ATO Interpretative Decision

ATO ID 2002/148 (Withdrawn)

Superannuation

• This ATO ID is withdrawn as it is superseded by TR 2009/2: Income Tax: Genuine redundancy payments.
  This document incorporates revisions made since original publication. View its history and amending notices, if applicable.

Issue

Does the severance payment, not shown as a bona fide redundancy payment on the taxpayer's group certificate, qualify as a bona fide redundancy payment for the purposes of section 27F of the Income Tax Assessment Act 1936 (ITAA 1936)?

Decision

Yes. The payment does qualify as a bona fide redundancy payment under section 27F of the ITAA 1936.

Facts

The taxpayer receives compensation payments from WorkCover in respect of an injury received at work. The taxpayer receives a letter from the employer advising that it is no longer viable to hold the taxpayer's position open due to a 'general down turn' in business. The employer subsequently informs the taxpayer, who is under 65 years of age, that the employment is terminated due to redundancy. The employer also makes another employee (not injured) from the taxpayer's work area redundant as the result of its financial difficulties.

The taxpayer receives a severance payment in addition to lump sum payments for annual and long service leave, annual leave loading and accrued rostered time off. The taxpayer's employer does not show the severance payment made to the taxpayer as a bona fide redundancy payment on the taxpayer's group certificate in order to avoid a perceived breach of its obligations under the Workers Rehabilitation and Compensation Act 1986 (SA) (WRCA). Specifically, the employer considers that it can not make the taxpayer 'redundant', due to its belief that section 58B of the WRCA would require the employer to re-employ the taxpayer should its economic position improve.

Pursuant to sections 58B and 58C of the WRCA, no penalty is applied by the WorkCover Corporation against the employer for terminating the taxpayer's employment.

Reasons for Decision

A payment will constitute a bona fide redundancy payment, under section 27F of the ITAA 1936, if it is:

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made as a consequence of the dismissal of the taxpayer from their employment by reason of bona fide redundancy;

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not made from an eligible superannuation fund;

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normally, the time of termination is prior to the taxpayer reaching 65 years of age;

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the termination of the taxpayer's employment is done at 'arms-length'; and

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at the time of termination there is no agreement existing between the employer, or another person, to employ the taxpayer.

In order for termination of employment to be by reason of redundancy, it is necessary that the termination arises from the particular position no longer being required. Redundancy does not include dismissal on personal or inefficiency grounds, nor does it cover situations where the dismissed employee is replaced by another person performing similar duties.

On the facts, the taxpayer is dismissed by reason of redundancy. What the taxpayer receives is more than what the taxpayer would be entitled to on an ordinary termination, and the taxpayer is dismissed prior to normal retiring age. Finally, although section 58B of the WRCA may require the employer to re-employ the taxpayer if its economic position improves, there is no agreement for the purposes of section 27F of the ITAA 1936 to re-employ the taxpayer.

The severance payment constitutes a bona fide redundancy payment for the purposes of section 27F of the ITAA 1936.

Legislative References:
Income Tax Assessment Act 1936
   subsection 27A(1)
   section 27F

Case References:
R v. The Industrial Commissioner of South Australia
   (1977) 44 SAIR 1202

Other References:
Previously released as CDS10361

Keywords
Eligible termination payments
Bona fide redundancy payments
Eligible termination payments - PAYE instalment deduction issue
Exempt income
Superannuation case reports
Workers compensation income

Business Line:  Superannuation

Date of publication:  8 February 2002

ISSN: 1445-2782