Private ruling: Withholding obligations
Published: May 2014
Ruling period: Year ending 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Q1: Are payments to be made to ex-members by a government department employment termination payments? | A1: Yes

Relevant facts and circumstances: The government department have a number of ex-members. These members were formerly employed under a specific Act who have subsequently transferred employment within the government and were then employed under a different Act. One taxpayer had been employed continuously by the government department and on a certain date the taxpayer voluntarily resigned from their position and was appointed as a public servant with the same government department. They subsequently terminated their employment with the government department. In accordance with advice received, upon termination of employment with the government department this taxpayer would receive a gross payment of a certain amount. However, if the government department recognised the taxpayer's first service period with the government department the taxpayer would receive a higher amount. Similarly, another taxpayer had been employed continuously by the government department and the taxpayer voluntarily resigned from their position and was appointed as a public servant within the government department. This taxpayer subsequently resigned as a public service and was appointed as public servant (under a different Act) at a later date. The taxpayer subsequently terminated their employment. In accordance with advice, this taxpayer would receive a certain payment compared to a higher amount if the taxpayer's total service period with the government department was recognised. The upshot is that both taxpayers, upon retirement, each received a lesser amount than they would have received had their total service period with both government departments been recognised. One government department proposes that an 'Act of Grace' payment be made to each taxpayer for the difference between the severance payment able to be made under the regulations and the payment they would have received if their total service period with the first government department is recognised. Two 'Act of Grace' payments were authorised to be paid to both taxpayers due to their unique circumstances. During a telephone conversation with the case officer, the applicant stated that both taxpayers have retired and they will be paid in the 2013-14 income year.

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 Section 82-135. | Income Tax Assessment Act 1997 Section 82-140. | Income Tax Assessment Act 1997 Section 82-145. | Income Tax Assessment Act 1997 Paragraph 82-155(1). | Income Tax Assessment Act 1997 Paragraph 82-155(2). | Income Tax Assessment Act 1997 Section 995-1. Schedule 1 of Taxation Administration Act 1953 section 12-85.

