1 Are one or both retention payments taxed as Employment Termination Payments (ETP) under section 82-130 of the Income Tax Assessment Act 1997 (ITAA 1997)?
No. Question 2 Are the two retention bonuses genuine redundancy payments under section 83-175 of the ITAA 1997? Answer No. Question 3 If the retention bonuses are genuine redundancy payments, does the calculation of tax-free amount under subsection 83-170(3) of ITAA applies to the payments? Answer Not applicable. This private ruling applies for the following period: For the year ended 20XX The scheme commenced on: 1 July 20XX
This private ruling is based on the facts and circumstances set out below. If your facts and circumstances are different from those set out below, this private ruling has no effect and you cannot rely on it. Find out more about when you can rely on your private ruling at ato.gov.au/relyonprivateruling. 1. You were a director, employee and shareholder of Company A. 2. The Company A was sold to the Company B. You were employed by the Company B. 3. The Company B issued a letter with retention bonus payments that would be paid to you on each vesting date. 4. The conditions attached to the retention bonus stated on the letter: • you must not have left your employment at the date the entitlement vests other than the Company's request (except in the case where you are in breach of your employment contract) • there is no entitlement to receive any pro rata of the bonus if you choose to leave your employment (or if you breach your employment contract) before the vesting date;
• all unpaid bonuses will vest if you leave your employment at the Company B's request (except in the case where you are in breach of your employment contract) and are considered to be a "good leaver". • bonuses are inclusive of superannuation and tax and will be deducted from any bonuses prior to payment; and • each payment will be in the pay run following the vesting date. 5. Internal announcements were made regarding the sale of Company A to a new owner. The sale of the majority of shares was completed on XXX. 6. The week before the sale of the Company A, you were advised that they would not require your ongoing services, but you were asked to stay on for a period of time to support the transition to the new owner, after which your position would be made redundant. 7. You received an email from the Company B confirming that you are eligible to the retention bonus on each vesting date despite the fact that you are leaving the company.
8. On XXX, you received a letter from the Company confirming your redundancy with a 3 months' notice of period. Your final day (termination date) was XXX. Your arguments and contentions 9. You were provided with the retention bonuses to encourage you to remain employed with the Company B up to the bonus payment vesting dates. 10. You would not be entitled to these bonuses if you had left the company prior to these dates, hence they were conditional on you being employed by the company on those dates. An exception was that if you were a "good leaver" which included being made redundant. You would not be eligible for the bonus payments at the time your employment ended unless you had been made redundant.
11. On XXX you were notified that your employment was terminated and you were made redundant. Your final day was to be XXX. You are now entitled to be paid the two retention bonus payments, (without being employed at the two vesting dates) because your employment was terminated by the Company. If you had resigned, you would not have received either retention payment. Hence the retention payments will be paid to you only because your employment was terminated.
Income Tax Assessment Act 1997 Section 82-130 Income Tax Assessment Act 1997 Section 82-135 Income Tax Assessment Act 1997 Section 83-175 Other ATO document Taxation Ruling 2003/13 Income tax : employment termination payments (ETP): payments made in consequence of the termination of any employment: meaning of the phrase 'in consequence of' Taxation Ruling TR 2009/2 Income tax : genuine redundancy payments Reason for decision These
accompany the Notice of private ruling. This is to explain how we reached our decision. This is not part of the private ruling. Question 1 Are one or both retention payments taxed as Employment Termination Payments (ETP) under section 82-130 of the Income Tax Assessment Act 1997 (ITAA 1997)? Detailed reasoning A payment is an ETP if it satisfies all the requirements in section 82-130 of the ITAA 1997 and is not specifically excluded under section 82-135 of the 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. Paid as 'in consequence of' the termination of employment
The phrase 'in consequence of' is not defined in the ITAA 1997. However, the courts have interpreted the phrase in a number of cases. Taking into account the courts' decisions on the meaning of the phrase, the Commissioner's view on the meaning and application of the 'in consequence of' test are set out in 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 ) . Paragraphs 5 and 6 of TR 2003/13 state 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.
