Edited version of private ruling

Authorisation Number: 1011585018129

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Ruling

Subject: Redundancy payment

Question

Are the payments received from entity B genuine redundancy payments in accordance with section 83-170 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Advice/Answer

No.

This ruling applies for the following period

For the year ended 30 June 2009

The scheme commenced on

1 July 2008

Relevant facts and circumstances

Your client commenced employment in a full-time position with an employer (the employer) and was employed under an award (the award).

Later, your client's employment was terminated when your client's position was made redundant.

In a letter, the employer has stated that your client's position was made redundant due to several projects being completed simultaneously consequently leaving a shortage of work.

A clause of the award defines 'redundancy' as follows:

Redundancy means a situation where an employee ceases to be employed by an employer respondent to this award, other than for reasons of misconduct or refusal of duty. Redundant has a corresponding meaning.

Another clause of the award sets out the redundancy/severance payments payable on redundancy, as defined under the award.

Company A, trading as entity B, is a trustee company established by unions and employers in a particular industry to provide payments for industry workers between jobs. It administers redundancy funds for certain industry workers (fund X) and for other Industries (fund Y).

The employer, to meet its obligations under the award, contributed a weekly amount in respect of your client to entity B. Your client was a member of entity B.

The employer completed the confirmation of termination certificate on an entity B Initial Claim Form and then your client completed the employee request for payment portion of this same form which was signed by your client during the relevant income year.

Your client was entitled to receive a redundancy payment in respect of all continuous service with the employer. Under the award it sets out the redundancy/severance payment entitlements calculated in respect of all continuous service (as defined by the award) with the employer.

PAYG Payment Summary - Employment Termination Payments for the year show the taxable amounts with tax withheld made to your client by entity B.

In addition to the redundancy payment your client received unused annual leave entitlements from the employer.

There was no date prior to your client's sixty-fifth birthday when your client was required to cease employment.

Your client is under 55 years of age.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 82-10(2)

Income Tax Assessment Act 1997 Section 82-10(3)

Income Tax Assessment Act 1997 Section 82-130

Income Tax Assessment Act 1997 Subsection 82-130(1)

Income Tax Assessment Act 1997 Paragraph 82-130(1)(a)

Income Tax Assessment Act 1997 Paragraph 82-130(1)(b)

Income Tax Assessment Act 1997 Paragraph 82-130(1)(c)

Income Tax Assessment Act 1997 Subsection 82-130(5)

Income Tax Assessment Act 1997 Subsection 82-130(7)

Income Tax Assessment Act 1997 Section 82-135

Income Tax Assessment Act 1997 Paragraph 82-135(a)

Income Tax Assessment Act 1997 Paragraph 82-135(c)

Income Tax Assessment Act 1997 Paragraph 82-135(d)

Income Tax Assessment Act 1997 Paragraph 82-135(e

Income Tax Assessment Act 1997 Paragraph 82-135(i)

Income Tax Assessment Act 1997 Section 82-140

Income Tax Assessment Act 1997 Section 82-145

Income Tax Assessment Act 1997 Section 82-150

Income Tax Assessment Act 1997 Section 82-155

Income Tax Assessment Act 1997 Section 82-160

Income Tax Assessment Act 1997 Section 83-170

Income Tax Assessment Act 1997 Section 83-175

Income Tax Assessment Act 1997 Subsection 83-175(1)

Income Tax Assessment Act 1997 Section 83-295

Income Tax Assessment Act 1997 Section 995-1

Reasons for Decision

Summary

The payments are not excluded from being employment termination payments as the tax-free part of genuine redundancy payments as all the conditions have not been satisfied.

The payments are taxable components of employment termination payments to be included in your client's assessable income for the income year.

Detailed reasoning

Employment termination payment

From 1 July 2007, payments made in consequence of the termination of a taxpayer's employment are known as employment termination payments. Where the payment is received during the life of the taxpayer it is known as a 'life benefit termination payment'. Where the payment is received after the death of the taxpayer, it is known as a 'death benefit termination payment'.

Section 995-1 of the ITAA 1997 states that:

employment termination payment has the meaning given by section 82-130.

Subsection 82-130(1) of the ITAA 1997 states:

A payment is an employment termination payment if:

(a) it is received by you:

(i) in consequence of the termination of your employment; or

(ii) after another person's death, in consequence of the termination of the other person's employment; and

(b) it is received no later than 12 months after the termination (but see subsection (4)); and

(c) it is not a payment mentioned in section 82-135.

Section 82-135 of the ITAA 1997 provides that certain payments are not employment termination payments, including:

· payments for unused annual leave or unused long service leave

· the tax-free part of a genuine redundancy payment or an early retirement scheme payment

· reasonable capital payments for personal injury.

To determine if the payments from entity B to your client constitutes life benefit termination payments, all the conditions in section 82-130 of the ITAA 1997 will need to be satisfied.

Failure to satisfy any of the conditions will result in the payment not being considered an employment termination payment.

