Private ruling: Employment termination payment
Published: February 2012
Ruling period: 1 July 2011 to 30 June 2012 | 1 July 2012 to 30 June 2013
Date scheme commenced: 1 July 2011

Ruling: Q1: Will the golden handshake payment to be made by the company to the retiring director be an employment termination payment? Advice/Answers: Yes.


Relevant legislative provisions: Income Tax Assessment Act 1997 Section 995-1. | Income Tax Assessment Act 1997 Paragraph 82-10(3)(a) | Income Tax Assessment Act 1997 Paragraph 82-130(1)(a). | Income Tax Assessment Act 1997 Paragraph 82-130(1)(b). | Income Tax Assessment Act 1997 Paragraph 82-130(1)(c). | Income Tax Assessment Act 1997 Subsection 82-130(2). | 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 Section 82-150.

Reasons for decision: Summary: The payment is an employment termination payment as it was made in consequence of the termination of employment of the employee. The tax-free component is not assessable and not exempt income. The taxable component is assessable and taxed at 15% plus Medicare levy. A tax offset will apply to ensure the payment is taxed at 15%. | Detailed Reasoning - Employment termination payment: Payments made in consequence of the termination of any employment of a taxpayer are called employment termination payments. Where the payment is made during the life of a taxpayer the employment termination payment will be known as a life benefit termination payment (LBTP - subsection 82-130(2) of the Income Tax Assessment Act 1997 (ITAA 1997)). Section 995-1 of the ITAA 1997 states: employment termination payment has the meaning given by section 82-130. 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. | Detailed Reasoning - Payment is made in consequence of the termination of employment: The first condition to be met is that there must be an employment termination payment that is made in consequence of the termination of employment of the taxpayer. The phrase 'in consequence of' is not defined in the ITAA 1997. However, the Commissioner has issued Taxation Ruling TR 2003/13 which discusses the meaning of the phrase. 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 ). 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. 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 of the ITAA 1997. In this case, it is evident that the payment referred to as a golden handshake to be made to the employee will be made in consequence of her termination of employment. This is because the payment would not have been made had there been no termination of employment. The termination of employment and the payment are intertwined and connected. If not for the termination of employment, the issue of paying the golden handshake would not have arisen. Consequently, the payment is considered to be in consequence of the termination of the employee's employment. Therefore the requirement of subparagraph 82-130(1)(a) of the ITAA 1997 will be met. | Detailed Reasoning - The payment is received no later than 12 months after termination of employment: 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, is that the employment termination payment was paid to the taxpayer no later than 12 months after their employment was terminated. In this case if the employment termination payment is paid to the employee by within 12 months after termination of employment, the requirement under paragraph 82-130(1)(b) of the ITAA 1997 will be met. | Detailed Reasoning - Payments excluded from being employment termination payments: Section 82-135 of the ITAA 1997 provides that certain payments are not employment termination payments, including: o an unused annual leave payment; o an unused long service leave payment; or o the tax-free part of a genuine redundancy payment or an early retirement scheme payment. The proposed payment is none of those included under this section, therefore paragraph 82-130(1)(c) of the ITAA 1997 will be met. As all the conditions will be met , the payment will be an employment termination payment. | Detailed Reasoning - Tax Treatment of the employment termination payment: An employment termination payment will be comprised of the following components: · Tax free component - this includes the pre-July 83 segment (if any) and/or the invalidity segment (if any); and · Taxable component - the amount remaining after deducting the tax free component from the total payment. The tax free component is not assessable income and is not exempt income. It does not have to be included in the employee's income tax return. The taxable component is included, in full, as assessable income. The employee commenced employment with the employer before 1 July 1983. Therefore, there will be a pre-July 83 segment within the meaning of section 82-155 of the ITAA 1997. This tax free component is calculated as follows: · The pre July 1983 component is calculated by multiplying the amount of the employment termination payment by the number of pre 1 July 1983 service days and divided by the total number of days of employment relevant to the employee's employment. · As the payment is not made because of the employee ceasing to be being gainfully employed as a result of suffering from ill-health, but rather for input and work for the Company, there is no invalidity segment for the purposes of section 82-150 of the ITAA 1997. · As the employment termination payment of contains a pre-July 83 segment but no invalidity segment, the tax free component is only the pre July 1983 component as defined in section 82-140 of the ITAA 1997. The remainder of the employment termination payment which is the employment termination payment less the pre July 1983 component is a taxable component as defined in section 82-145. The taxable component is subject to tax, depending on the person's age when the payment is received. For recipients above preservation age, the taxable component of an employment termination payment is taxed at 15% plus Medicare levy for amounts below the employment termination payments (ETP) cap of $165,000 for the 2011-12 income year, and at the top marginal rate for amounts above the cap. Preservation age is the age at which retirees can access their superannuation benefits. This will be 55 for persons born before 1 July 1960 and between 55 and 60 for persons born after 30 June 1960. In this case, the employee is over preservation age on the last day of the income year in which the payment will be made. Therefore, provided the employee does not receive any additional taxable components of LBTPs which will count towards and exceed the ETP cap amount of $165,000, a tax offset will apply to ensure that the rate of tax on the taxable component of $108,172 will not exceed 15%, in accordance with paragraph 82-10(3)(a) of the ITAA 1997. The ETP cap amount is $175,000 for the 2012-13 income year. The tax payable on the taxable component is at 16.5%.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet. | A company (the Company) was registered many years ago. | An employee (the employee) was an inaugural director and shareholder of the Company. From the beginning the employee also performed administrative duties. | Some years ago the employee resigned as director of the Company. | In the following year the employee was re-instated as a director. | In the 2011-12 income year the employee resigned from the Company as director and employee. | The Board of Directors met, accepted the employee's resignation and proposed to give her a golden handshake to recognise her input and work for the past years. | The employee was over 55 years of age when she retired.