Reasons for decision: Summary: The Payments are employment termination payments as: _ they are made in consequence of the termination of the employment; _ they are made within 12 months of termination of employment; and _ they are not payments which are excluded from being employment termination payments. | Detailed Reasoning - Employment termination payment: Section 995-1 of the Income Tax Assessment Act 1997 (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 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. To determine if a payment constitutes an employment termination payment, all the conditions in section 82-130 of the ITAA 1997 will need to be satisfied. Failure to satisfy any of the three conditions will result in the payment not being considered an employment termination payment. Furthermore, any termination payments received outside of the 12 months will be taxed as ordinary income at marginal tax rates, unless the taxpayer is covered by a determination exempting them from the 12 month rule. | Detailed Reasoning - Paid as a consequence of the termination of your employment: It should be noted that the phrase 'in consequence of the termination of your employment' is not defined in the legislation. However, both the Courts and the Commissioner have considered the meaning of this phrase. In Taxation Ruling TR 2003/13 the Commissioner has considered the meaning of the phrase 'in consequence of'. In paragraph 5 of TR 2003/13 the Commissioner states: … 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. As further stated by the Commissioner in paragraph 6 of TR 2003/13, there must be: … 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. The phrase 'in consequence of 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 ). In Reseck Justice Gibbs stated: Within the ordinary meaning of the words a sum is paid in consequence of the termination of employment when the payment follows as an effect or result of the termination… It is not my opinion necessary that the termination of the services should be the dominant cause of the payment. While Justice Jacobs stated: It was submitted that the words 'in consequence of' import a concept that the termination of the employment was the dominant cause of the payment. This cannot be so. A consequence in this context is not the same as a result. It does not import causation but rather a 'following on'. In looking at the phrase 'in consequence of' the Full Federal Court in McIntosh considered the decision in Reseck . Justice Brennan considered the judgments of Justice Gibbs and Justice Jacobs in Reseck and concluded that their Honours were both saying that a causal nexus between the termination and payment was required, though it was not necessary for the termination to be the dominant cause of the payment. Suffice it to say that 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. The phrase in consequence of and the decisions in Reseck and McIntosh were considered by the Federal Court in Le Grand v Federal Commissioner of Taxation [2002] FCA 1258; (2002) 124 FCR 53; (2002) 195 ALR 194; (2002) 2002 ATC 4907; (2002) 51 ATR 39 ( Le Grand ), where Justice Goldberg stated: I am satisfied that there is a sufficient connection between the termination of the applicant's employment and the payment to warrant the finding that the payment was made in consequence of the termination of the applicant's employment. I am satisfied that the payment was an effect or result of that termination in the sense that there was a sequence of events following the termination of the employment which had a relationship and connection which ultimately led to the payment. Justice Goldberg concluded that the test for determining when a payment is made in consequence of the termination of employment is that which was expressed by Justice Gibbs in Reseck . Thus, for the payment to have been made in consequence of the termination of employment, the payment must follow as an effect or result of the termination of employment. As noted in both paragraphs 6 and 28 of TR 2003/13, there must be 'a causal connection between the termination and the payment even though the termination need not be the [sole or] dominant cause of the payment'. Therefore if the payment follows as an effect or a result from 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. Hence the payment will be an employment termination payment unless the payment is specifically excluded under section 82-135. 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 the present case, both taxpayers were employed by one government department under a certain Act and both subsequently transferred employment to another government department under a different Act. The two taxpayers' previous service period with the first government department was not recognised by the second government department. Simply, the requirements of the Act are in place to make sure only appropriate service is recognised in any severance payment. However, due to their particular circumstances, service under the first Act cannot be brought to account under the Regulations for the purposes of calculating voluntary severance payments. As a result, upon retirement, both taxpayers received a lesser amount than they would have received had their service been recognised for their total service period. It is not the intention of the Act to discriminate against employees who have service with the one employer, albeit under different legislation. To overcome this situation the first employer recommended that an 'Act of Grace' payment (the Payment) be made to each of the Taxpayers. The Payment is a special gift of money by the government made under the authority of the Act. The Payment may be appropriate in circumstances where: (a) the application of legislation produces unintended, anomalous, inequitable, unjust or otherwise unacceptable results in particular circumstances; or (b) the matter is not covered by legislation but certain benefits of proposed legislation are considered desirable in the particular case; or (c) particular circumstances of the case lead to the conclusion that there is a moral obligation on the government to make a payment. It was considered by the government that the taxpayers' circumstances would fall within the categories for the Payment. The recommendation was endorsed and authorised by the government. It is clear from the facts provided that the Payment made to both taxpayers was made as 'in consequence of the termination of employment'. Although the dominant cause of each Payment was compensation for the termination benefits that would otherwise be paid, there is still a causal connection between the termination and the making of the Payment. The termination and the Payment are all intertwined and connected. Therefore the first requirement under subparagraph 82-130(1)(a)(i) of the ITAA 1997 has been satisfied. | Detailed Reasoning - The payment is received no later than 12 months after termination: The second condition for the payment to meet the criteria, as an employment termination payment is stated under paragraph 82-130(1)(b) of the ITAA 1997. The payment must be received within 12 months of the taxpayer's termination of employment, unless the taxpayer is covered by a determination exempting him or her from the 12 month rule. As noted in the facts, the Payments were made within 12 months of the termination of their employment, the requirement in paragraph 82-130(1)(b) of the ITAA 1997 has been satisfied. | Detailed Reasoning - Not a payment mentioned in section 82-135 of the ITAA 1997: Certain payments made on termination of employment are excluded from being an employment termination payment under section 82-135 of the ITAA 1997. These payments include: (a) accrued annual and long service leave; and (b) the tax-free parts of a genuine redundancy payment or an early retirement scheme payment; as well as other types of payments which do not apply to an employment termination payment. As stated above, each Payment is considered to be a payment received in consequence of the termination of employment and is not a payment mentioned in section 82-135 of the ITAA 1997. Thus, the requirement in paragraph 82-130(1)(c) is satisfied in this instance. Consequently, the Payment made to each Taxpayer is considered to be an employment termination payment as it satisfies all the requirements in section 82-130 of the ITAA 1997, and is not specifically excluded under section 82-135. | Detailed Reasoning - Conclusion:: Each Payment was paid in consequence of termination of employment; the Commissioner concludes that each Payment is an employment termination payment as it satisfies all of the relevant provisions as shown above. | Detailed Reasoning - Taxation Treatment: An employment termination payment will be comprised of the following components: _ Tax free component - as provided in section 82-140 of the ITAA 1997, this includes an invalidity segment within the meaning of section 82-150 (if any) and/or a pre-July 83 segment within the meaning of section 82-155 (if any); and _ Taxable component - the amount remaining after deducting the tax free component calculated in accordance with section 82-140 from the total payment, as prescribed in section 82-145. | Detailed Reasoning - Pre-July 1983 segment: Subsection 82-155(1) of the ITAA 1997 states: An employment termination payment includes a pre-July 83 segment if any of the employment to which the payment relates occurred before 1 July 1983. Subsection 82-155(2) of the ITAA 1997 provides the following formula to calculate the pre-July 83 segment : | Detailed Reasoning - total employment days: where: _ pre-July 83 days are the number of days of employment to which the payment relates that occurred before 1 July 83; and _ employment days are the total number of days of employment to which the payment relates. The tax free component is not assessable income and is not exempt income. The taxable component, which is included in full as assessable income, is subject to tax, depending on the person's age when the payment is received. | Detailed Reasoning - PAYG Withholding: Section 12-85 of Schedule 1 of the Taxation Administration Act 1953 states: An entity must withhold an amount from any of the following payments it makes to an individual: (a) a superannuation lump sum; (b) an employment termination payment. As shown above, the payment to be made to each Taxpayer is an employment termination payment. Therefore, an amount of tax must be withheld. The amount to withhold depends on whether a Tax File Number (TFN) has been provided. If a TFN has not been provided before the payment is made, tax must be withheld at the rate of 46.5% from the taxable component. This represents the top marginal rate plus Medicare levy. If the taxpayer has provided the employer with a TFN, tax must be withheld at the following rates: | Detailed Reasoning - Maximum rate of tax (including Medicare levy): Employment termination payment (ETP) - taxable component Under preservation age Amount up to the ETP cap amount 31.5% At or above preservation age Amount up to the ETP cap amount 16.5% All ages Amount above the ETP cap amount 46.5% For the income year in question the ETP cap amount is $180,000. Preservation age is the age at which retirees can access their superannuation benefits generally when they retire. If the taxpayer was born: _ before 1 July 1960 they can access their superannuation when they are 55. _ after 30 June 1960, their preservation age will be between 55 and 60. This is because the preservation age will gradually increase from 55 to 60 between 2015 and 2025.