Commissioner of Taxation v Boyn
Document type: Decision Impact Statement
Venue: Federal Court of Australia (NSD 1651 of 2012)
Judgment date: 20 March 2013
Date published: 29 April 2013

Summary of decision:
Outlines the ATO response to this case which concerned the meaning of "employment termination remainder" and the correct method of calculating the tax payable by a taxpayer who received an employment termination payment.

Overview of facts:
On 30 July 2009 the taxpayer received an employment termination payment ("ETP"), a life benefit termination payment, from his former employer. The taxpayer was a resident for Australian income tax purposes and he had already reached preservation age for superannuation purposes. | The ETP comprised a taxable component of $250,880 and a tax free component of $144,120. Only the taxable component was included in his assessable income. The taxable component exceeded the $150,000 ETP cap amount for the 2010 financial or income year. | For the 2010 income year, the taxpayer had a taxable income of $75,261. The Commissioner calculated tax payable on the basis that his taxable income consisted entirely of employment termination remainder (ETR). Under paragraph (aa) in clause 1 of Part I of Schedule 7 to the Income Tax Rates Act 1986 (ITRA), the rate of tax of 45% was applied to the taxable income. | On review of the Commissioner's objection decision, the AAT considered that this approach was not supported by the legislation. It set aside the objection decision and remitted the matter to the Commissioner to recalculate the tax payable. The Commissioner appealed the AAT decision to the Federal Court. | Issues decided by the Federal Court | The Federal Court held that the definition of "employment termination remainder" in subsection 3(1) of the ITRA places a cap on the amount of taxable income that can be the ETR. The ETR cannot be greater than the taxable income. The Federal Court also said that the relevant provisions were 'clear and unambiguous'. | In this case, the taxable component of the ETP represented taxable income that otherwise satisfied the definition in subsection 3(1), and the excess of the taxable component over the ETP cap amount (i.e. $100,880) was greater than the taxable income of $75,261. The Federal Court held that the definition of ETR therefore applied so that the taxable income was an ETR, concluding that the Commissioner had correctly calculated the tax payable by the taxpayer.

Issues decided:
The Federal Court held that the definition of "employment termination remainder" in subsection 3(1) of the ITRA places a cap on the amount of taxable income that can be the ETR. The ETR cannot be greater than the taxable income. The Federal Court also said that the relevant provisions were 'clear and unambiguous'. In this case, the taxable component of the ETP represented taxable income that otherwise satisfied the definition in subsection 3(1), and the excess of the taxable component over the ETP cap amount (i.e. $100,880) was greater than the taxable income of $75,261. The Federal Court held that the definition of ETR therefore applied so that the taxable income was an ETR, concluding that the Commissioner had correctly calculated the tax payable by the taxpayer.

ATO view of decision:
The Federal Court confirmed the Commissioner's interpretation of the definitions of "employment termination remainder" and "ordinary taxable income" in the ITRA. It also confirmed the Commissioner's method of calculation of the tax payable for an income year in those cases where: • the taxable component of an ETP exceeds the ETP cap amount (i.e. there is an ETR as per the ITRA); and • that taxable component is greater than the taxable income for the income year. | • the taxable component of an ETP exceeds the ETP cap amount (i.e. there is an ETR as per the ITRA); and • that taxable component is greater than the taxable income for the income year. | The decision affirms the Commissioner's view that, whenever the taxable component of an ETP exceeds the ETP cap amount, the taxable income will contain an ETR. Under step 3 in subsection 4-15(1) of the ITAA 1997 if total deductions equal or exceed assessable income then there is no taxable income. | It follows that the Commissioner's methodology will remain correct wherever there is a "superannuation remainder" as defined in subsection 3(1) of the ITRA. A superannuation remainder is taxed the same way as an ETR. | A superannuation remainder can only arise when a superannuation lump sum is paid from an untaxed plan. If the "element untaxed in the fund" part of the taxable component of that superannuation lump sum exceeds the "untaxed plan cap amount" then the taxable income of the taxpayer will include a superannuation remainder.

Administrative treatment:
None | Implications for ATO precedential documents (Public Rulings & Determinations etc) | None | Implications for Law Administration Practice Statements | None

Legislative references: Income Tax Assessment Act 1997 4-10(3) 4-15(1) 82-10 82-160 960-265 Income Tax Assessment Act 1936 6(1) Income Tax Rates Act 1986 3(1) 4 12(1) Schedule 7 Part 1
Case references: Alcan (NT) Alumina Pty Ltd v Commissioner of Territory Revenue (NT) (2009) 239 CLR 27 (2009) 73 ATR 256 2009 ATC 20-134 Commissioner of Taxation v Consolidated Media Ltd (2012) 293 ALR 257 (2012) 84 ATR 1 2012 ATC 20-361
Subject references: Employment termination payment Employment termination remainder