Private ruling: Eligible termination payment
Date of advice: 11 December 2020
Published: February 2021
Ruling period: 1 July 20XX to 30 June 20XX
Date scheme commenced: Upon signing of the settlement agreement.

Ruling: Q1: Is the amount proposed to be paid to the Former Employees by the Company under an agreement an employment termination payment as defined in section 82-130 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes. | Q2: Is there an obligation on the Company to withhold from payment to the Former Employees under section 12-85 of Schedule 1 to the Taxation Administration Act 1953 (TAA)? | A2: Yes.

Relevant facts and circumstances: Prior to the termination of their employment with the Company the Former Employees were employed with the Company. The Former Employees were covered by the Agreement. In late 20XX, the Company identified that due to proposed changes in contractual arrangements and programs the roles being performed by the Former Employees would no longer be required to be done by them or anyone at the Company if the proposed changes occurred. The Former Employees were informally notified of this on 1 December 20XX and advised arrangements were still being determined. On 30 October 20XX, the Company advised the Former Employees that it had identified alternative positions which each of them could perform, following their current positions being made redundant on 30 November 20XX. If the offer of the new position was accepted then the Former Employees would commence their new role on 1 December 20XX, if they did not accept the offer, they would be taken to have resigned from their positions. The Former Employees, through their legal representative wrote to the Company on 1 November 20XX asserting that the Former Employees were entitled to a redundancy in accordance with the Agreement. The Company responded on the same day stating that they had the right under the Agreement to redeploy the Former Employees to the positions which they were to commence on 1 December 20XX. On 19 November 20XX the Former Employees legal representative wrote to the Company disputing the fact that the new roles were inferior and would result in deskilling, and that their roles will be made redundant they cannot rely on the Agreement to redeploy the Former Employees. None of the Former Employees attended their rostered work shifts for their new roles on 1 December 20XX or any time thereafter. As a result, the Company, on 4 December 20XX, terminated their employment. The Former Employees were paid an amount in respect of unused annual, long service and personal leave in accordance with the Agreement. On 14 March 20XX, the Union, on behalf of the Former Employees commenced legal proceedings against the Company. The Union alleged that the Company had contravened the Agreement and sought payment entitlements under the Agreement, pleaded as a redundancy payment. The Company and the Former Employees agreed to settle their dispute in accordance with a Deed of Release. The Company has, without admitting liability or acknowledging the Former Employees were genuinely made redundant, that the settlement payments will be made to the Former Employees with reference to the clauses of the employment Agreement.

Relevant legislative provisions: Income Tax Assessment Act 1997 subsection82-130. | Income Tax Assessment Act 1997 section 83-175. Employment termination payments | A payment made to an employee is an employment termination payment if the payment satisfies all the requirements under section 82-130 of the ITAA 1997 and is not specifically excluded under section 82-135 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. | Paid in consequence of the termination of employment | 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) states, at paragraphs 5 and 6 that: | 5. ...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. | 6. The phrase requires 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 will be determined by the relevant facts and circumstances of each case. | While TR 2003/13 contains references to repealed provisions, some of which may have been rewritten, the ruling still has effect. | Whether payments made in respect of a taxpayer as a result of settlement of litigation arising out of the termination of the taxpayer's employment, is made 'in consequence of' the termination of employment is specifically addressed in TR 2003/13. According to paragraph 31 of TR 2003/13: | 31. It is clear from the decision in Le Grand , that when a payment is made to settle a claim brought by a taxpayer for wrongful dismissal or claims of a similar nature that arise as a result of an employer terminating the employment of the taxpayer, 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 this instance, legal proceedings were brought by the Union on the basis that the termination was in breach of the Agreement and that the Former Employees were made redundant. This in turn led to negotiations for a settlement between the Company and the Former Employees which resulted in a Settlement Agreement being drafted for each of the Former Employees signed in March 20XX. | The payments under the Settlement Deed would not have been made had there been no termination of employment. The termination of employment and these payments are thus intertwined and connected. Therefore, the payment has been made 'in consequence' of the termination of your employment, satisfying paragraph 82-130(1)(a) of the ITAA 1997. | Accordingly, the payment will be received in consequence of the termination of employment and subsection 83-175(1) of the ITAA 1997 has been satisfied. | Furthermore, the Former Employees were not terminated by the Company under a genuine redundancy agreement. | Under the terms of the Settlement Deed, the Company does not acknowledge liability in relation to the dispute nor admission that the Former Employees were genuinely made redundant from their employment. The purpose of the Settlement was to compensate the employees, with the payment amount determined with reference to the employment Agreement. | Payment must be received no later than 12 months after termination | As stated above, the employment of the Former Employees was made effective on 4 December 20XX, and the payment in relation to this termination will be made shortly after the issuing of this ruling. | Subsection 82-130(4) of the ITAA 1997 however, provides an exemption from the application of paragraph 82-130(1)(b) of the ITAA 1997, (the 12 month rule), if: | • you are covered by a determination under subsection (5) or (7); or | • the payment is a genuine redundancy payment or an early retirement scheme payment. | The Income Tax Employment Termination Payments (12 month rule) Determination 2018 (Determination) extends the definition of employment termination payments to include certain payments that are received more than 12 months after the termination of the person's employment. | The Determination makes a payment received more than 12 months after termination of a person's employment an employment termination payment, if the delay in the payment was due to the commencement of legal action concerning either or both: | (a) the person's entitlement to the payment; | (b) the amount of the person's entitlement. | The legal action must have commenced within 12 months of the termination of a person's employment. 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 instance, legal action was commenced on behalf of the Former Employees by the Union, within twelve months of the termination of the Former Employees. | As a result, the payment when made will satisfy this requirement. | Exclusions under section 82-135 of the ITAA 1997 | Section 82-135 of the ITAA 1997 provides that certain payments are not employer termination payments. This includes (among others): | • unused annual leave and unused long service leave payments; and | • part of genuine redundancy payment. | In this instance, the Settlement amount is not payment that is excluded from being and employment termination payment. | Conclusion | In this instance, based on the facts and evidence provided, the payment to the Former Employees will meet the definition of an eligible termination payment and will be included in the taxable income of the Former Employees in the financial year the amount is paid. | Question 2 | PAYG tax withholding | Section 12-85 of Schedule 1 to the TAA states an entity must withhold an amount from any of the following payments it makes to an individual: | (a) a superannuation lump sum; | (b) a payment that is an employment termination payment or would be one except that it is received more than 12 months after termination of employment. | As the amounts paid to the Former Employees are deemed to be eligible termination payments, tax must be withheld on the payments.