Income tax: treatment of transfer payments made to employees of Green State Power Pty Ltd

This Ruling sets out the Commissioner's opinion on the way in which the relevant provision(s) identified below apply to the defined class of entities, who take part in the scheme to which this Ruling relates.

The relevant provisions dealt with in this Ruling is: • section 82-130 of the Income Tax Assessment Act 1997 (ITAA 1997) • section 82-135 of the ITAA 1997, and • section 995-1 of the ITAA 1997. All legislative references are to the ITAA 1997 unless otherwise indicated.

The class of employees to whom this scheme applies is all employees of Green State Power Pty Ltd (Green State Power), who: • cease employment with Green State Power • take up employment with the successful purchaser of the business (either by way of being directly employed by the purchaser or having their employment transferred to the new entity which is immediately sold to the successful purchaser), and • receive a 'transfer payment' from Green State Power under the scheme described in paragraph 17 of this Ruling.

The Commissioner makes this Ruling based on the precise scheme identified in this Ruling.

The class of entities defined in this Ruling may rely on its contents provided the scheme actually carried out is carried out in accordance with the scheme described in paragraphs 9 to 19 of this Ruling.

If the scheme actually carried out is materially different from the scheme that is described in this Ruling, then: • this Ruling has no binding effect on the Commissioner because the scheme entered into is not the scheme on which the Commissioner has ruled, and • this Ruling may be withdrawn or modified.

This Ruling applies from 11 June 2014 to 30 June 2015. The Ruling continues to apply after 30 June 2015 to all entities within the specified class who entered into the specified scheme during the term of the Ruling. However, this Ruling will not apply to taxpayers to the extent that it conflicts with the terms of a settlement of a dispute agreed to before the date of issue of this Ruling (see paragraphs 75 and 76 of Taxation Ruling TR 2006/10).

The following description of the scheme titled Income tax: treatment of transfer payments made to employees of Green State Power Pty Ltd is based on information provided by the applicant.

Green State Power is a proprietary limited company established on 4 June 2013. The sole shareholder is the Treasurer of New South Wales (NSW) for and on behalf of the Crown in the right of the State of NSW.

The NSW Government intends to sell the business undertaking conducted by Green State Power to a private sector entity.

The principals carrying out the scheme include Green State Power and the NSW Government.

The NSW Government is currently considering the method of sale of the business of Green State Power under the Electricity Generator Assets (Authorised Transition) Act 2012 (NSW) (the Act).

Various methods of sale alternatives are under consideration, however, under each of these scenarios, employees will cease employment with Green State Power. The possible alternatives include: 1. The NSW Government will sell the shares in Green State Power to a third party purchaser. Under this scenario the employees will either: • cease employment with Green State Power and be transferred directly to the primary employing entity of the private sector purchaser or a newly created entity owned by the purchaser. The private sector purchaser will acquire the shares in Green State Power, or • cease employment with Green State Power and be transferred to a newly established employment services company, initially held by the NSW Government or Green State Power. The private sector purchaser will acquire the shares in the employment services company and the shares in the Green State Power. There may be a need to establish an employment services company to better manage the transition of employees to the private sector. Specifically, the management of State legislated and preserved terms and conditions of employment, for example, a four year employment guarantee, the application and management of the new EBA and to provide time to harmonise employee terms and to limit potential Industrial Relations risk associated with the transition. 2. The NSW Government will transfer the assets in Green State Power (by way of a vesting order under the Act) to a purchaser or purchasers. Under this scenario, employees will either: • cease employment with Green State Power and be transferred directly to either one of the private sector purchasers or the primary employing entity of a private sector purchaser, or • cease employment with Green State Power and be transferred to a newly established employment services company or companies. The employment services company/companies will initially be held by either the NSW Government or Green State Power. 3. As a variation to (2) above, Green State Power assets will be transferred to a new proprietary limited company ('Newco') or various Newcos (by way of a vesting order under the Act) depending on the sale arrangement. The Newco(s) will initially be owned by either Green State Power or the NSW Government. Shares in Green State Power and/or Newco(s) will be sold to the purchaser(s). Employees will terminate employment with Green State Power and transfer either to the Newco or directly to the purchaser.

The class of entities to which this arrangement applies are all employees of Green State Power who: • cease employment with Green State Power • take up employment with the successful purchaser of the business (either by way of being directly employed by the purchaser or having their employment transferred to the new entity which is immediately sold to the successful purchaser, and • receive a 'transfer payment' from Green State Power under this scheme.

Upon the sale of Green State Power, all permanent (full or part-time) employees with more than one year's service with Green State Power, who cease employment with Green State Power and take up employment with the purchaser of Green State Power (by one of the alternatives outlined above) will receive a 'transfer payment' from Green State Power.

