The impact of this case on ATO policy is discussed in Decision Impact Statement: Long v Commissioner of Taxation ( VT2004/237).
LONG v FC of TMembers:
BH Pascoe SM
Administrative Appeals Tribunal
MEDIA NEUTRAL CITATION:
 AATA 1269
ATC 2157BH Pascoe (Senior Member):
1. This is an application to review a decision of the Commissioner of Taxation (the respondent) to disallow an objection lodged by Mrs H. Long (the applicant), against an assessment of income tax for the year ended 30 June 2002. The objection sought exclusion of the amount of $18,530 from assessable income on the grounds that the amount was a bona fide redundancy payment and exempt.
2. At the hearing Mrs Long was represented by Mr F. O'Loughlan of counsel and the respondent was represented by Mr P. Sest of counsel. Evidence was given by Mrs Long, her husband, Mr P. Long and their accountant, Mr P. Eddy.
3. Mrs Long gave evidence that she, her husband and a son were directors of V.B.S. Pty Ltd (VBS) as trustee of the P & H Long Family Trust. In March 1996 VBS commenced a business as principal contractor to Austar Entertainment Pty Ltd (Austar) to install and maintain satellite dishes at premises of customers of Austar operating a pay television service in regional Australia. Mr Long had been the regional manager of Austar and resigned in order to establish VBS as contractor. Between March 1996 and December 2001, VBS employed between six and nine employees and used 40 to 50 sub-contractors. Its business entailed receiving orders from Austar after a customer entered into a contract, arranging the supply of the necessary hardware, arranging sub-contractors to effect the installation and undertaking after sales service at the installation sites.
4. Mrs Long was a joint managing director of VBS and said that she worked in excess of eight hours per day and usually six days a week. She was responsible for dealing directly with Austar and its customers to resolve any problems and had to be available at all times. Mrs Long listed the duties for which she was responsible as:
- • managing the head office function of VBS;
- • supervising staff engaged in taking order from Austar, arranging sub-contractors and liaising with customers to arrange installation times;
- • dealing with after sales service;
- • arranging supplies of hardware;
- • general liaison with Austar;
- • ensuring computer and related facilities operated efficiently;
- • attending to administrative and accounting requirements;
- • hiring staff; and
- • attending to banking and financial matters.
Mr Long was responsible for the technical aspects of the business.
5. On 28 September 2001, Mr Long was advised formally by Austar that it had decided to use a single alliance partner to provide the work currently done by VBS and would cease any direct contractual relationship with VBS. Notwithstanding a prior verbal extension of its contract with Austar to 31 December 2001, VBS did not receive any work from Austar after 4 December 2001. Mrs Long said that, at that time, VBS committed to its employees that they would be paid until the end of the year. VBS had no other business activity. After consultation with the Department of Employment and Workplace Relations and the accountant, Mr Eddy, all employees were paid a lump sum.
6. From the wages records provided by Mr Eddy, it is noted that, of the five arm's length employees, two were paid to 7 December 2001 and three to 31 December 2001. All were paid their calculated holiday pay entitlement at the date of termination in a lump sum. Mr T. Long, a son of Mr and Mrs Long and a full time employee from the commencement of the business in 1996, was paid to 31 December 2001 plus his calculated holiday pay entitlement plus a redundancy payment of $18,530. Mr and Mrs Long were paid salary to 31 December 2001 plus a redundancy payment of $18,530 each, but no accumulated holiday pay.
7. Bona Fide Redundancy Payment is defined in s 27F of the Income Tax Assessment Act 1936 (the Act) as follows:
- "(1) Where:
- (a) an eligible termination payment is made in relation to a taxpayer in consequence of the dismissal of the taxpayer from any employment at any time (in this section referred to as the
) by reason of the bona fide redundancy of the taxpayer;
- (aa) if the eligible termination payment is made on or after 1 July 1994-the payment was not made to the taxpayer from an eligible superannuation fund;
- (b) the termination time was before:
- (i) if there was a date before the sixty-fifth anniversary of the birth of the taxpayer on which the termination of the employment of the taxpayer would necessarily have occurred by reason of the taxpayer attaining a particular age or completing a particular period of service-that date; or
- (ii) in any other case-the sixty-fifth anniversary of the birth of the taxpayer;
- (c) if the Commissioner, having regard to any connection between the employer and the taxpayer and to any other relevant circumstances, is satisfied that the employer and the taxpayer were not dealing with each other at arm's length in relation to the termination of the employment of the taxpayer-the amount of the eligible termination payment does not exceed the amount of an eligible termination payment that could reasonably be expected to have been made in relation to the taxpayer if the employer and the taxpayer had been dealing with each other at arm's length in relation to the termination of the employment of the taxpayer; and
- (d) there was, at the termination time, no agreement between the taxpayer and the employer, or the employer and another person, to employ the taxpayer after the termination time;
so much of the eligible termination payment as exceeds the amount (in this section referred to as the ' termination amount' ) of an eligible termination payment that could reasonably be expected to have been made in relation to the taxpayer had he voluntarily retired from that employment at the termination time is a bona fide redundancy payment in relation to the taxpayer."
