Private ruling: Employment termination payment
Published: November 2013
Ruling period: Year ending 30 June 2013
Date scheme commenced: 1 July 2012

Ruling: Q1: Is the retention bonus payment received by you on termination of your employment, considered to be an employment termination payment in accordance with section 82-130 of the Income Tax Assessment Act 1997 (ITAA 1997)? Advice/Answer Yes.

Relevant facts and circumstances: You are under 65 years of age. You commenced employment with the Employer over five years ago. In a letter the Employer advised that there had been an organisational review. As a result the decision has been made to wind down operations in your area. Your position with the Employer would no longer be required and would become redundant. In a separate letter, the Employer advised that in order to meet its contractual obligations and achieve successful closure they were prepared to offer you a payment (the Payment) under a special program. This acts as an incentive to secure your employment services in the 2012-13 income year. The Payment was conditional on you remaining in employment with the Employer until your cessation date. Had you voluntarily resigned or you voluntarily transfer to another area or to any associated enterprise you would not have been entitled to the Payment. All dealings between yourself and the Employer were at arm's length. There will not be any re-employment by the Employer or evidence of any re-employment arrangement with another entity. The Payment was paid to you in the 2012-13 income year. The Payment was paid to you within 12 months of the termination of your employment. Along with your other entitlements you also received a redundancy payment of from the Employer. The redundancy payment both includes and exceeds the tax-free part of a genuine redundancy payment you can receive in the 2012-13 income year.

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 83-170. | Income Tax Assessment Act 1997 section 83-175.

Reasons for decision: Summary: The Payment you received is an employment termination payment. As such, Payment is required to be included in your assessable income for the 2012-13 income year, but will be taxed concessionally. | Detailed Reasoning - Employment termination payment: A payment is an employment termination payment if it satisfies all the requirements in section 82-130 of the Income Tax Assessment Act 1997 (ITAA 1997) and is not specifically excluded under section 82-135 of the ITAA 1997. Subsection 82-130(1) of the ITAA 1997 states: 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 the termination (but see subsection (4)); and (c) it is not a payment mentioned in section 82-135. Section 82-135 of the ITAA 1997 provides that certain payments are not employer termination payments. These include (among others): · superannuation benefits · unused annual leave or long service leave payments · foreign termination payments covered under Subdivision 83-D of the ITAA 1997 and · the tax-free part of a genuine redundancy payment or an early retirement scheme payment. Based on the information provided, your employment was terminated when you were made redundant in the 2012-13 income year. To determine if a payment constitutes an employment termination payment, all the conditions in subsection 82-130(1) of the ITAA 1997 must be satisfied. Failure to satisfy any of the three conditions under subsection 82-130(1) of the ITAA 1997 will result in the payment not being considered an employment termination payment. | Detailed Reasoning - Payment is made in consequence of the termination of your employment: For a payment to be treated as an employment termination payment, the first condition that needs to be met is that there must be a payment that is made in consequence of the termination of employment of the taxpayer, as per subparagraph 82-130(1)(a)(i) of the ITAA 1997. | Detailed Reasoning - The Payment: The Payment was paid to you in the 2012-13 income year. The phrase 'in consequence of' is not defined in the ITAA 1997. However, the courts have interpreted the phrase in a number of cases. Whilst the courts have divergent views on the meaning of this phrase, the Commissioner's view on the meaning and application of the 'in consequence of' test are set out 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'. While TR 2003/13 considered the meaning of the phrase 'in consequence of' in the context of eligible termination payments, TR 2003/13 can still be relied upon as both the former provision under the Income Tax Assessment Act 1936 and the current provision under the ITAA 1997 both use the term 'in consequence of' in the same manner. In paragraph 5 of TR 2003/13 the Commissioner states: 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. In paragraph 6 of TR 2003/13, the Commissioner recognises that: 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 phrase 'in consequence of' the termination of employment has been interpreted by the courts in several cases. Of note are the decisions made by the High Court in Reseck v. Federal Commissioner of Taxation (1975) 49 ALJR 370; (1975) 6 ALR 642; (1975) 5 ATR 538; (1975) 75 ATC 4213; (1975) 133 CLR 45 ( Reseck ) and the Full Federal Court in McIntosh v. Federal Commissioner of Taxation (1979) 25 ALR 557; (1979) 10 ATR 13; (1979) 45 FLR 279; (1979) 79 ATC 4325 ( McIntosh ). Both Courts views were that for a payment to be made in consequence of the termination of employment it had to follow on as a result or effect of the termination of employment. Additionally, while it is not necessary to show that termination of employment is