Private ruling: Employment termination payments - exemption from 12 month rule
Date of advice: 2 March 2016
Published: April 2016
Ruling period: Income Year ending 30 June 2016
Date scheme commenced: 1 July 2015

Ruling: Q1: Is the payment to be received by a person (Your Client) an employment termination payment in accordance with subsection 82-130(1) of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes

Relevant facts and circumstances: Your Client was employed as a medical professional by an entity (the Employer) that provided pathology services to a certain hospital (the Hospital) under a contract. Several years ago, the contract for the provision of the relevant services was put out to tender. As a result, Employer's contract was awarded to another entity (the New Provider). Part of the contractual requirements imposed on the New Provider was that employees employed by the Employer would be offered positions with the New Provider. The New Provider subsequently made an offer of employment to Your Client. All leave entitlements accrued with Employer were to be transferred to/continue to accrue with the New Provider. Your Client's employment was then terminated by the Employer with no redundancy entitlements. One day later, Your Client commenced employment with the New Provider. Less than 12 months after the termination of Your Client's employment with the Employer, the union of which Your Client was a member made an application in the relevant Court (Fair Work Division) for breach of terms and conditions by the Employer. During the 20XX-YY income year, Your Client, other affected employees, and the Employer decided to resolve the issue in private and a written agreement was entered into to settle the Court proceeding. As a result of the settlement of the relevant Court proceedings, Your Client is to receive an amount (the Settlement Sum) within 14 days of this ruling.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 82-130 | Income Tax Assessment Act 1997 Section 82-135 | Income Tax Assessment Act 1997 Section 995-1

Reasons for decision: Detailed Reasoning - Summary of decision: The payment to be received by Your Client from the Employer is an employment termination payment as defined in section 82-130 of the ITAA 1997. | Detailed Reasoning - Employment termination payment: 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 (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. Payment received by Your Client from the Employer will be an ETP only if all the conditions in section 82-130 of the ITAA 1997 are satisfied. Failure to satisfy any of the conditions will result in the payment not being considered an ETP. | Detailed Reasoning - Paid as a consequence of the termination of employment: The phrase 'in consequence of ' is not defined in the ITAA 1997. However, the words have been interpreted by the courts in several cases. 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 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). 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, it states: 5… 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. In this case, Your Client's employment with the Employer was terminated in the 20VV-WW income year and, as agreed between the Employer and the New Provider, Your Client commenced employment with the New Provider immediately after termination. The Employer treated this arrangement (which included an offer of suitable alternative employment) as a 'Transfer of Business' rather than a redundancy and, as such, did not make any redundancy payments to Your Client. Your Client (together with other employees of the Employer) applied to the relevant Court seeking redundancy entitlements against the Employer. The legal action against the Employer was settled out of Court and Your Client is to be paid an amount (the Settlement Sum) by the Employer as a result of the settlement. Consequently, the Settlement Sum will be paid in consequence of the termination of Your Client's employment because it is paid to settle the legal proceedings which were commenced because of the termination of Your Client's employment. That is, this payment 'follows as an effect or result of' the termination of Your Client's employment. In other words, if not for the termination of Your Client's employment the Settlement Sum would not be paid to Your Client. | Detailed Reasoning - The payment is received no later than 12 months after termination: Paragraph 82-130(1)(b) of the ITAA 1997 requires that the payment must be received within 12 months of the employee's termination of employment. However, paragraph 82-130(4)(a) of the ITAA 1997 states that the 12 month rule prescribed in paragraph 82-130(1)(b) of the ITAA 1997 does not apply if: (a) a person is covered by a determination made by the Commissioner under subsection 82-130(5) or (7) of the ITAA 1997; or (b) the payment is a genuine redundancy payment or an early retirement scheme payment. The Employment Termination Payments (12 month rule) Legislative Instrument 2007 is a legislative instrument made by the Commissioner of Taxation pursuant to subsection 82-130(7) of the ITAA 1997. It applies to employment termination payments received after 30 June 2007 and provides that a payment received more than 12 months after termination of person's employment will be an ETP 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; and the legal action was commenced within 12 months of the termination of employment. In this case, Your Client's employment with the Employer was terminated in the 20VV-WW income year without entitlements to redundancy. However, prior to this Your Client's union had lodged an application with Fair Works Australia to recover Your Client's (and other Employer's employees') termination of employment entitlements. At that time, Fair Works Australia (now Fair Works Commission) was a national workplace relations tribunal with the authority to adjudicate legal disputes between the parties. Therefore, legal action to recover You Client's entitlements commenced within 12 months of the termination of their employment. That being the case, the 12 month rule found in paragraph 82-130(1)(b) of the ITAA 1997 does not apply in this case. | Detailed Reasoning - Not a payment mentioned in section 82-135 of the ITAA 1997: The payment to be received by Your Client is not included in section 82-135 of the ITAA 1997 which lists payments that are not ETPs. Hence, the Settlement Sum to be received by Your Client is an ETP for the purposes of section 82-130 of the ITAA 1997 and will be taxed accordingly.