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Half tax rate for the pension lump sum
If a managing director is granted the option of a cash settlement instead of a promised ongoing old‑age pension, he must exercise this option on the day of the business cessation in order to be able to claim any income‑tax advantages.
A sole shareholder and managing director of a GmbH was dismissed from his managing director role on the day he turned 62 years old ("reaching the pension age"). Instead of a promised old‑age pension, he was granted the option of a one‑off cash settlement. However, he only exercised this option at a later date. In his income‑tax return he nevertheless claimed the half tax rate.
The tax office rejected the claim for the half tax rate and distributed the cash settlement over three years. In the appeal to the Federal Fiscal Court (BFG) the court even denied the application of the three‑year distribution, because the initiative to exercise the option right came from the managing director and no compensation was present.
Assessment by the Administrative Court (VwGH)
The VwGH confirmed the BFG's view that the three‑year distribution does not apply. Capital payments as compensation for pension claims can be considered a favoured compensation as a "damage compensation" for the loss of a pension entitlement right. However, this is predicated on the initiative to conclude the settlement agreement not originating from the pension claimant. In the present case the former managing director, of his own accord, decided to demand the cash settlement.
Furthermore, the VwGH found that, due to his dismissal, the managing director had effected a business cessation and any gain from the cessation – to be determined by a comparison of business assets – must be subject to the reduction of progression (provided the further conditions laid down in the relevant provisions are met). As the managing director had until then determined his income by the income‑expenditure method, the change of profit‑determination method would have required the claim to be recorded on the balance sheet up to the date of business cessation.
The managing director could have recorded and exercised the granted option for a cash settlement when the business‑specified condition was met (reaching the age of 62) on the balance sheet. He, however, exercised the option only at a later date, so that, due to the lack of exercise at the time of business cessation, the claim had not yet arisen. Had he exercised the option on the cessation date, the claim would have arisen and formed part of the cessation gain. The application of the half tax rate was therefore refused because the option was exercised too late.
Conclusion
In the present case it was disputed whether the half tax rate benefit could be applied to the settlement from the promised occupational pension. The VwGH affirmed the benefit only where the claim from the cash settlement of the occupational pension had arisen no later than the date of business cessation.
The tax office rejected the claim for the half tax rate and distributed the cash settlement over three years. In the appeal to the Federal Fiscal Court (BFG) the court even denied the application of the three‑year distribution, because the initiative to exercise the option right came from the managing director and no compensation was present.
Assessment by the Administrative Court (VwGH)
The VwGH confirmed the BFG's view that the three‑year distribution does not apply. Capital payments as compensation for pension claims can be considered a favoured compensation as a "damage compensation" for the loss of a pension entitlement right. However, this is predicated on the initiative to conclude the settlement agreement not originating from the pension claimant. In the present case the former managing director, of his own accord, decided to demand the cash settlement.
Furthermore, the VwGH found that, due to his dismissal, the managing director had effected a business cessation and any gain from the cessation – to be determined by a comparison of business assets – must be subject to the reduction of progression (provided the further conditions laid down in the relevant provisions are met). As the managing director had until then determined his income by the income‑expenditure method, the change of profit‑determination method would have required the claim to be recorded on the balance sheet up to the date of business cessation.
The managing director could have recorded and exercised the granted option for a cash settlement when the business‑specified condition was met (reaching the age of 62) on the balance sheet. He, however, exercised the option only at a later date, so that, due to the lack of exercise at the time of business cessation, the claim had not yet arisen. Had he exercised the option on the cessation date, the claim would have arisen and formed part of the cessation gain. The application of the half tax rate was therefore refused because the option was exercised too late.
Conclusion
In the present case it was disputed whether the half tax rate benefit could be applied to the settlement from the promised occupational pension. The VwGH affirmed the benefit only where the claim from the cash settlement of the occupational pension had arisen no later than the date of business cessation.