Private ruling: Employment termination payment - 12 month rule
Published: October 2014
Ruling period: Year ended 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Q1: Does the 12-month rule in paragraph 82-130(1)(b) of the Income Tax Assessment Act 1997 (ITAA 1997) apply to the payment received from your former employer? | A1: No.

Relevant facts and circumstances: You are under 65 years of age. In the 2011-12 income year, you commenced employment with your former employer (the Employer). After working with the Employer for less than one year, the Employer went into voluntary administration. You were advised in writing by the Employer's voluntary administrators (the Administrators) that your employment with the Employer is being terminated on the grounds of redundancy. In the 2012-13 income year, you made a claim for assistance under the General Employee Entitlements and Redundancy Scheme (GEERS) with the Department of Education, Employment and Workplace Relations (DEEWR). In the 2013-14 income year, DEEWR advised you that your claim for assistance had been finalised and you were eligible for an advance. Subsequently a payment (the Payment) was made to you. The Payment comprised of an annual leave amount and an amount paid in lieu of notice. The governing instrument used to calculate your outstanding entitlements is Clerks- Private Sector Award 2010 (the Award). The Award includes the following clauses: The NES and this award contain the minimum conditions of employment for employees covered by this award (clause 6). Notice of termination is provided for in the NES (clause 13.1). The notice of termination required to be given by an employee is the same as that required of an employer except that there is no requirement on the employee to give additional notice based on the age of the employee concerned. If an employee fails to give the required notice the employer may withhold from any monies due to the employee on termination under this award or the NES, an amount not exceeding the amount the employee would have been paid under this award in respect of the period of notice required by this clause less any period of notice actually given by the employee (clause 13.2). Requirements for notice of termination or payment in lieu are set out in section 117 of the Fair Work Act 2009 (Cth) (the Act) as follows: Period Employee's period of continuous service with the employer at the end of the day the notice is given Period 1 Not more than 1 year 1 week 2 More than 1 year but not more than 3 years 2 weeks 3 More than 3 years but not more than 5 years 3 weeks 4 More than 5 years 4 weeks … increase the period by 1 week if the employee is over 45 years old and has completed at least 2 years of continuous service with the employer at the end of the day the notice is given. In accordance with section 87 of the Act, for each year of service with his or her employer, an employee is entitled to four weeks of paid annual leave which accrues progressively during a year of service according to the employee's ordinary hours of work.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 82-130 | Income Tax Assessment Act 1997 Subsection 82-130(1) | Income Tax Assessment Act 1997 Subparagraph 82-130(1)(a)(i) | Income Tax Assessment Act 1997 Paragraph 82-130(1)(b) | Income Tax Assessment Act 1997 Subsection 82-130(4) | Income Tax Assessment Act 1997 Subsection 82-130(5) | Income Tax Assessment Act 1997 Subsection 82-130(7) | Income Tax Assessment Act 1997 Section 82-135 | Income Tax Assessment Act 1997 Section 83-10 | Income Tax Assessment Act 1997 Section 83-15 | Income Tax Assessment Act 1997 Section 83-170 | Income Tax Assessment Act 1997 Subsection 83-170(2) | Income Tax Assessment Act 1997 Subsection 83-170(3) | 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) | Income Tax Assessment Act 1997 Subsection 83-175 (4) | Income Tax Assessment Act 1997 Section 995-1 Further issues for you to consider | Not applicable. | Anti-avoidance rules | Not applicable.