the sole or dominant cause, a temporal sequence alone would not be sufficient. There is also a broader view of the meaning of 'in consequence of' the termination of employment. Paragraph 29 of TR 2003/13 provides that a payment will be in consequence of the termination of employment if the termination is either a cause of the payment or an antecedent event. Furthermore, in Case No M 101/1976 (1977) 77 ATC 475; (1977) 22 CTBR (NS) 41 ( Case No M 101/1976 ) the No. 2 Board of Review considered whether a production completion bonus was made in consequence of termination of employment. The facts of the case were that on the day he was retrenched, the taxpayer received a production completion bonus of $2,750 from his employer. In a letter to the Deputy Commissioner, the taxpayer's former employer explained that the bonus payment was designed as an incentive to keep the employee on a particular project until he was no longer needed. Payment of the bonus was conditional on the employee remaining on the job until retrenched. The taxpayer gave evidence that had he resigned at any time before the retrenchment date he would have received no part of the bonus. The No. 2 Board of Review held that the payment constituted an allowance or compensation paid in a lump sum in consequence of the termination of the taxpayer's employment within the meaning of former paragraph 26(d) of the ITAA 1936 (the precursor to the ETP provisions). In making the decision the judgement of the majority of the Full High Court in Reseck was followed. 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. The circumstances of your case are very similar to the circumstances in Case No M 101/1976 considered by the No. 2 Board of Review. In the facts of your case, the Employer has advised your position would become redundant. In a separate letter, the Employer advised that in order to meet its contractual obligations and achieve successful closure they were prepared to offer you the Payment under a special program. This acts as an incentive to secure your employment services in the 2012-13 income year. It is clear from the facts provided that the Payment is made 'in consequence of' the termination of your employment. As such, there is a direct causal connection between the termination of your employment and the making of the payment. If not for the termination of your employment, the Payment would not have been made. In particular, the Payment was conditional on you remaining in employment with the Employer until your cessation date. Had you voluntarily resigned, you would not have been entitled to the Payment. It is therefore considered there is a sufficient causal nexus between the making of the Payment and the termination of employment to say that the payment was made in consequence of the termination of your employment. | Detailed Reasoning - Payment is received no later than 12 months after that termination: The second condition for the payment to meet the criteria as an employment termination payment requires the payment in question be received within twelve months of that termination (paragraph 82-130(1)(b) of the ITAA 1997), unless they are covered by a determination exempting them from the 12 month rule. In this case, paragraph 82-130(1)(b) of the ITAA 1997 has been satisfied as the Payment was paid to you within 12 months of the termination of your employment. | Detailed Reasoning - Payment is not a payment mentioned in section 82-135 of the ITAA 1997: The final requirement for a payment to qualify as an employment termination payment, as per paragraph 82-130(1)(c) of the ITAA 1997, is that the payment is not a payment mentioned in section 82-135 . This paragraph includes a number of types of payments, including unused annual and long service leave. With the possible exception of paragraph 82-135(e) of the ITAA 1997, none of these payments are relevant in your case. Relevantly in your case, paragraph 82-135(e) of the ITAA 1997 states that the tax-free part of a genuine redundancy payment, worked out under section 83-170, is not an employment termination payment. | Detailed Reasoning - Genuine redundancy payment: Genuine redundancy payments (GRP) are tax-free up to a limit worked out under section 83-170 of the ITAA 1997. Section 83-175 of the ITAA 1997 outlines the requirements to be satisfied before any payment made to a person whose employment is terminated qualifies for treatment as a GRP. This section states in part: (1) A genuine redundancy payment is so much of a payment received by an employee who is dismissed from employment because the employee's position is genuinely redundant as exceeds the amount that could reasonably be expected to be received by the employee in consequence of the voluntary termination of his or her employment at the time of the dismissal. (2) A genuine redundancy payment must satisfy the following conditions: (a) the employee is dismissed before the earlier of the following: (i) the day he or she turned 65; (ii) 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 the age or complete the period of service (as the case may be); (b) if the dismissal was not at arm's length the payment does not exceed the amount that could reasonably be expected to be made if the dismissal were at arm's length; (c) at the time of the dismissal, there was no arrangement between the employee and the employer, or between the employer and another person, to employ the employee after the dismissal… The first requirement which is specified in subsection 83-175(1) of the ITAA 1997 has three criteria: (i) the payment is received by an employee who is dismissed from