Income tax: tax treatment of transfer payment to employees of Sydney Trains

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 provision dealt with in this Ruling is section 82-130 of the Income Tax Assessment Act 1997 (ITAA 1997). All subsequent references in this Ruling are to the ITAA 1997 unless otherwise stated.

The class of employees to which the arrangement will apply are those who are currently employed by Sydney Trains who: (a) at the date that the business is transferred, work at the Bathurst Rail Fabrication Centre (BRFC), and (b) as a consequence of the transfer cease employment with Sydney Trains (and hence their work at BRFC), and (c) are offered an opportunity to take up employment with a new employer, and (d) receive a 'transfer payment' from Sydney Trains under the arrangement.

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 7 to 21 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because the scheme entered into is not the scheme on which the Commissioner has ruled, and • this Ruling may be withdrawn or modified.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 17 September 2014 to 31 December 2014. The Ruling continues to apply after 31 December 2014 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).

Transport for NSW (TfNSW) and Rail Corporation New South Wales (RailCorp) are NSW Government agencies constituted under the Transport Administration Act 1988.

Sydney Trains is a subsidiary corporation of RailCorp and part of the 'transport cluster' controlled by TfNSW.

The Bathurst Rail Fabrication Centre (BRFC) is part of Sydney Trains.

The majority of BRFC employees have been employed for over 10 years.

On 2 November 2012, the NSW Minister for Transport announced planned changes to the ownership and operation of BRFC as part of the 'Better Workshops Initiative' (the Initiative). The Initiative forms part of the NSW Government's 'Fixing The Trains' reform program which involves transition from RailCorp to a new operator and maintainer model under Sydney Trains and NSW Trains.

Sydney Trains will issue a Request for Tender for commercial options to operate BRFC.

On the basis of Sydney Trains' evaluation of the Request for Tender proposals, Sydney Trains will invite submission of Tenders for the following commercial options for BRFC: (a) an outright sale of the BRFC business (being the welded rail and turnout businesses) as well as all assets of BRFC (Outright Sale Option), and (b) entering into an incorporated joint venture with RailCorp to own and operate the BRFC businesses and all the assets of BRFC and inventory (Joint Venture Option). This will involve the incorporation of a joint venture company (BRFC Co).

The Request for Tender will be released in April 2014. Tenderers will respond to either or both the Outright Sale Option or the Joint Venture Option. A preferred tenderer will be chosen and the transfer completed shortly after. The transfer will require consent by the NSW Minister for Transport.

Following the Tender, employees of Sydney Trains may cease employment with Sydney Trains and either: (a) become employed by the purchaser under the Outright Sale Option, or (b) be transferred to BRFC Co, the shareholders of which will include RailCorp under the Joint Venture Option.

Transferring employees will be given a termination or transfer payment by Sydney Trains. This payment is intended to compensate the transferring employees for any potential loss of certain public sector employment conditions and entitlements, notwithstanding that the same or similar employment conditions may be obtained with the new employer.

The payment will be calculated at five weeks' pay per continuous full time year of service limited to 30 weeks' pay.

The payment will be made by Sydney Trains on the occurrence of either: (a) employees ceasing employment with Sydney Trains and being employed by the purchaser on the sale of the business, or (b) employees being transferred to BRFC Co, the new joint venture company and as a consequence, ceasing employment with Sydney Trains and commencing employment with BRFC Co.

The class of employees to which the arrangement will apply is those currently employed by Sydney Trains who: (a) at the date the business is transferred work at BRFC (b) as a consequence of the transfer, cease employment with Sydney Trains (and hence their work at BRFC) (c) are offered an opportunity to take up employment with a new employer, and (d) receive a 'transfer payment' from Sydney Trains under the arrangement.

The payment is only payable on the condition that employees have terminated their employment with Sydney Trains. The payment will be received by employees within 12 months of the employees' termination of employment with Sydney Trains.