- (a) an eligible termination payment is made in relation to a taxpayer in consequence of the dismissal of the taxpayer from any employment at any time (in this section referred to as the 'termination time' ) by reason of the bona fide redundancy of the taxpayer;
An eligible termination payment is defined in s 27A of the Act as any payment made in respect of the taxpayer in consequence of the termination of any employment... other than certain exceptions which are not relevant to this case. The one relevant exclusion is the tax free amount of a bona fide redundancy payment ascertained under s 27F of the Act made on or after 1 July 1994. Section 27A(19) of the Act defines the tax-free amount for the year ended 30 June 2002 as so much of the payment as does not exceed $5,295 + [$2,647 × years of service]. As Mrs Long commenced her employment in March 1996 she had five whole years of service producing a figure of $18,530.
8. There was no dispute that the amount of $18,530 was an eligible termination payment. However, the primary argument advanced by the respondent was that the payment was not consequence of dismissal from employment. It was submitted that Mrs Long as a director of VBS was actively involved in the decision to terminate her own employment and thus consented to that decision making the termination voluntary. In addition, it was submitted that VBS and Mrs Long were not dealing at arm's length and the payment exceeded an arm's length amount as demonstrated by the failure to pay any such redundancy payment to an arm's length employee.
9. For the applicant it was submitted that Mrs Long was dismissed from her employment in that it was an involuntary termination being a decision forced on VBS and its directors. It was said that as a result of circumstances beyond their control, VBS no longer had any work to do and no jobs for any employee. It was further argued that the payment did not exceed an arm's length account.
10. The first issue is whether the payment in question was in consequence of the dismissal of Mr Long from employment. In
Smith v Director-General of School Education (1993) 31 NSWLR 349, the Full Court of the Industrial Court of NSW said at 366:
"...we find no difficulty in accepting the ordinary meaning of "dismissal"... as being "the termination of services by the employer without the employees consent"; we would add that where an employee does not freely consent to the termination, understood in a broad sense, then the circumstances may still amount to a
ATC 2159dismissal by the employer as a constructive dismissal..."
Graham v Minister for Industry and Commerce and Molloy  IR (Irish) 156 Fitzgibbon J said at 164:
"'Dismissal' is a word of very ambiguous meaning. You can dismiss a servant, but I am unable to hold that you cannot dismiss a contractor. 'Dismissal' is merely a convenient expression for the determination of an employment whatever its nature may be, and does not necessarily import the relationship of master and servant..."
It would appear to be accepted generally that dismissal from employment involves termination of that employment in circumstances other than in accordance with the voluntary wishes of the employee. For the purposes of s 27F of the Act it is appropriate to consider the content in which the word dismissal is used and reflect on the full phrase of dismissal...by reason of the bona fide redundancy. In submissions, the respondent concentrated on the one word dismissal and argued that Mrs Long, as a director and part of the governing mind of VBS could not dismiss herself and must voluntary consent to the termination. However, if the concentration is placed on the full phrase and bona fide redundancy is found, it is difficult to say that the employee was not dismissed if there is no work available for that employee.
Quality Bakers of Australia Ltd v Goulding (1995) 60 IR 327 Beazley J said at 332:
"A redundancy will arise where an employer has labour in excess of the requirements of the business; where the employer no longer wishes to have a particular job performed; or where the employer wishes to amalgamate jobs."
There is no dispute in this case that, as at December 2001 VBS had no work remaining for any employee. Consequently all employees as such became redundant in the proper sense of that word. The New Shorter Oxford Dictionary defines dismiss in the context as remove from a post or employment, discharge, expel: It is clear that the employees were removed or discharged from their employment with VBS as there was no further work for them to do.