At paragraph 30 of TR 2003/13 the Commissioner considers payments such as golden handshakes: A severance payment that is made in respect of a taxpayer by a former employer after the termination of the taxpayer's employment, such as a golden handshake, is a payment that follows as an effect or result of the termination. Accordingly, the payment is made in consequence of the termination of employment. In such circumstances there is a causal connection between the payment and the termination of employment in that the payment would not have been made to the taxpayer but for the termination of the employment. Based on the conditions to receive the cash retention bonus: • you must not have left your employment at the date the entitlement vests other than at the Company's request (except in the case where you are in breach of your employment contract) • there is no entitlement to receive any pro rata of the bonus if you choose to leave your employment (or if you breach your employment contract) before the vesting date
• all unpaid bonuses will vest if you leave your employment at the Company's request (except in the case where you are in breach of your employment contract) and are considered to be a "Good Leaver • bonuses are inclusive of superannuation and tax and will be deducted from any bonuses prior to payment; and • each payment will be in the pay run following the vesting date. The first condition for an ETP payment is you receive it as a consequence of the termination of employment. The issue is whether the bonus payment is made as a consequence of the termination of employment. We need to establish if the retention bonus payment 'follows as an effect or result of' the termination of employment. To receive the retention bonus, you must be employed on each vesting date. One exception is when the Company B asks you to leave your employment.
You were offered the retention bonus because of your skills helping out the transition of the sale of your business, the bonus has no connection to the termination of employment. On the contrary, you are required to stay on the employment in order to receive the bonus. The bonus does not follow as an effect or result of the termination of employment. As such, the requirement under paragraph 82-130(1)(a) of ITAA 1997 is not satisfied. Payment received no later than 12 months after termination Paragraph 82-130(1)(b) of the ITAA 1997 requires that the payment must be received no later than 12 months after the termination of employment. In your case, the first payment vested on XXX which is within 12 months after the termination date. The second payment will be vested more than 12 months after the termination date. However, all requirements on paragraph 82-130(1) needs to be satisfied for the payments to be considered an ETP. Payments mentioned in section 82-135 of the ITAA 1997
Paragraph 8-130(1)(c) of the ITAA 1997 specifies that a payment is an ETP if it is mentioned in section 82-135 of the ITAA 1997. Paragraph 82-135(e) of the ITAA 1997 states that a payment is not an ETP when it is the part of a genuine redundancy payment worked out under section 83-170 of the ITAA 1997. A genuine redundancy payment is defined under section 83-175 of the ITAA 1997. A payment made to an employee is a genuine redundancy payment if it satisfies all the following conditions (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 dismissal. (2) A genuine redundancy payment must satisfy the following conditions: (a) the employee is dismissed before the earlier of the following: i. the day the employee reached pension age;
ii. if the employee's employment would have terminated when he or she reached a particular age or completed a particular period of service the day he or she would reach the age or complete the period of service (as the case may be); (b) if the dismissal was not at arm's length the payment does not exceed the amount that could reasonably be expected to be made if the dismissal were at arm's length; (c) at the time of the dismissal, there was no arrangement between the employee and the employer, or between the employer and another person, to employ the employee after the dismissal. (3) However, a genuine redundancy payment does not include any part of a payment that was received by the employee in lieu of superannuation benefits to which the employee may have become entitled at the time the payment was received or at a later time. The Commissioner has issued Taxation Ruling TR 2009/2 Income tax : genuine redundancy payments (TR 2009/2). The ruling outlines 4 necessary components in the basic requirements for a genuine redundancy payment under subsection 83-175(1). Paragraph 10 and paragraph 11 of the TR 2009/2 state:
10. Under subsection 83-175(1), a genuine redundancy payment is one 'received by an employee who is dismissed from employment because the employee's position is genuinely redundant'. 11. There are four necessary components within this requirement: • The payment must be received 'in consequence of' an employee's termination. • That termination must involve an 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. As explained above, the retention bonus payments were not made 'in consequence of' the termination of your employment. The first necessary component has not been met, therefore it means that subsection 83-175(1) of ITAA 1997 is not satisfied. As a result, the retention bonus payments are not considered genuine redundancy payment under section 83-175(1) ITAA 1997. Conclusion
All the requirements on paragraph 82-130(1)(a), (b), (c) of ITAA 1997 have to be satisfied for the payment to be considered an ETP. The retention bonus payments received has no connection to the termination of employment, therefore it is not an ETP in accordance with section 82-130 of the ITAA 1997. Question 2 Are the two retention bonuses genuine redundancy payments under section 83-175 of the ITAA 1997? Answer No. Detailed reasoning As explained above Question 3 If the retention bonuses are genuine redundancy payments, does the calculation of tax-free amount under subsection 83-170(3) of ITAA applies to the payments? Answer Not applicable.