Taxation Ruling
IT 2426
Income tax : eligible termination payments - payment to compensate for loss of benefits resulting from termination of former employment
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Please note that the PDF version is the authorised version of this ruling.
FOI status:
May be releasedFOI number: I 1206446PREAMBLE
A situation recently brought to the attention of this office called for a decision whether a payment made to a taxpayer in the circumstances described hereunder was correctly characterised as a payment made in consequence of the termination of the taxpayer's employment within the meaning of that expression in sub-section 27A(1) of the Income Tax Assessment Act, i.e. in short, whether the payment was an eligible termination payment.
2. The taxpayer had been employed for a number of years under the terms of a service agreement. The agreement provided that either party could give to the other not less than one year's notice of termination of the agreement. If notice was not given the agreement would lapse at the end of the stated period. The agreement provided for the payment of a retiring allowance at the end of the stated period. If the taxpayer terminated the agreement prior to its expiration the retiring allowance was to be reduced in the manner fixed in the agreement.
3. The taxpayer terminated the employment before the expiration of the service agreement. He received a reduced retiring allowance in accordance with the terms of the agreement.
4. The reason for the taxpayer terminating the agreement lay in the fact that he wished to accept new employment. The terms of the new employment required the new employer to pay to the taxpayer an amount to compensate him for that part of the retiring allowance foregone as a result of the early termination of the service agreement with the former employer. It was contended that the payment by the new employer was a payment in consequence from the taxpayer's former employment.
RULING
5. A payment received in these circumstances is not considered to be an eligible termination payment. Notwithstanding the wide meaning given to the expression "in consequence of retirement" in Reseck v. F.C. OF T. 75 ATC 4213; 5 ATR 538 the reality of the situation is that the payment has nothing to do with former employment - the taxpayer had received from his former employer all that he was entitled to receive under the terms of the service agreement. Although the payment may have been calculated by reference to some benefit foregone as a result of the early termination of the service agreement, it relates to the new employment. It is part of the remuneration paid to the taxpayer by the new employer, i.e. an inducement paid by the new employer to gain the taxpayer's services.
COMMISSIONER OF TAXATION
9 July 1987
References
ATO references:
NO 86/11189-6
Subject References:
ELIGIBLE TERMINATION PAYMENT
Legislative References:
27A(1)
Case References:
Reseck v. F.C. OF T
75 ATC 4213
5 ATR 538