ATO Interpretative Decision

ATO ID 2002/150 (Withdrawn)

Superannuation

• This ATO ID is withdrawn as it is superseded by Taxation Ruling TR 2009/2 Income Tax: genuine redundancy payments.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

Do the 'golden handshake' type payments made to the taxpayers constitute bona fide redundancy payments under subsection 27F(1) of the Income Tax Assessment Act 1936 (ITAA 1936) when provision has been made for others to perform the taxpayers' duties upon their departure from the company?

Decision

No, the payments do not qualify as bona fide redundancy payments under subsection 27F(1) of the ITAA 1936 when provision has been made for others to perform the taxpayers' duties upon their departure from the company.

Facts

A private company conducts a business and employs two full time working directors. These directors, who are also the shareholders of the company, are approaching retiring age.

The company sells the main part of its business activity. As a result, the company now operates its business on a smaller scale. Soon after the sale, both directors are made redundant. Upon dismissal, each director receives a 'golden handshake' type payment of $100 000.

The company appoints two new directors to operate and control the remaining business.

Reasons for Decision

Bona fide redundancy payments qualify for concessional tax treatment if the requirements of subsection 27F(1) of the ITAA 1936 are satisfied. These include:

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

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the payment must not be made from an eligible superannuation fund;

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the termination must occur before the taxpayer reaches the age of 65, or such earlier date upon which the taxpayer's employment would have terminated;

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if the taxpayer and employer are not at arm's length, then the ETP must not be greater than the amount that could reasonably be expected to have been paid had the parties been at arm's length; and

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there must not be any agreement existing between the employer, or another person, to employ the taxpayer.

Paragraph 12 of Taxation Ruling TR 94/12 states that 'redundancy' refers to the situation where an employer no longer requires employees to carry out work of a particular kind or carry out the work at the same location. Furthermore, redundancy refers to the job becoming redundant rather than the employee.

In this case, the directors' positions have not been made redundant, as others currently perform their former duties. Consequently, the directors were not dismissed from their employment by reason of a bona fide redundancy, and the payments do not qualify as bona fide redundancy payments under subsection 27F(1) of the ITAA 1936.

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

Related Public Rulings (including Determinations)
TR 94/12

Other References:
Previously released as CDS10396

Keywords
Bona fide redundancy payments
Eligible termination payments
ETP concessional component

Business Line:  Superannuation

Date of publication:  8 February 2002

ISSN: 1445-2782