The 'transfer payment' reflects compensation for the loss of certain public sector employment conditions following cessation of employment with Green State Power (notwithstanding that same or similar employment conditions may be obtained with the new employer) such as: • 'no forced redundancies and voluntary redundancy' provisions of public sector management policies • access to redeployment provisions, including salary maintenance (a period up to 12 months on full salary if an employee's position is made redundant) and professional career transition support with external providers • paid maternity leave provisions • broader range of paid leave and leave without pay provisions • mandatory flexible working hours arrangements • access to provisions regarding the management of conduct and performance, and • access to provisions regarding the advertising, eligibility, selection and appointment to positions.

The 'transfer payment' will be calculated by reference to each employee's years of service as set out in the following table: Length of Service Transfer Payment Week's ordinary time base rate of pay Less than one year 0 One year or more, but less than two years 7.5 Two years or more, but less than three years 13.125 Three years or more, but less than four years 18.75 Four years or more, but less than five years 22.5 Five years or more, but less than six years 26.25 Six years or more 30

The 'transfer payment' will be paid by Green State Power on: (a) employees ceasing employment with Green State Power and being employed by the purchaser, or (b) transfer of the new Pty Limited company to the purchaser, immediately following the cessation of employees' employment with Green State Power and employment with the new Pty Limited company.

There are no conditions attached to the payment regarding continued employment with the new entity. As such, employees could retire in the week following the transfer of their employment to the purchaser and not forfeit their transfer payment.

The proposed transfer payments made in accordance with the Scheme are made in consequence of the termination of employment. Unless the employee is covered by a determination exempting them from the 12 month rule, the payment must be received within 12 months of the employee's termination of employment to qualify as an employment termination payment under section 82-130.

A payment made to an employee is an employment termination payment if the payment satisfies all the requirements in section 82-130 and is not specifically excluded under section 82-135.

Section 995-1 states that an employment termination payment has the meaning given by section 82-130.

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 that termination (but see subsection (4)); and (c) it is not a payment mentioned in section 82-135.

Section 82-135 lists payments that are not employment termination payments. These include (among others): • superannuation benefits • unused annual leave or long service leave payments • the tax free part of a genuine redundancy payment or an early retirement scheme payment.

The proposed transfer payment is not a payment mentioned in section 82-135.

For a transfer payment to constitute an employment termination payment, all the conditions in subsection 82-130(1) must be satisfied. Failure to satisfy any of the three conditions under subsection 82-130(1) will result in the payment not being considered an employment termination payment.

Even where all the conditions in subsection 82-130(1) have been satisfied, generally, to qualify as an employment termination payment, the payment must be received by the person within 12 months of termination. [1] Generally any termination payments received outside of the 12 months will be assessable at the person's marginal tax rates, [2] unless the person is covered by a determination exempting them from the 12 month rule. [3]

Paragraph 9 of Taxation Ruling IT 2152 titled: Income Tax: retiring allowances paid to employees upon restructuring of a business states: Where a company or other employer ceases carrying on a business which has been transferred to an associated entity, it will be accepted that the employees of the company have had their employment terminated. This will apply in cases similar to the Paklan Case where it is clear that the business in question has been transferred to another entity and it is also clear that the employee's employment has, in fact, been terminated...

Furthermore, at paragraph 2 of Taxation Determination TD 93/140 titled 'Income tax: if a company ceases carrying on a business which has been transferred to an associated entity, will a payment made by that company to a former employee be an eligible termination payment as defined in subsection 27A(1) of the Income Tax Assessment Act 1936?' confirms the view expressed in IT 2152 that employees of an entity ceasing business have had their employment terminated.

The facts in Paklan Pty Ltd and others v. Federal Commissioner of Taxation [ 4 ] (Paklan) can be summarised as follows: • The taxpayers were directors and shareholders of a company (the old company) which carried on business as consulting engineers. • On 30 June 1977, the company ceased to carry on business and the next day sold the business to another company (the new company) also controlled by the taxpayers. • The new company commenced carrying on the business from the same premises and subject to the same arrangements for occupancy as the old company. • All the old company's employees, including the taxpayers, became employees of the new company, and • Six months later, it was decided to pay a lump sum to former directors. The payments were actually made a year after the company ceased business and out of outstanding fees received after the business had ceased.

The taxpayers in Paklan did not succeed in having the lump sums in question treated as a 'payment in consequence of termination' as they were paid under circumstances and at a time too remote to the termination. However, the Full Federal Court did not dispute the fact employment had terminated when the old company had ceased business on 1 July 1977.