12. Much of the submission was devoted to the question of the dual capacity of Mrs Long as a director and an employee. It is clearly accepted that a person can have such a dual role and have two capacities within the company. The respondent argued that there was but one mind and it is not possible to class the employment termination as a dismissal with a person in one capacity not consenting to a decision made by the same person acting in another capacity. However, in my view and in the words used in Smith it cannot be said that Mrs Long freely consented in a broad sense to the termination of her employment. It was a cessation of employment against her wishes, forced on her by external issues which, as a director, led to the necessary decision to terminate all employment with VBS. As such, I am of the view that these circumstances satisfied the provisions of s 27F(1)(a) of the Act.
13. It was noted that the applicant in this case received test case funding from the respondent. It is assumed that this was done in order to test the question of whether s 27F(1)(a) of the Act can ever be satisfied where the employee concerned is both employee and director. In my view, it is not possible to answer this question in absolute terms. In common with many areas of revenue law, an answer will depend on the particular facts of each case. Here, I am satisfied that where all work of the employer ceased as a result of external circumstances beyond the control of the employer and all employees, including the directors in their capacity as employees, are made redundant, such termination meets the requirements of that paragraph of s 27. The termination was forced on Mrs Long as both a director and employee.
14. Having made the foregoing finding there remains two further issues to be dealt with. The first is s 27F(1)(c) of the Act. There is no doubt that VBS and Mrs Long were not dealing at arm's length. The question then arises as to whether the amount paid to Mrs Long exceeded the amount that could reasonably be expected if they had been dealing with each other at arm's length. The respondent took the view that it did by comparison with amounts paid to arm's length employees. However, in my view, that is not the test. The Act clearly recognises and
ATC 2160accepts that a bona fide redundancy payment can be made to a non-arm's length employee. The test then is whether such payment exceeds a reasonable arm's length amount in relation to that person. In my view, it is not an answer simply to compare the payment to amounts paid to other employees. Mrs Long was a very senior employee of VBS having responsibility for the administration of the business and I accept her evidence of the responsibility and hours of work involved. In the year ended 30 June 2001, Mrs Long received a salary of $63,606. In addition an amount of $65,090 was contributed to a superannuation fund on her behalf. If the then required Superannuation Guarantee Charge of 8 per cent was deducted, the resultant remuneration package would be some $119,000. The redundancy payment of $18,530 would then represent the equivalent of some eight weeks pay. In my view, and accepting the evidence of Mr Eddy as to enquiries made, I am satisfied that such amount would not exceed the amount that could reasonably be expected to be paid to an arm's length employee with over five years service and with the management responsibility. It is noted that no accrued holiday pay or any other entitlement was paid to Mrs Long, reinforcing the view that the amount was a reasonable arm's length amount.
15. The second issue is that the final words of s 27F(a) of the Act requires an assessment of:
"an eligible termination payment that could reasonably be expected to have been made in relation to the taxpayer had he voluntarily retired from that employment at the termination time."
Neither submission dealt with this issue nor was there any evidence of what amount, if any, Mrs Long could have expected if she had retired from employment voluntarily. Subsequent to the hearing, the Tribunal directed that both parties file submissions on this issue.
16. It was accepted by both parties that accrued holiday pay or long service leave is not included in the definition of an eligible termination payment under s 27A of the Act. Consequently the issue is solely whether Mrs Long could have reasonably expected to have received any sum as an eligible termination payment if she had voluntarily retired from her employment with VBS, rather than accrued holiday pay. In other words what notional or hypothetical eligible termination payment might be reasonably expected if there had been a voluntary retirement. Such a hypothesis must assume a voluntary retirement in circumstances where ongoing employment was available.
17. Not surprisingly, it was the applicant's submission that there would have been no entitlement to any eligible termination payment and no reasonable expectation of one. For the respondent it was submitted that there was no evidence to suggest that an amount less than $18,530 would have been reasonably expected in a voluntary retirement from employment.
18. Here, it is clear that, apart from an entitlement to accrued holiday pay, there would have been no legal or enforceable entitlement to any eligible termination payment if Mrs Long had voluntarily retired from her employment. In my view, the hypothesis required to be adopted for the purposes of the concluding words of s 27(1) must also overcome an arms length relationship between employee and employer. In the circumstances of an employee with five years and nine months service, who voluntarily resigns, such employee could not reasonably expect any amount of eligible termination payment. Whether the employer may have made such a payment is not the question. The question must be whether the employee could reasonably expect that payment. In my view, the answer in this case must be no. Consequently no amount can be applied in reduction of the eligible termination payment actually made and the total sum is a bona fide redundancy payment.
19. The result of the forgoing is that the decision under review should be set aside and the objection allowed in full.