Edited version of private advice

Authorisation Number: 1052374779334

Date of advice: 31 March 2025

Ruling

Subject: Employment termination payment

Question 1

Will the Commissioner determine that the time between the employment termination and the payment is reasonable pursuant to subsection 82-130(5) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer 1

Yes

This ruling applies for the following periods:

Year ending 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The Taxpayer was employed by the Company under a contract (the Contract).

The Contract expired on around Date A. The Taxpayer continued to be employed by the Company after that date.

On around Date B, the Taxpayer commenced employment with another employer (Y Employment).

An email dated on Date C indicated that the Company would offer the Taxpayer a further fixed term contract (the Proposed Further Contract).

By agreement between the Taxpayer and the Company, the Company preserved the Taxpayer's leave entitlements during the Y Employment.

On Date D, the Taxpayer was advised by the Company that the Proposed Further Contract would no longer be offered. Upon receiving this advice, negotiations were undertaken regarding the Taxpayer's entitlements.

The Taxpayer and the Company, without admitting liability, reached the terms in a Deed of release (the Deed), on Date E (within 1 month from Date D).

The Taxpayer provided a copy of the Deed which contains some of the following:

a)      ss sum of $XX,XXX.XX less applicable tax, being a payment in satisfaction of all the Taxpayer's entitlements (including superannuation) in respect of the Termination and the agreements reached under the Deed, except annual leave;

b)      ss sum of $XX,XXX.XX less applicable tax, being a payment in satisfaction of the Taxpayer's entitlement to accrued but unused annual leave accrued up to X date.

The Company made the payment to the Taxpayer in accordance with the Deed, within a short timeframe after Date E.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 82-130

Income Tax Assessment Act 1997 section 82-135

Further issues for you to consider

We have limited our private ruling to the questions raised in the application. There may be related issues that should considered, including:

•          subsection 82-135(a) of the ITAA 1997 excludes a superannuation benefit from being an employment termination payment (ETP).

•          subsection 82-135(c) of the ITAA 1997 excludes an unused annual leave payment from being an ETP.

•          Consequently, any superannuation and unused annual leave components within your payment may not meet the ETP definition under section 82-130 of the ITAA 1997.

The Taxpayer may apply for another private ruling on these or any other matters.

Reasons for decision

Question

Will the Commissioner determine that the time between the employment termination and the payment is reasonable pursuant to subsection 82-130(5) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Summary

The Commissioner has determined that the delay in payment in this case is reasonable given the Taxpayer's circumstances.

Accordingly, the Taxpayer's request for the Commissioner's determination under subsection 82-130(5) of the ITAA 1997 has been allowed, meaning that paragraph 82-130(1)(b) of the ITAA 1997 has no application in relation to the payment in question.

Employment termination payment (ETP)

Section 995-1 of the ITAA 1997 states that:

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

For the payment made to the Taxpayer under the Deed to constitute an ETP, all the conditions in section 82-130 of the ITAA 1997 will need to be satisfied.

Failure to satisfy any of the conditions will result in the payment not being considered an employment termination payment. Furthermore, any termination payments received outside of the 12 months are taxed as ordinary income at marginal tax rates, unless the taxpayer is covered by a determination exempting them from the 12-month rule.

The 12-month rule set out in paragraph 82-130(1)(b) of the ITAA 1997

To qualify as an ETP, the payment must be received no later than 12 months after the termination of the taxpayer's employment (paragraph 82-130(1)(b) of the ITAA 1997). Also as noted previously, payments received more than 12 months after the termination of the employment do not qualify as ETPs and will be taxed as ordinary income at marginal tax rates under the terms of section 83-295 of the ITAA 1997.

However, by virtue of paragraph 82-130(4)(a) of the ITAA 1997, the 12-month rule prescribed in paragraph 82-130(1)(b) of the ITAA 1997 will not apply to you if they are covered by a determination made by the Commissioner under either subsection 82-130(5) or subsection 82-130(7) of the ITAA 1997.

Subsection 82-130(5)

The Commissioner may determine, in writing, that paragraph (1)(b) does not apply to you if the Commissioner considers the time between the employment termination and the payment to be reasonable, having regard to the following:

(a) the circumstances of the employment termination, including any dispute in relation to the termination;

(b) the circumstances of the payment;

(c) the circumstances of the person making the payment;

(d) any other relevant circumstances.

In this case, after the Contract with the Company ended on Date A, the Company offered the Proposed Further Contract with further employment, where it was agreed that the Taxpayer's leave entitlements would be carried forward to the further employment.

However, the Taxpayer was informed on Date D, that the Proposed Further Contract would not be offered to them, which prompted the Taxpayer to seek negotiations regarding their entitlements under the Contract.

The Deed was reached on date E, and the payment pursuant to the Deed was received within a short timeframe after date E.

The Commissioner considers it is reasonable to determine, the time between the employment termination and the payments to be reasonable, having regard to the above circumstances where there was a change in the employment arrangement, and the Taxpayer took prompt steps to reach the Deed which resulted in the payment.

Accordingly, the Taxpayer's request for the Commissioner's determination under subsection 82-130(5) of the ITAA 1997 has been allowed, meaning that paragraph 82-130(1)(b) of the ITAA 1997 has no application in relation to the payment in question.

Subsection 82-130(7)

The Employment Termination Payments (12 months rule) Determination 2018 (SPR 2018/1) is a legislative instrument made by the Commissioner of Taxation pursuant to subsection 82-130(7) of the ITAA 1997. This instrument applies to ETPs received after 30 June 2007.

This instrument makes a payment received more than 12 months after termination of persons employment an ETP, if the delay in the payment was due to the commencement of legal action concerning either or both:

(a) the persons entitlement to the payment;

(b) the amount of the persons entitlement

and the legal action was commenced within 12 months of the termination of employment.

According to SPR 2018/1 Explanatory Statement, legal action is intended to cover any Court, Tribunal and other proceedings of a judicial or quasi-judicial nature which may result in the payment of an amount in consequence of the termination of a person's employment.

In this case, as the Commissioner has determined that paragraph 82-130(1)(b) does not apply to the Taxpayer under subsection 82-130(5) above, it is therefore not necessary to further consider the legislative instrument under subsection 82-130(7) of the ITAA 1997.