ATO Interpretative Decision

ATO ID 2001/529

Superannuation

Superannuation, retirement and employment termination: Bona Fide Redundancy and Director of a Company
FOI status: may be released
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CAUTION: This is an edited and summarised record of a Tax Office decision. This record is not published as a form of advice. It is being made available for your inspection to meet FOI requirements, because it may be used by an officer in making another decision.

This ATOID provides you with the following level of protection:

If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.

Issue

Whether a payment made to a taxpayer, an employee of a company who was also a director of the company, would be assessed as a bona fide redundancy payment under section 27F of the Income Tax Assessment Act 1936 (ITAA 1936)?

Decision

No, the payment made to the taxpayer would not be assessed as a bona fide redundancy payment for the purposes of section 27F of the ITAA 1936.

Facts

The company operated a business.

The rulee is a director and shareholder of the company.

The company sold its business to an unrelated company.

The taxpayer, as director and shareholder of the company, made the decision to end the company's existence.

At the date of the sale of the business, the company employed a number of people. The services of all employees were terminated when the business was sold.

Reasons for Decision

A payment on the termination of employment will be a bona fide redundancy payment within the terms of section 27F of the ITAA 1936 if it meets all the following requirements:

the payment must be an 'eligible termination payment' (ETP) made in relation to the employee in consequence of the dismissal from his or her employment by reason of bona fide redundancy;
the ETP must be made otherwise than from a superannuation fund;
the time of termination must be before the date that the taxpayer attains 65 years of age, or such earlier date on which the taxpayer's employment would necessarily have had to terminate under the terms of employment;
where the employee and the employer are not dealing with each other at arms length, the payment does not exceed what would have been paid to the employee had they been dealing at arm's length; and
at the termination time, there is no agreement in force between the employee and the employer or the employer and another person to re-employ the employee after the date of termination.

Paragraph 35 of Taxation Ruling TR 94/12 states that 'dismissal' carries with it the concept of the involuntary (on the employee's part) termination of employment.

The taxpayer (a director and shareholder of the company) made the decision to end the company's existence. This decision led to the termination of the taxpayer's employment. The termination of the employment of the director is not an involuntary act on the part of the employee. Consequently, the termination of employment of the taxpayer does not constitute a bona fide redundancy within the meaning of paragraph 27F(1)(a) of the ITAA 1936.

Note: The view contained in this ATO ID only applies to income years up and including the 2006-07 income year as section 27F and subsection 27A(1) of the ITAA 1936 have been repealed by the Superannuation Legislation Amendment Simplification Act 2007. The view contained in this ATO ID does not apply to the 2007-08 income year and later income years.

Date of decision:  16 August 2001

Year of income:  Year ended 30 June 2001

Legislative References:
Income Tax Assessment Act 1936
   section 27F
   paragraph 27F(1)(a)

Related Public Rulings (including Determinations)
TR 94/12
TR 94/12ER

Keywords
Company directors
Deemed dividends
Eligible termination payments
Bona fide redundancy payments
Shareholders
Dismissal of employees

Business Line:  Superannuation

Date of publication:  26 October 2001

ISSN: 1445-2782

history
  Date: Version:
You are here 16 August 2001 Original statement
  16 April 2010 Withdrawn