There is no requirement for an employee to partially or fully repay the amount in the event of any future employment with TfNSW or any obligation to remain employed with the new employer for any particular length of time.

The proposed transfer payment made in accordance with the scheme described above is in consequence of the termination of employment from Sydney Trains.

The payment will be an employment termination payment under section 82-130 if: • it is received within 12 months of the employee's termination of employment, or • the employee is covered by a determination exempting them from the 12 month rule.

A payment made to an employee is an employment termination payment if the payment satisfies all the requirements in section 82-130 of the Income Tax Assessment Act 1997 (ITAA 1997), and is not specifically excluded under section 82-135 of the ITAA 1997.

Section 995-1 of the ITAA 1997 states that an employment termination payment has the meaning given by section 82-130.

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.

Section 82-135 of the ITAA 1997 lists payments that are not employment termination payments. These include (among others): • superannuation benefits • unused annual leave or long service leave payments, and • 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 of the ITAA 1997.

For a transfer payment to constitute an employment termination payment, all the conditions in subsection 82-130(1) of the ITAA 1997 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, to qualify as an employment termination payment, the payment must be received by the person within 12 months of termination (paragraph 82-130(1)(b)). Generally, any termination payments received outside of the 12 months will be assessable at the person's marginal tax rates (section 83-295), unless the person is covered by a determination exempting them from the 12 month rule (subsection 82-130(4)).

Paragraph 9 of Taxation Ruling IT 2152 Income tax: retiring allowances paid to employees upon restructuring of a business (IT 2152) 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 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 (in liq) v. Federal Commissioner of Taxation (1983) 83 ATC 4456; (1983) 67 FLR 328; (1983) 14 ATR 457 (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 old 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. • 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 that employment had terminated when the old company had ceased business on 1 July 1977.

The facts in Case Q118 (1983) 83 ATC 610; (1983) 27 CTBR (NS) 312 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 (at 618), 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.

While in Case K76 (1978) 78 ATC 703; (1978) 23 CTBR (NS) 24, where a taxpayer 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 the taxpayer's employment with the subsidiary company had been terminated.

The relevant facts in respect of Sydney Trains indicate that employees who take up positions with the purchaser under the Outright Sale Option or are transferred to BRFC Co under the Joint Venture Option will cease employment with Sydney Trains. 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 (1975) 133 CLR 45; (1975) 75 ATC 4213; (1975) 5 ATR 538 (Reseck) Justice Gibbs 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 (1979) 45 FLR 279; (1979) 79 ATC 4325; (1979) 10 ATR 13; (1979) 25 ALR 557 (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. Federal Commissioner of Taxation [2002] FCA 1258; (2002) 124 FCR 53; (2002) 2002 ATC 4907; (2002) 51 ATR 139 (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 Income tax: eligible termination payments (ETP): payments made in consequence of the termination of any employment: meaning of the phase 'in consequence of'.

In paragraphs 5 and 6 of TR 2003/13, the Commissioner, after considering the above judgments, stated: ... 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. 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 under the Outright Sale Option or are transferred to BRFC Co under the Joint Venture Option, the transfer payment is payable only on the condition that the employees have terminated their employment with Sydney Trains. 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 Sydney Trains.

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 Sydney Trains • the payment is calculated by reference to each transferring employee's years of service with Sydney Trains, 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 Sydney Trains. Although the transfer payment is payable to those who take up employment with the purchaser or transfer to BFRC Co under the Joint Venture Option, it more directly relates to the termination of employment with Sydney Trains.

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: What this Ruling is about 1 Relevant provision(s) 2 Class of entities 3 Qualifications 4 Date of effect 6 Scheme 7 Ruling 22 Appendix 1 - Explanation 24 Employment termination payment 24 Is there a termination of employment? 31 Is the making of the transfer payment 'in consequence of the termination of employment'? 38 Appendix 2 - Detailed contents list 49