Private ruling: Employment termination payment
Published: October 2012
Ruling period: Year ended 30 June 2011
Date scheme commenced: 1 July 2010

Ruling: Q1: Is the taxable component of the employment termination payment received by your client in the relevant income year correct? | A1: Yes.

Relevant facts and circumstances: Your client commenced employment with an Employer (the Employer) in the specific income year. During the 20XX-YY income year your client's employment was terminated as a result of a redundancy. Details on one document (Document X) provided show: (a) the completed full years of service your client had with the Employer; (b) the amount that was a redundancy payment ; (c) the tax-free amount of the redundancy payment; and (d) the amount in excess of the tax-free part of the redundancy payment was treated as a taxable component on which an amount of tax was withheld. A copy of the PAYG payment summary - employment termination payment (the ETP Summary) in relation to the 20XX-YY income year has been provided. The Summary shows: (i) the payment was made soon after the termination of your client's employment; (ii) the taxable component is an amount greater than in Document X; and (iii) tax withheld on the taxable component as same as that in Document X. The PAYG Payment Summary in relation to your client, which was prepared by the Employer for the 20XX-YY income year has been provided and it shows amongst other matters that the tax-free amount of the redundancy payment has been correctly returned as a label D lump sum. The Employer sent you a document (Document Y) stating the total amount of the taxable component on the ETP Summary is correct and was made up of the: · amount of the redundancy payment in excess of the tax-free amount; and · an unused sick leave paid out In Document Y the Employer also stated tax had not been taken out of the unused sick leave payment. Your client is less than 55 years of age.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subsection 82-10(2). | Income Tax Assessment Act 1997 Subsection 82-10(3). | Income Tax Assessment Act 1997 Section 82-130. | Income Tax Assessment Act 1997 Subsection 82-130(1). | Income Tax Assessment Act 1997 Subsection 82-130(2). | 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 amount your client received from the former Employer in relation to a pay out of unused sick leave forms part of an employment termination payment (ETP). Further, as the payment is an ETP which comprises wholly of a taxable component, and it was received before your client's preservation age, it is taxed at a rate of 31.5%. | Detailed Reasoning - Employment termination payments: Payments made in consequence of the termination of a taxpayer's employment are known as employment termination payments. Employment termination payments are defined in section 82-130 of the Income Tax Assessment Act 1997 (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 employment termination payments, including: · payment for unused annual leave or unused long service leave; · the tax-free part of a genuine redundancy payment (GRP) or an early retirement scheme payment; · reasonable capital payments for personal injury. To be an employment termination payment, the amount received by your client, that is, the taxable component amount in the ETP Summary and Document X, which is the subject of this ruling, must satisfy all three conditions listed above. | Detailed Reasoning - Payment is made in consequence of the termination of employment: The first condition to be met is that the payment is made in consequence of the termination of employment of the taxpayer. In Taxation Ruling TR 2003/13 (TR 2003/13) the Commissioner considered the meaning of the phrase in consequence of as interpreted by the Courts. 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. Also in paragraph 5 of TR 2003/13 the Commissioner notes that the Courts have considered the meaning of the words in consequence of in several cases. Of note are the decisions made by the Full Bench of 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, in the same case, 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 . In doing so the Full Federal Court emphasised that a payment may be in consequence of the termination of employment even though the termination is not the dominant cause of the payment. In particular, 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 more recently 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 applicants employment and the payment to warrant the finding that the payment was made in consequence of the termination of the applicants 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 articulated 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 a life benefit employment termination payment unless the payment is specifically excluded under section 82-135 of the ITAA 1997. In this case, your client's employment with (the Employer) was terminated as a result of genuine redundancy in the 20XX-YY income year. As a result of your client's termination of employment the facts show that, in addition to salary and statutory entitlements, your client also