018-19 income year, this amount will be subject to concessional tax treatment, taxed at a maximum rate of 32% (including the Medicare levy).

34.  From 1 July 2012, employment termination payments may also be subject to the 'whole-of-income cap'. This cap is $180,000 less your other taxable income for the year.

Conclusion

35.  Based on the above, all the conditions in subsection 82-130(1) of the ITAA 1997 have been met.

36.  Therefore the payment is an ETP.

37.  As the payment consists wholly of a taxable component, the entire payment will form part of your assessable income for the 2018-19 income year.