In consequence of the termination of employment

The first criterion to be met is that the payment is received by the person in consequence of the termination of their employment. The phrase 'in consequence of' is not defined in the ITAA 1997. The Commissioner has issued Taxation Ruling TR 2003/13 titled: Income tax: eligible termination payments (ETP): payments made in consequence of the termination of any employment: meaning of the phase 'in consequence of' which discusses the meaning of the phrase.

In paragraph 5 of TR 2003/13 the Commissioner states:

… a payment is made in respect of a taxpayer in consequence of the termination of the employment of the taxpayer if the payment 'follows as an effect or result of' the termination. In other words, but for the termination of employment, the payment would not have been made to the taxpayer.

As further stated by the Commissioner in paragraph 6 of TR 2003/13, there must be:

… a causal connection between the termination and the payment, although the termination need not be the dominant cause of the payment. The question of whether a payment is made in consequence of the termination of employment will be determined by the relevant facts and circumstances of each case.

The phrase 'in consequence of termination of employment' has been interpreted by the courts in several cases.

Of note are the decisions made by the High Court in Reseck v. Federal Commissioner of Taxation (1975) 133 CLR 45; 75 ATC 4213; (1975) 5 ATR 538; (Reseck) and the Full Federal Court in McIntosh v. FC of T 79 ATC 4325; (1979) 10 ATR 13 (McIntosh).

Both Courts' views were that for a payment to be made in consequence of the termination of employment it had to follow on as a result or effect of the termination of employment. Additionally, while it is not necessary to show that termination of employment is the sole or dominant cause, a temporal sequence alone would not be sufficient.

Therefore if the payment follows as an effect or a result from the termination of employment, the payment will be made 'in consequence of' the termination of employment for the purposes of subparagraph 82-130(1)(a)(i) of the ITAA 1997. Hence the payment will be an employment termination payment unless the payment is specifically excluded under section 82-135 of the ITAA 1997.

It is evident that a claim for payment from entity B will only be accepted where there is confirmation of the termination of employment by an authorised officer of the employer. The payment would not have been made had there been no termination of employment. The termination of employment and the payment are all intertwined and connected. If not for the termination of employment, the issue of a claim for payment would not have arisen.

It is considered that there is sufficient nexus between the making of the payment and the termination of your client's employment to say that the payments would be made in consequence of your client's termination of employment.

Received no later than 12 months after the termination

The second condition for the payment to meet the criteria, as an employment termination payment is stated under paragraph 82-130(1)(b) of the ITAA 1997, is that the employment termination payment was paid to the taxpayer no later than 12 months after their employment was terminated.

Your client's employment was terminated during the income year and the payments were made by entity B to your client later in the income year. Therefore, the payments were made within 12 months after the termination of employment. Accordingly, the requirement under paragraph 82-130(1)(b) of the ITAA 1997 will be met.

The final requirement under paragraph 82-130(1)(c) of the ITAA 1997 is that the payment is not a payment mentioned in section 82-135 of the ITAA 1997.

Not a payment mentioned in section 82-135 of the ITAA 1997

Section 82-135 of the ITAA 1997 provides that certain payments are not employment termination payments. These include:

· superannuation benefits (paragraph 82-135(a) of the ITAA 1997)

· payments for unused annual leave or unused long service leave (paragraphs 82-135(c) and 82-135(d) of the ITAA 1997)

· the tax-free part of a genuine redundancy payment or an early retirement scheme payment (paragraph 82-135(e) of the ITAA 1997), and

· reasonable capital payments for personal injury (paragraph 82-135(i) of the ITAA 1997).

For the payments to be excluded from being employment termination payments as the tax-free part of genuine redundancy payments all the conditions under section 83-175 of the ITAA 1997 must be satisfied. Failure to satisfy any of the conditions will result in the payment not being considered a genuine redundancy payment.

Genuine redundancy payments

A payment made to an employee, after 30 June 2007, is a genuine redundancy payment if it satisfies all the criteria set out in section 83-175 of the ITAA 1997.

The first criteria to be satisfied (subsection 83-175(1) of the ITAA 1997) is:

· that the payment is received by an employee who is dismissed from employment because the employee's position is genuinely redundant; and

· that the payment exceeds the amount that could reasonably be expected to be received by the employee in consequence of the voluntary termination of his or her employment at the time of the dismissal.

Subsection 83-175(2) of the ITAA 1997 requires that all of the following conditions must be met:

· The employee is dismissed before the earlier of:

- the day he or she turned 65, or

- if the employee's employment would have terminated when he or she reached a particular age or completed a particular period of service - the day he or she would reach that age or complete the period of service (as applicable).

· If the dismissal was not at arms length the payment must not exceed the amount that could reasonably be expected to be made if the dismissal was at arms length.

· At the time of the dismissal, there was no arrangement between the employee and the employer, or between the employer and another person, to employ the employee after the dismissal.

Subsection 83-175(3) of the ITAA 1997 imposes a further condition that the payment does not include any part of a payment that was received by the employee in lieu of superannuation benefits to which the employee may have become entitled at the time of the payment or at a later time.

