In a decision handed down on Wed 20.3.2013, the Federal Court allowed the Commissioner’s appeal from the decision in AAT Case [2012] AATA 660, Re Boyn and FCT concerning the calculation of tax payable on an ETP.
In July 2009, the taxpayer received an ETP from his employer comprising a taxable component of $250,880 and a tax-free component of id=”mce_marker”44,120. The Tax Office calculated the tax payable on the ETP taxable component of $250,880 by first offsetting the taxpayer’s deductions (and id=”mce_marker”73,445 of prior year losses) against his “ordinary taxable income”. The taxpayer argued that the deductions and losses should have first been applied against the “employment termination remainder” (subject to a 45% tax rate), with the excess then offset against the ETP cap amount (id=”mce_marker”50,000 for 2009-10). On this basis, the taxpayer said the total tax liability would be $8,512 (instead of the $31,881 assessed).
The AAT agreed with the taxpayer and held that the Commissioner had incorrectly calculated the tax payable on the ETP by not allocating the deductions and prior year losses in a manner most favourable to the taxpayer. The Commissioner appealed.
The Federal Court allowed the appeal. It said that, contrary to the taxpayer’s calculations, only if his taxable income was zero, would his employment termination remainder (ETR) be zero. The Court said the Tribunal’s error was that while it referred to the definition of ETR in s 3(1) of the Income Tax Rates Act 1986, it did not consider its text. “In doing so, it failed to appreciate the second quantitative limb in the definition”. The Court held the Commissioner’s calculation of the tax payable by the taxpayer was correct.
(FCT v Boyn [2013] FCA 232, Federal Court, Edmonds J, 20 March 2013.)
[LTN 54, 20/3/13]
Extract from s3(1) of the Income Tax Rates Act 1986
“employment termination remainder” of taxable income means so much of the taxable income as:
(a) is included in assessable income under a maximum tax rate provision in Division 82 of the Income Tax Assessment Act 1997 or Division 82 of the Income Tax (Transitional Provisions) Act 1997 ; and
(b) does not give rise to an entitlement to a tax offset under that maximum tax rate provision.