Edited version of private advice

Authorisation Number: 1051766783594

Date of advice: 27 October 2020

Ruling

Subject: Early retirement scheme payment

Question 1

Is the payment made under the Deed of Release an early retirement scheme payment pursuant to section 83-180 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

Question 2

Is the payment assessable in the 20XX-XX income year?

Answer

Yes. Where the payment exceeds the tax-free limit worked out under section 83-170 of the ITAA 1997, the excess amount will be taxed as an employment termination payment (ETP) in the year it is received, in this case the 20XX-XX income year.

This ruling applies for the following period:

1 July 20XX to 30 June 20XX

Relevant facts and circumstances

You ceased employment with the Employer in the 20XX year of income after terminating your employment under an early retirement scheme (Scheme) - due to the Employer's major organisational reform.

In accordance with Scheme employees were to receive entitlements in accordance with the Enterprise Agreement based on their completed years of service.

At the time of the dismissal, there was no arrangement between you and the Employer, or between the Employer and another person, to employ you after the dismissal.

You received payments under the Scheme as calculated by the Employer.

You commenced legal proceedings against your former Employer disputing the completed years of service calculations.

In November 20XX your former Employer provided a written offer to settle your dispute based on a payment to you. The offer contained the following terms:

·         The applicable taxation payment will be calculated in accordance with the Scheme.

·         The Employer will withhold tax from the settlement sum, noting the relevant 20XX-XX tax-free threshold and ETP cap are applicable.

·         A PAYG payment will be made to the ATO and you will be provided with a 'PAYG payment summary - employment termination payment' statement.

You will enter a Deed of Release with your former Employer which will include terms as stated in the letter of offer.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 82-135

Income Tax Assessment Act 1997 section 83-170

Income Tax Assessment Act 1997 section 83-180

Other relevant documents

Taxation Ruling TR 2009/2: Income tax: genuine redundancy payments

Taxation Ruling TR 2003/13 Income tax: employment termination payments (ETP): payments made in consequence of the termination of any employment: meaning of the phrase 'in consequence of'

Case law

Dibb v Commissioner of Taxation [2003] FCA 673

Dibb v Commissioner of Taxation [2004] FCAFC 126

Le Grand v Commissioner of Taxation [2002] FCA 1258

McIntosh v FC of T [1979] FCA 65

Reseck v Commissioner of Taxation [1975] HCA 38

Reasons for decision

Detailed reasoning

Issue 1 - Is the payment an early retirement scheme payment?

Under subsection 83-180(1) of the ITAA 1997 an early retirement scheme payment is 'so much of the payment received by an employee because the employee retires under an early retirement scheme, as exceeds the amount that could reasonably be expected to be received by the employee in consequence of the voluntary termination of his or her employment at the time of the retirement.'

The Commissioner's view on whether the payment was made 'in consequence of' termination of employment is outlined below.

In consequence of termination

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 the phrase, the Commissioner's view on the meaning and application of the 'in consequence of' test are set out in Taxation Ruling 2003/13 Income tax: employment termination payments (ETP): payments made in consequence of the termination of any employment: meaning of the phrase 'in consequence of' (TR 2003/13). Whilst the ruling explores the meaning of that phrase in relation to ETPs, the same principles apply in determining the meaning of the phrase in the context of early retirement scheme payments.

Paragraph 5 of TR 2003/13 states the Commissioner's view that a payment is received by a taxpayer in consequence of the termination of the taxpayer's employment 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 received by the taxpayer.

The phrase requires a causal connection between the termination and the payment, although the termination need not be the dominant cause for the payment. The question of whether a payment is received in consequence of the termination of employment will be determined by the relevant facts and circumstances of each case.

Le Grand has been seen as reconciling the various views outlined in the earlier cases of Reseck and McIntosh. Goldberg J said at [33]:

I do not consider that the issue can simply be determined by seeking to identify the "occasion" for the payment. The thrust of the judgments in Reseck and McIntosh is rather to the effect that a payment is made "in consequence" of a particular circumstance when the payment follows on from, and is an effect or result, in a causal sense, of that circumstance. The passages in the judgments to which I referred earlier make this clear. They also make it clear that there need not be identified only one circumstance which gives rise to a payment before it can be said that the payment is made "in consequence" of that circumstance. The passages to which I have referred make it clear that it can be said that a payment may be made in consequence of a number of circumstances and that, for present purposes, it is not necessary that the termination of the employment be the dominant cause of the payment so long as the payment follows, in the causal sense referred to in those judgments, as an effect or result of the termination.

The approach in Le Grand has been cited with approval in other cases and is consistent with the Commissioner's approach in TR 2003/13.[1]

Further it is clear from the decision in Le Grand and the Federal Court in Dibb that when a payment is made to settle a claim brought by a taxpayer for wrongful dismissal (or claims of a similar nature arising from termination of employment) the payment will have a sufficient causal connection with the termination of the taxpayer's employment. The payment will be taken to have been made in consequence of the termination of employment because it would not have been made but for the termination.

