Edited version of private advice

Authorisation Number:1052087701819

Date of advice: 17 February 2023

Ruling

Subject: Employment termination payment

Question

Are any of the payments you received an employer termination payment as defined under section 82-130 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

This ruling applies for the following period

Year ending 30 June 20XX

The scheme commence on:

1 July 20XX

Relevant facts and circumstances

This private ruling is based on the facts and circumstances set out below. If your facts and circumstances are different from those set out below, this private ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

A copy of the Agreement you provided advises that you commenced a position in early 20XX with the employer as Chief Executive Officer (CEO) of the employer and the terms of the employment are set out in this agreement.

In late 20XX the employer granted the New Employer exclusivity to develop a transaction in respect of the employer and its subsidiaries. This resulted the New Employer acquiring all the shares in the employer with effect from mid 20XX (the Transaction).

You were made redundant in mid 20XX from the role of CEO of the employer as a result of a transaction resulting in the employer being 100% acquired by the New Employer.

You advise in your application you received three lump sum termination payments:

•                Payment 1 - untaken annual leave.

•                Payment 2 - payment in lieu of notice.

•                Payment 3 - retention Bonus.

You have supplied a copy of a letter dated mid 20XX from the employer confirming the employee entitlements were paid to you in mid 20XX

In relation to the termination of your employment you have provided a letter dated late 20XX signed by the Senior Managing Director (the Director) which sets out the following:

•                your termination was made without your consent, was arm-length and was directly linked to the Transaction

•                the decision to terminate you was not due to personal or disciplinary reasons

•                the understanding of the Director in discussion with the New Employer in early 20XX, your position as CEO of the employer was superfluous to the New Employer's requirements post the Transaction

•                to the extent of the Director's knowledge your position as CEO was not performed by any new positions created after your departure

•                the Director is not aware of an arrangement with the Employer to employ you after your departure.

Copies of the bank statement provided shows two payments made to you. One payment in mid 20XX and another payment later in mid 20XX.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 82 130

Income Tax Assessment Act 1997 section 83 175

Income Tax Assessment Act 1997 subsection 83 175(1)

Income Tax Assessment Act 1997 subsection 83 175(2)

Income Tax Assessment Act 1997 subsection 83 175(3)

Reasons for decision

Summary

Payment 1 is not an employment termination payment (ETP)

Payment 2 and 3 are ETPs as they were made in consequence of the termination of your employment.

Detailed reasoning

A person's assessable income consists of ordinary income and statutory income. An amount is statutory income if it is not ordinary income and is included in assessable income by a provision of the Income Tax Assessment Act 1936 or the ITAA 1997.

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)            (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.

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

An unused annual leave payment.

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

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 ETP. 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 in consequence of the termination of your employment

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

The phrase 'in consequence of' is not defined in the ITAA 1997. However, the courts have interpreted the phrase in a number of cases. Considering the courts decisions, the Commissioner formed a view on the meaning and application of the 'in consequence of'. This view is 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).

In paragraph 5 of TR 2003/13 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.

Paragraph 6 of TR 2003/13, then states that 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 is determined by the relevant facts and circumstances of each case.

In this case, the payments were made to you was in consequence of the termination of your employment with the Employer. There is a causal connection between your termination and the payment. In other words, but for the termination of your employment, the payments would not have been made.

Payment is received no later than 12 months after termination

In this case, your employment was terminated in mid 20XX and you have provided documentation that supports the payments being made to you in mid 20XX and later in mid 20XX, which is within 12 months of your termination.

Therefore, this condition is satisfied.

Payment is not a payment mentioned under section 82-135

Section 82-135 of the ITAA 1997 provides that certain payments are not employment termination payments, including an unused annual leave payment (subsection 82- 135 (c) of the ITAA 1997). Therefore, Payment 1 for unused annual leave would not satisfy this condition.

Payment 2 and Payment 3 are not payments mentioned in section 82-135 of the ITAA1997.

Conclusion

Payment 1 is not an ETP as it is a payment specified under section 82-135. Payment 2 and Payment 3 satisfy all the conditions in subsection 82-130(1) of the ITAA 1997 and are therefore ETPs.

Taxation of employment termination payments

An ETP made may be comprised of the following components:

•                Tax free component - as provided in section 82-140 of the ITAA 1997, this includes an invalidity segment within the meaning of section 82-150 (if any) and/or a pre-July 83 segment within the meaning of section 82-155 (if any); and

•                Taxable component - the amount remaining after deducting the tax-free component from the total payment, as prescribed in section 82-145 of the ITAA 1997.

Pursuant to section 82-10(2) of the ITAA 1997, the taxable component of a life benefit ETP is assessable income.

For recipients below preservation age, an individual is entitled to a tax offset on the taxable component of a life benefit termination payment to ensure that the rate of income tax does not exceed 30% for amounts below the ETP cap amount ($225,000 for the 2021-22 income year) (subsection 82-10(3) of the ITAA 1997). The remainder of the taxable component is taxed at the top marginal rate.