The facts dealt with by the Board of Review in Case Q118 [5] were similar to those in Paklan and again involved the sale of a company's business as a going concern to a new company. All the employees of the old business were transferred across to the new company. The Board of Review did not dispute the fact that employees of the old company had ceased to be employees of the old company immediately before taking up employment with the new company.

The Board of Review decision Case K76, [6] involved a taxpayer who ceased work with a subsidiary company due to a corporate restructure and immediately re-commenced work with the parent company on the same terms and conditions. It was held by the Board of Review that the taxpayer's employment with the subsidiary company had been terminated.

The relevant facts in respect of Green State Power indicate that employees who take up positions with the purchaser will cease employment with Green State Power. Therefore, there is a termination of employment for the purposes of subsection 82-130(1).

A payment can be considered to be in consequence of termination where it follows from the termination, or the termination is a condition precedent to the payment. In Reseck v. Federal Commissioner of Taxation [7] (Reseck) Justice Gibbs of the High Court said: 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 in my opinion necessary that the termination of the services should be the dominant cause of the payment.

In the same case, Justice Jacobs said that 'in consequence of' did not import causation but rather a 'following on'.

The decision in Reseck was considered by the Full Federal Court in McIntosh v. Federal Commissioner of Taxation [8] (McIntosh). The case concerned a taxpayer who became entitled to a payment subsequent to his retirement. In finding that the payment was in consequence of the taxpayer's termination, Justice Brennan said: ...if the payment is made to satisfy a payee's entitlement, the phrase 'in consequence of retirement' requires that the retirement be the occasion of, and a condition of, entitlement to the payment. A sufficient causal nexus between the payment and the retirement is thus established.

The phrase 'in consequence of' and the decisions in Reseck and McIntosh were also considered more recently by the Federal Court in Le Grand v. Commissioner of Taxation [ 9 ] (Le Grand).

Le Grand involved a payment by the taxpayer as a result of accepting an offer of compromise in respect of claims brought by him against his former employer, in relation to the termination of his employment. The taxpayer had made claims for common law damages for breach of the employment agreement and for statutory damages for misleading and deceptive conduct to procure the taxpayer's employment with the employer. The payment was found to be in consequence of the taxpayer's termination. Justice Goldberg said: I do not consider that the issue can simply be determined by seeking to identify the 'occasion' for the payment. The thrust of the judgments in Reseck and McIntosh is rather to the effect that payment is made 'in consequence' of a particular circumstance when the payment follows on from, and is an effect or result, in a causal sense, of the circumstance. ... there need not be identified only one circumstance which gives rise to a payment before it can be said that the payment is made 'in consequence' of that circumstance. ... it can be said that a payment may be made in consequence of a number of circumstances and that, for present purposes, it is not necessary that the termination of the employment be the dominant cause of the payment so long as the payment follows in the causal sense referred to in those judgments, as an effect or result of the termination.

The Commissioner of Taxation has issued Taxation Ruling TR 2003/13 titled 'Income tax: eligible termination payments (ETP): payments made in consequence of the termination of any employment: meaning of the phrase 'in consequence of''. In paragraphs 5 and 6 of TR 2003/13, the Commissioner states: 5. ... 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. 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 made in consequence of the termination of employment will be determined by the relevant facts and circumstances of each case.

In the present case, whilst the transfer payment is payable only to the relevant transferring employees who take up employment with the purchaser, the transfer payment is payable only on the condition that the employees have terminated their employment with Green State Power. The payment follows as an effect or result of the termination and the payment would not have been made to the employees but for the termination of their employment with Green State Power.

The following aspects of the arrangement reinforce the characterisation of the transfer payment as an employment termination payment (as distinct from, for example, a transfer or sign-on fee): • the payment will be made by Green State Power • the payment is calculated by reference to each transferring employee's years of service with Green State Power, and • there are no obligations imposed on the relevant transferring employees to continue their employment with the purchaser for any particular period after the sale of the business.

The transfer payment is only payable on the condition that employees have terminated their employment with Green State Power. No entitlement to the payment arises prior to this event. Although the transfer payment is payable to those who take up employment with the purchaser, it more directly relates to the termination of employment with Green State Power.

In view of the above, the transfer payment is in consequence of the termination of employment and is therefore an employment termination payment under section 82-130. Unless the employee is covered by a determination exempting them from the 12 month rule, the payment must be received within 12 months of the employee's termination of employment to qualify as an employment termination payment under section 82-130.

The following is a detailed contents list for this Ruling: Paragraph What this Ruling is about 1 Relevant provision(s) 2 Class of entities 3 Qualifications 4 Date of effect 7 Scheme 8 Ruling 23 Appendix 1 - Explanation 21 Employment termination payment 21 Termination of employment 28 Payment made 'in consequence of the termination of employment' 35 Appendix 2 - Detailed contents list 45