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 ?

Yes, provided the payment is, in fact, made in consequence of the termination of employment of the former employee, and is not excluded by the provisions of subparagraphs 27A(1)(a)(i) to (v) of the definition of eligible termination payment.

Taxation Ruling IT 2152 dealt with termination of employment as it related to the provisions of former paragraph 26(d). Paragraph 9 of IT 2152 included the statement: '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'.

The relevant wording of the former paragraph 26(d), as it relates to the above statement, is similar to that in the definition of eligible termination payment in subsection 27A(1). Therefore the above statement applies equally to the eligible termination payment provisions. Example: Ms A, has been employed by X Pty Ltd as a salesperson for several years. X Pty Ltd is a subsidiary of Z Pty Ltd. Z Pty Ltd has decided to disband the sales division of X Pty Ltd and transfer the employees to Z Pty Ltd. In appreciation of Ms. A's prior service, X Pty Ltd makes a payment to her of $10,000 in consequence of the termination of her employment. The $10,000 is an eligible termination payment.