employment; (ii) the employee is dismissed because the employees position is genuinely redundant; and (iii) the payment exceeds the amount that could reasonably be expected to be received by the employee in consequence of the voluntary termination of his or her employment at the time of the dismissal. As already considered in this case, the Payment was made to you in consequence of the termination of your employment. Your employment was being terminated by the Employer as a result of an organisational review. The termination of your employment is clearly a dismissal, instigated by the Employer. The Payment would be paid to you if you remained employed by the Employer until your cessation date and your employment did not end through resignation or misconduct or poor work performance. You would not be eligible for the payment if, prior to your cessation date, you voluntarily transfer to another area or to any associated enterprise. The Payment is therefore clearly being paid to you in circumstances of genuine redundancy. The Payment is also in excess of the amount that you could reasonably expect to receive if you had resigned or retired from employment in the position you held at the time of dismissal. If not for the termination of your employment, the Payment would not have been made. It is therefore considered that you have satisfied the requirements of subsection 83-175(1) of the ITAA 1997 in this instance. | Detailed Reasoning - The requirements under paragraphs 83-175(2)(a) and (b) of the ITAA 1997: As already noted previously, paragraph 83-175(2)(a) of the ITAA 1997 prescribes that the employee must be dismissed before the earlier of: Ÿ the day he or she turned 65; or Ÿ 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 the age or complete the period of service (as applicable). It is accepted that there was no date prior to your 65 th birthday on which you were required to terminate employment, and that you were not required to terminate employment before you were dismissed on the effective date. Also given that you were under 65 years of age at the time of your dismissal, you have satisfied the requirements of paragraph 83-175(2)(a) of the ITAA 1997. Additionally, it is accepted that all dealings between yourself and the Employer were at arm's length. Therefore, it follows that you have also satisfied the requirement under paragraph 83-175(2)(b) of the ITAA 1997. | Detailed Reasoning - The requirement under paragraph 83-175(2)(c) of the ITAA 1997: Also as noted previously, paragraph 83-175(2)(c) of the ITAA 1997 requires that at the time of the dismissal, there was no arrangement between the employee and the employer, or between the employer and another person, to employ the employee after the dismissal. In your case, there will not be any re-employment by the Employer or evidence of any re-employment arrangement with another entity, so it is accepted that you have satisfied the requirement under paragraph 83-175(2)(c) of the ITAA 1997 in this case. | Detailed Reasoning - A GRP under sections 83-170 and 83-175 of the ITAA 1997: As you have satisfied the relevant criteria set out in section 83-175 of the ITAA 1997, it is considered that the Payment constitutes a GRP for the purposes of section 83-170. | Detailed Reasoning - Tax-free treatment of a GRP: Some or all of a genuine redundancy payment may be non-assessable and non-exempt income, and accordingly tax-free, under section 83-170 of the ITAA 1997. Subsection 83-170(2) of the ITAA 1997 provides that so much of the GRP that does not exceed the amount worked out using the formula prescribed in subsection 83-170(3) is not assessable income and is not exempt income. The extent to which the payment is tax-free will depend on the amount of the payment and the total number of whole years of employment to which the payment relates. The formula for working out the tax-free amount is: Base amount + (Service amount × Years of service) As your termination of employment occurred during the 2012-13 income year, the base amount is $8,806 and the service amount is $4,404. Years of service means the number of whole years in the period, or sum of periods, of employment to which the payment relates. The 'years of service' to which the genuine redundancy payment relates refers to each whole year of completed employment service to which the redundancy payment relates. It should be noted that, 6 months, 8 months or even 11 months do not count as a whole year for the purposes of this calculation. This tax-free amount is not assessable income and is not exempt income in accordance with subsection 83-170(2) of the ITAA 1997. Along with your other entitlements you also received a redundancy payment of from the Employer. The redundancy payment both includes and exceeds your tax-free amount. Consequently, it utilises all of the tax-free part of a genuine redundancy payment you can receive in the 2012-13 income year. Therefore, no part of the Payment will be excluded from being an employment termination payment as the tax-free part of a genuine redundancy payment worked out under section 83-170 of the ITAA 1997. Hence, the Payment is an employment termination payment and will be taxed accordingly. | Detailed Reasoning - Conclusion: The Payment you received is an employment termination payment. The Payment is paid in consequence of the termination of your employment is an employment termination payment and a genuine redundancy payment. As the Payment you received is in excess of the tax-free amount of a genuine redundancy payment, the Payment will be assessable income and taxed as an employment termination payment.