Private ruling: Employment termination payment
Date of advice: 11 December 2018
Published: April 2019
Ruling period: Income year ended 30 June 2018
Date scheme commenced: 1 July 2017

Ruling: Q1: Is any part of the payment you received on termination of employment, considered to be a genuine redundancy payment in accordance with section 83-175 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No.

Relevant facts and circumstances: You are under 65 years of age. In 2012, you commenced employment with an entity (the Former Employer). In 2017, you entered into an employment contract with the Former Employer. The employment contract was a five year period (unless sooner terminated). In early 2018, you emailed the Former Employer advising you were resigning on a particular date to focus on your next challenge and career step. After your email notification, the Former Employer issued correspondence to you confirming your resignation with effect from your stipulated date. Several weeks later, a Deed of Separation and Release (the Deed), was executed between yourself and the Former Employer in which it was stated that you agreed to resign from your employment on the stipulated date. A few weeks after the Deed was executed, you received a termination payment of $X from the Former Employer, which comprised an amount of unused annual leave.

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 83-175 | Income Tax Assessment Act 1997 Subsection 83-175(1) | Income Tax Assessment Act 1997 Subsection 83-175(4) All references are to the ITAA 1997 unless otherwise indicated.

Reasons for decision: Summary: A portion of the termination payment you received from the Former Employer is an employment termination payment (ETP) and treated as assessable income in the 2017-18 income year. The amount up to the ETP cap amount is subject to tax at a concessional rate. The amount representing unused annual leave is not an ETP. This amount is included in your assessable income in the 2017-18 income year and subject to marginal rates of tax. | Detailed Reasoning - Employment termination payment: A payment is an ETP if it satisfies all the requirements in section 82-130 and is not specifically excluded under section 82-135. Subsection 82-130(1) 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 provides that certain payments are not ETPs. Relevantly, these include (among others): n unused annual leave or long service leave payments; and n the tax-free part of a genuine redundancy payment or an early retirement scheme payment. | Detailed Reasoning - Termination payment: 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) states, at paragraphs 5 and 6, that: 5. ...the Commissioner considers that a payment is received by a taxpayer in consequence of the termination of the taxpayer's employment 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 received by 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 received in consequence of the termination of employment will be determined by the relevant facts and circumstances of each case. While TR 2003/13 contains references to repealed provisions, some of which may have been rewritten, the ruling still has effect. You resigned from employment with the Former Employer in early 2018 and, as a result, a payment of $X was paid to you by the Former Employer several weeks later. There is a clear causal connection between the termination of your employment and the payment of this amount. In other words, but for the termination of employment this payment would not have been made to you. Therefore, the payment of $X was made in consequence of the termination of employment as defined in subparagraph 82-130(1)(a)(i). Further, this amount was paid to you within 12 months of your termination (thereby satisfying paragraph 82-130(1)(b)). However, it is important to note, that unused annual leave payments are specifically excluded from being ETPs under section 82-135. Consequently, an amount representing unused annual leave is not an ETP. Unused annual leave payments receive a more specific tax treatment and are also excluded from being genuine redundancy payments by section 83-175(4). Further, the tax-free part of a genuine redundancy payment is also excluded from being an ETP under section 82-135. | Detailed Reasoning - Genuine redundancy payment: Under subsection 83-175(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. In Taxation Ruling 2009/2 Income tax: genuine redundancy payments (TR 2009/2), the Commissioner of Taxation (the Commissioner) outlines 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. The Commissioner considers that there are four necessary components within this termination requirement: ● The payment being tested must be received in consequence of an employee’s termination. ● That termination must involve the employee being dismissed from employment. ● That dismissal must be caused by the redundancy of the employee’s position. ● The redundancy payment must be made genuinely because of a redundancy. | Detailed Reasoning - Component 1: Payment ‘in consequence of’ an employee’s termination.: As stated above, it is considered that the total termination payment of $X you received was in consequence of the termination of your employment. Therefore, the first component of subsection 83-175(1) has been satisfied. | Detailed Reasoning - Component 2: Dismissal from employment.: At paragraphs 18 and 19 of TR 2009/2, the Commissioner states: 18. Dismissal is a particular mode of employment termination. It requires 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. 19. Consent in this context refers to the employee freely choosing to agree to or approve the act or decision to terminate employment in circumstances where the employee has the capacity to make such a choice. Determining whether the employee has consented to their termination requires an assessment of the facts and circumstances of each case. Consent may be either expressly stated by the employee or implied by their behaviour or conduct. On the facts in your case, it is evident that you resigned from employment with the Former Employer. Your employment ceased at your own initiative. You and the Former Employer ‘agreed’ to the end date of your resignation as per your email. The Former Employer subsequently accepted and confirmed your resignation in correspondence issued to you. You and the Former Employer executed the Deed in which your resignation date was stipulated. There is no evidence to suggest that you were dismissed from your employment at the initiative of the Former Employer. The Commissioner also acknowledges that in certain cases where an employee resigns, it may be necessary to consider whether cases of ‘constructive dismissal’ are a dismissal for the purposes of subsection 83-175(1). At paragraph 22 of TR 2009/2, the Commissioner states: …Constructive dismissal is currently recognised to occur where the actions or behaviour of the employer in relation to the employment relationship effectively curtails the element of consent on the employee’s behalf. The simplest example of constructive dismissal is where an employee resigns under threat (explicit or implicit) of dismissal. Another example is where the employee resigns after the employer offers work in an alternative position which is inappropriate given the employee’s particular circumstances (for example, their skills or experience). You contend that the Former Employer offered you a project based role, a role which you felt inappropriate given your skills. You also contend that no particular project was ever specified and that you had no option but to leave. Based on the facts of your case, there is no evidence to show that an alternative position was ever offered to you by the Former Employer. Further, there is no evidence to show that you may have resigned under threat (explicit or implicit). Your separation from the Former Employer as presented by the facts appears to be on clear, agreeable and amicable terms. There is no evidence in your case to show that the termination of your employment amounted to a constructive dismissal. As there was no dismissal from employment, the second component of subsection 83-175(1) has not been satisfied. Therefore, a portion your termination payment of $X does not qualify for treatment as a genuine redundancy payment and is to be treated as an ETP. The amount representing unused annual leave is not an ETP. This amount is assessable income and subject to marginal rates of tax.