Reasons for decision: Summary: The annual leave amount is not an employment termination payment or a genuine redundancy payment. It is included in your assessable income for the 2013-14 income year and you are entitled to a tax offset to ensure that the rate of tax on that amount does not exceed 30%. The amount paid in lieu of notice is a genuine redundancy payment. That amount is less than the tax-free amount worked out under subsection 83-170(3) of the ITAA 1997, as such, it is not an employment termination payment, and it is not assessable income and is not exempt income. Because neither amount is an employment termination payment, the 12-month rule in paragraph 82-130(1)(b) of the ITAA 1997 does not apply to the Payment. | Detailed Reasoning - Employment termination payment: Section 995-1 of the ITAA 1997 states that employment termination payment (ETP) has the meaning given by section 82-130 of the ITAA 1997. In accordance with subsection 82-130(1) of the ITAA 1997,a payment is an ETP 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. | Detailed Reasoning - Paid in consequence of the termination of employment: The phrase 'in consequence of' is not defined in the ITAA 1997. However, the meaning of the words has been considered by the courts in a number of decisions. In light of these decisions, the Commissioner discusses the meaning of the phrase 'in consequence of' in the context of the expression 'in consequence of the termination of any employment' (as used in Subdivisions A and AA of Division 2 of Part III of the Income Tax Assessment Act 1936 ) in Taxation Ruling TR 2003/13 (TR 2003/13). While TR 2003/13 contains references to repealed provisions, some of which may have been rewritten, the ruling still has effect. At paragraphs 5 and 6 of TR 2003/13, Commissioner states: 5. The phrase 'in consequence of' is not defined in the ITAA 1936. However, the words have been interpreted by the courts in several cases. Whilst there are divergent views as to the correct interpretation of the phrase, 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. Relevantly, at paragraph 31 of TR 2003/13 the Commissioner states: … 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. The essence of this analysis is that if the payment follows as an effect or a result of the termination of employment, the payment will be made in consequence of the termination of employment for the purposes of subparagraph 82-130(1)(a)(i) of the ITAA 1997. The termination of the payment need not be the sole or dominate cause of the payment. In this case, your employment with the Employer was terminated by the Administrators without your consent. As a result of the termination, you made a claim under the GEERS and were paid an amount in settlement of entitlements owed to you by the Employer. In other words, but for the termination of your employment with the Employer, the payment under the GEERS would not have been made to you. Therefore, it is considered that the Payment was made to you in consequence of the termination of your employment with the Employer. | Detailed Reasoning - The payment is received no later than 12 months after termination: For an employer payment to qualify as an ETP, in accordance with paragraph 82-130(1)(b) of the ITAA 1997, the payment must be received within 12 months of the employee's termination of employment. However, subsection 82-130(4) of the ITAA 1997 states that the 12 month rule prescribed in paragraph 82-130(1)(b) of the ITAA 1997 will not apply if: • you are covered by a determination made by the Commissioner under subsection 82-130(5) or (7)of the ITAA 1997; or • the payment is a genuine redundancy payment or an early retirement scheme payment. | Detailed Reasoning - Not a payment mentioned in section 82-135 of the ITAA 1997: Section 82-135 of the ITAA 1997 lists payments that are not ETPs. These include (among others): • unused annual leave payments; and • the tax- free part of a genuine redundancy payment. In your case, the Payment comprised of an unused annual leave component and of an amount paid in lieu of notice. Based on the above, the unused annual leave component is not an ETP. In accordance with sections 83-10 and 83-15 of the ITAA 1997, annual leave amount should be included in your assessable income for 2013-14 income year and you are entitled to a tax offset to ensure that the rate of tax on that amount does not exceed 30%. The reminder, that is, the amount paid in lieu of notice will not be an ETP to the extent that it represents a tax-free part of a genuine redundancy payment. | Detailed Reasoning - Genuine redundancy payments: In accordance with subsection 83-175(1) of the ITAA 1997, a genuine redundancy payment is so much of a payment that: • is received by an employee who is dismissed from employment because the employee's position is genuinely redundant; and • exceeds the amount that could reasonably be expected to be received by the employee in consequence of the voluntary termination of their employment at the time of the dismissal. The requirements to be satisfied before any payment made to a person whose employment is terminated qualifies for treatment as a genuine redundancy payment under section 83-175 of the ITAA 1997 are discussed in Taxation Ruling TR 2009/2 (TR 2009/2). With regard to the first requirement set out in subsection 83-175(1) of the ITAA 1997, the Commissioner considers that there are four necessary components within this requirement: • the payment must be received in consequence of a termination; • termination must involve an employee being dismissed from employment; • the dismissal must be caused by the redundancy of the employee's position; and • the redundancy payment must be made genuinely because of a redundancy. For the reasons stated earlier, it is considered that, in this case, the Payment was received by you in consequence of the termination of your employment. The terms 'dismissal' and 'redundancy' are not defined in the ITAA 1997 therefore, consistent with basic principles of statutory interpretation, their meaning must be determined according to the ordinary meaning of the words, having regard to the context in which they appear. Accordingly, the Commissioner's view, as stated in Taxation Ruling TR 2009/2, is that dismissal means a decision to terminate employment