In Dibb the Federal Court found that despite the delay due to the litigation, the payment made under the relevant deed to settle the proceedings was 'in consequence of termination'. Heery J stated at [22]-[23]:

The subject matter of the litigation in the Federal Court was clearly the termination, the allegedly wrongful way AVCO effected it and its financial and other consequences for the applicant. The various causes of action, whether breach of contract, conspiracy, breach of fiduciary duty or contravention of the Trade Practices Act were, as Goldberg J would say (Le Grand at ATC 4915 [36]; ALR [36]), "interwoven and intertwined" with the termination. The payment was a consequence of the settlement, which was a consequence of the Federal Court proceeding, which in turn was a consequence of the termination.

This aspect of the Federal Court's decision was upheld by the Full Federal Court on appeal.[2] In their joint judgment, Spender, Dowsett and Allsop JJ held at [16]:

We agree with the learned primary Judge's reasons. Although much happened between Mr Dibb's dismissal and the settlement of the Federal Court proceedings, those events and the passage of time all arose out of his complaints concerning his dismissal. Neither those events nor the passage of time altered the fact that payment of the lump sum settlement was "in consequence of the termination."

Is the payment to be made under the Deed of Release in consequence of termination?

The amount payable under the Deed of Release will not equal the full amount you were entitled to under the Scheme, which formed the basis of legal proceedings by you. However, the calculated entitlements based on your completed years of service were included in the proceedings initiated by you against the Employer, which led to the settlement.

But for the termination of your employment, due to the Scheme, the payment to be made under the Deed of Release will not have been made. The settlement and Deed of Release followed the action by your legal team to recover your outstanding liabilities, which followed your retirement due to the Employer's major organisational reform.

For the above reasons, we consider that the payment to be made under the Deed of Release is a payment made in consequence of your termination due to the Scheme. Therefore, the payment meets the conditions in subsection 83-180(1) as the payment will be made in consequence of the termination of your employment.

For a payment to qualify as an early retirement scheme payment, it must also satisfy the following requirements (as set out in subsections 83-180(2), 83-180(5) and 83-180(6)):

·         the retirement occurred before the employee reached pension age or such earlier date on which the employee's employment would have terminated under the terms of employment because of the employee attaining a certain age or completing a particular period of service (as the case may be)

·         if the employee and the employer are not dealing with each other at arm's length (for example because they are related in some way), the payment does not exceed the amount that could reasonably be expected to be made if the retirement was at arm's length

·         at the time of retirement there was no arrangement between the employee and the employer, or between the employer and another person, to employ the employee after the retirement

·         the payment must not be made in lieu of superannuation benefits, and

·         it is not a payment mentioned in section 82-135 (payments that are not early retirement payments - apart from paragraph 82-135(e), which refers to genuine redundancy and early retirement payments.

You have met the requirements in 83-180(2), (5) and (6) of the ITAA 1997.

As you have met all the criteria in section 83-180 of the ITAA 1997 the payment is an early retirement scheme payment for the purposes of that section.

Issue 2 - Is the payment assessable in the 20XX-XX income year?

Where the payment exceeds the tax-free limit worked out under section 83-170 of the ITAA 1997, the excess payment will be taxed as an ETP in the year it is received.[3] As such, any amount over the tax-free threshold from the payment you will receive in the 20XX-XX income year will be taxed in that year.

All payments made in consequence of the termination up to and including the time of the payment in question are assessed against a single voluntary termination element worked out at the time of the termination. In addition, only one tax-free amount can be claimed in respect of any and all redundancy payments made in consequence of a particular termination due to an early retirement scheme.

Paragraph 77 of TR 2009/2: Income tax: genuine redundancy payments provides that:

Where multiple redundancy payments are made over more than one income year, this cumulative approach does not require that the payments be brought to account in a single income year. To the extent that the payments are taxable, they are brought to account in the year that they are received.

The elements in working out the tax-free amount threshold are indexed annually. When assessing amounts in the year they are received, you use the threshold amount for the income year the particular amount is received.

Where an individual has reached their preservation age, a tax offset will apply to the ETP amount that will limit the maximum rate of tax to 15% plus 2% Medicare on the taxable component. ETPs are concessionally taxed up to a certain limit, or 'cap' (the ETP cap is $215,000 for 2020-21). The top rate of tax applies to amounts in excess of the cap.

The tax-free part of an early retirement scheme payment is excluded from assessable income and is determined by reference to a base amount plus an amount per completed year of service. If the early retirement scheme payment exceeds the available tax-free amount, then the remaining part of the payment will qualify as an ETP and be taxed accordingly.

As stated above, the 20XX and 20XX payment relate to the same termination event. The 20XX tax-free indexed figure will take into consideration the 20XX payment when assessing the tax-free component of the 20XX payment.

[1] Paragraph 29 of TR 2003/13.

[2] Dibb v Commissioner of Taxation [2004] FCAFC 126. Note the Full Federal Court did allow the taxpayer's appeal in part, holding that part of the payment was a genuine redundancy payment and not an ETP.

[3] See paragraphs 77-78 of TR 2009/2.