received: · a redundancy payment; and · a pay out of unused sick leave. It is evident that the above payments, the redundancy payment and unused sick leave pay out, were made to your client in consequence of your client's termination of employment. The payments would not have been made had there been no termination of employment. The termination of employment and the payments are all intertwined and connected. If not for the termination of employment, the issue of paying the above amounts would not have arisen. Accordingly, the above payments are considered to have been received by your client in consequence of the termination of employment. Therefore the requirement of subparagraph 82-130(1)(a) of the ITAA 1997 will be met. | Detailed Reasoning - Payment is received no later than 12 months after termination of employment: The second condition for a payment to be an ETP is that the payment was paid to the taxpayer no later than 12 months after their employment was terminated (paragraph 82-130(1)(b) of the ITAA 1997). In this case your client's employment was terminated in the 20XX-YY income year and the payments were made to your client within the same income year. Accordingly, the requirement under paragraph 82-130(1)(b) of the ITAA 1997 has been met. | Detailed Reasoning - Payment mentioned in section 82-135 of the ITAA 1997: As previously mentioned, section 82-135 of the ITAA 1997 excludes certain payments from being employment termination payments, These payments include: · a payment for unused annual leave · a payment for unused long service leave · capital payments for personal injury · the tax-free amount of a genuine redundancy payment. In your client's case, the facts provided show your client was made genuinely redundant and the redundancy payment paid to your client was a genuine redundancy payment (GRP) for the purposes of section 83-175 of the ITAA 1997. Accordingly, the tax-free amount of the GRP received by your client is calculated by using the formula in subsection 83-175(3) of the ITAA 1997, that is: Base amount + (Service amount Years of service) For the 20XX-YY income year: Base amount means $8,216; Service amount means $4,064; and Years of service means the number of whole years in the period, or sum of periods, of employment to which the payment relates. The tax-free amount available to your client has been calculated in accordance with the formula in subsection 83-170(3) of the ITAA 1997. Accordingly, part of the redundancy payment, by reason of its being the tax-free amount of a GRP, is excluded from being an ETP in accordance with paragraph 82-135(e) of the ITAA 1997. It is also noted that the tax-free amount has been correctly included as a label D lump sum amount on your client's PAYG Payment Summary in that it is an amount which is not required to be shown in your client's income tax return for the 20XX-YY income year. As for the amount of the redundancy payment which exceeds the tax-free limit, and bearing in mind it satisfies the other conditions discussed in relation to ETPs, that amount, is an ETP which is taxed according to its components. In the relation to the payment for unused sick leave, as previously discussed, it satisfies the ETP requirements of being made in consequence of termination of employment and being paid within 12 months of the termination of employment. Further, it should be noted that the issue of whether the unused sick leave amount forms part of a GRP is not relevant in this case. As discussed and shown above, the tax-free limit of a GRP available to your client was wholly applied towards the redundancy payment. Thus, regardless of whether the unused sick leave payment was a GRP, paragraph 82-135(e) of the ITAA 1997 would not exclude any part of that payment from being an ETP as there is no tax-free amount available left to your client for this termination of employment which could be applied against the unused sick leave payment. In view of the above, the payment for unused sick leave is an ETP. | Detailed Reasoning - Conclusion: The amount of the redundancy payment in excess of the tax-free amount and the unused sick leave paid to your client, as shown on the PAYG payment summary - employment termination payment (the Summary), are ETPs. Though the Employer correctly included the unused sick leave payout as part of an ETP it is noted that the Employer mistakenly treated the unused sick leave payout as being non-taxable (as shown in the Summary and Document Y). Notwithstanding the Employer correctly treated the amount of the GRP in excess of the tax-free amount and the unused sick leave payment as an ETP it should be noted that, as the ETP is comprised wholly of a taxable component and it represents assessable income. In relation to the rate of tax that applies to the ETP, subsection 82-10(3) of the ITAA 1997 specifies that a taxable component is subject to tax and the rate applied depends on the recipient's age. As your client is less than 60 years of age, and below the preservation age relating to your client, the ETP is taxed at a maximum rate of 30% plus Medicare levy.

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