at the employer's initiative without the consent of the employee. This stands in contrast to employment that is terminated at the initiative of the employee, for example in the case of resignation. A position is redundant when the functions, duties and responsibilities formerly attached to the position are determined by the employer to be unnecessary to the current needs and purposes of the organisation. A dismissal is not caused by redundancy where personal acts or default are the cause for termination for example, unsatisfactory performance or behaviour (TR 2009/2). Contrived cases of redundancy will not meet the conditions in section 83-175 of the ITAA 1997. The fact that an employer and employee have an understanding that a payment on termination is caused by redundancy, or that the employer treats the payment as a redundancy payment for tax purposes, does not of itself establish genuine redundancy (TR 2009/2). Applying the above to your circumstances, it is considered that the payment made in lieu of notice was made to you because your position was genuinely redundant. This view is based on the following: • your employment was terminated at the Administrators' rather than your initiative; • the Administrators advised you in writing that your employment was to be terminated because they had determined that your position is redundant; • there is nothing to indicate that your employment was terminated because there was a problem with your performance or behaviour; and • there is nothing to indicate that the redundancy was in any way contrived. However, subsection 83-175(1) also requires that for a payment to be a genuine redundancy payment, it should exceed the amount that would be received by the employee on voluntary termination of employment. That is, only that part of the payment that exceeds the amount that could reasonably be expected to be received by the employee had the employee voluntarily terminated his or her employment at the time of dismissal is treated as a genuine redundancy payment. To that effect, TR 2009/2, at paragraphs 61 and 62, states: 61.It would generally be expected that a greater amount would be paid on redundancy than voluntary termination. This recognises the purpose of redundancy payments, being primarily to compensate for loss of non-transferable entitlements (for example accrued sick leave and accrued long service leave prior to 10 years service) and the peculiar hardship associated with being made redundant. 62.Contractual or other entitlements payable by an employee on voluntary termination are generally a sound guide as to what might reasonably be expected … In your case, neither the Award nor the Act specify the entitlements that are payable to you on resignation from your employment. However, based on the provisions dealing with notice periods and the payment of annual leave, it may be concluded that the only entitlement on resignation without notice would be the accrued annual leave amount. Therefore, the amount of the Payment that exceeds the amount that you could have reasonably expected to receive as a consequence of voluntary termination of your employment is the Payment less the accrued annual leave amount. | Detailed Reasoning - Further conditions for a genuine redundancy payment: However, in addition to the above, subsection 83-175(2) of the ITAA 1997 states that genuine redundancy payment must meet the following conditions: • the employee is dismissed before the earlier of: • the day he or she turned 65; or • if the employee's employment would have terminated when he or she reached a particular age or completed a particular period of service - the day he or she would reach that age or complete the period of service (as applicable); • if the dismissal was not at arm's length - the payment must not exceed the amount that could reasonably be expected to be made if the dismissal was at arm's length; • at the time of the dismissal, there was no arrangement between the employee and the employer, or between the employer and another; and • it is not a payment mentioned in section 82-135 (apart from paragraph 82-135(e) of the ITAA 1997). Based on the above, we consider that the amount made in lieu of notice is a genuine redundancy payment because: • at the time of the termination of your employment you were less than 65 years old; • at the time of termination, there was no arrangement between you and the Employer, or between the Employer and another person, to employ you after the termination; • the dismissal was at arm's length; and • the payment is not a payment mentioned in section 82-135 of the ITAA 1997. | Detailed Reasoning - Tax-free amount: Subsection 83-170(2) of the ITAA 1997 provides that so much of the genuine redundancy payment that does not exceed the amount worked out using the formula prescribed in subsection 83-170(3) of the ITAA 1997 is not assessable income and is not exempt income. Any amount in excess of the tax-free amount is taxed as an employment termination payment. The formula for working out the tax-free amount is: Base amount + (Service amount x Years of service) For the 2013-14 income year: Base amount means $9,246; Service amount means $4,624; and Years of service means the number of whole years in the period, or sum of periods, of employment to which the payment relates. Your employment with the Employer lasted less than a year. Hence the 'years of service' to which the genuine redundancy payment relates is less than one whole year of service. Accordingly, the tax-free part of a genuine redundancy payment you can receive in the 2013-14 income year under subsection 83-175(3) of the ITAA 1997 is: $9,246 + ($4,624 × 0) = $9,246. In this case, the payment in lieu of notice is below the tax-free amount of a genuine redundancy payment. Therefore, the entire amount of the payment is the tax-free part of a genuine redundancy payment. This tax-free amount is not assessable income and is not exempt income under subsection 83-170(2) of the ITAA 1997. Consequently the amount paid in lieu of notice is not required to be included in your income tax return for the 2013-14 income year. Further, in accordance with section 82-135 of the ITAA 1997, the amount paid in lieu of notice is not an ETP. As such, paragraph 82-130(1)(b) of the ITAA 1997 does not apply to the payment.