Dismissal because of genuine redundancy

The first condition requires the taxpayer to be dismissed from employment because the taxpayer's position is genuinely redundant.

The terms 'dismissal' and 'redundancy' are not defined in the income tax legislation. Therefore, it is necessary to consider the ordinary meaning of the terms and the meaning the courts have ascribed to each word.

The Commissioner's view as stated in Taxation Ruling TR 2009/2, entitled: Income tax: genuine redundancy payments, is that a position is redundant when the functions, duties and responsibilities formerly attached to the position are determined by the employer to be superfluous to the current needs and purposes of the organisation. The decision to make an employee's position redundant is fundamentally one made by the employer. Dismissal requires that a termination of employment is made at the initiative of the employer without the consent of the employee.

Further, a dismissal is not caused by redundancy where personal acts or default are the cause for termination for example unsatisfactory performance or behaviour.

On the facts presented it is accepted that your client was dismissed from employment because your client's position was genuinely redundant. Your client's employment was terminated as a result of several projects being completed simultaneously which consequently left a shortage of work. There is nothing to indicate that the termination of your client's employment was on account of any personal act or default on your client's part.

As your position was redundant and there was a dismissal, part of the first condition under section 83-175 of the ITAA 1997 has been met. The condition also requires that for a payment to be a genuine redundancy payment, it should exceed the amount that would be received by the employee on voluntary termination of employment.

In excess of the amount that would be received on voluntary termination of employment

Under the second part of the condition under subsection 83-175(1) of the ITAA 1997 only that part of the payment that exceeds the amount that could reasonably be expected to be received by the employee had the employee voluntarily terminated his or her employment at the time of dismissal will be treated as a genuine redundancy payment.

One of the key factors in determining whether a payment is a genuine redundancy payment is that there is a greater amount paid than what the employee could reasonably have expected to receive on voluntary termination. Paragraphs 61 to 63 of TR 2009/2 state:

61. It would generally be expected that a greater amount would be paid on redundancy than voluntary termination. This recognises the purpose of redundancy payments, being primarily to compensate for loss of non-transferable entitlements (for example accrued sick leave and accrued long service leave prior to 10 years service) and the peculiar hardship associated with being made redundant.

62. Contractual or other entitlements payable by an employee on voluntary termination are generally a sound guide as to what might reasonably be expected …

63. There may be industry norms that could be used as a guide as to what payments would be made on voluntary termination …

As noted in the facts, your client was employed under an award. A clause of the award defines 'redundancy' as follows:

Redundancy means a situation where an employee ceases to be employed by an employer respondent to this award, other than for reasons of misconduct or refusal of duty. Redundant has a corresponding meaning.

At another clause of the award sets out the redundancy/severance payments payable on redundancy, as defined under the award.

The way the term 'redundancy' is defined under the award means that a person who voluntarily terminates their employment will receive the same amount as a person who is genuinely redundant where the period of continuous service with the employer are identical. This means that there would not be an amount paid on genuine redundancy that is greater than the amount that could reasonably have been expected to have been received on voluntary termination.

Another clause of the award allows for employers to utilise a fund to meet all or some of its liabilities created by the clause. In the present case, your client's employer was making contributions on behalf of your client to one of the redundancy funds administered by entity B.

Under the rules of the redundancy funds administered by entity B there are two sorts of payments that employees who are unemployed can apply for through entity B:

1. An amount not exceeding the maximum initial benefit as prescribed in the trust deeds and as adjusted at a specified time each year or the balance of their account if the amount held is less than the maximum initial benefit.

2. The remaining balance in the form of a lump sum payment.

Employees can apply for their initial benefit by completing an 'Initial Claim Form' and forwarding it to entity B together with:

· completion of the employer section of the claim form by an authorised officer of the company and bearing the company seal or company stamp; or

· a Separation Certificate completed and signed by an authorised officer of the employer and bearing the company seal or company stamp; or

· a letter from the employer on company letterhead, signed by an authorised officer of the employer, confirming the employee's termination and the date terminated.

The employee can apply to withdraw the remaining balance of money left in their account after the initial benefit has been paid subject to the completion of a Redundancy Benefits Claim Form and provided one of the following criteria is met:

· The employee has been unemployed for a number of weeks and registered with Centrelink or entity B's Training Employment and Careers Unit as looking for work, or they have completed and have executed the Statutory Declaration which is included in the claim form.

· They are unemployed or have not worked in the industry for a specified number of weeks;

· They are retiring and are over 55 years of age; or

· They are unemployed and leaving Australia for more than two years (they will need to provide a certified copy of their passport and airline tickets as proof).

It is clear from the foregoing that payments from either fund administered by entity B may be made for reasons other than genuine redundancy. Further, the amount made on genuine redundancy would not be greater than the amount that could reasonably have been expected to have been received on voluntary termination.

The Commissioner has issued a public ruling regarding redundancy entitlements from fund Y (administered by entity B) which discusses the tax treatment of payments made from fund Y. Whilst the ruling refers to payments made from fund Y the circumstances for payments made by entity B from fund X and their tax treatment are the same as with fund Y.

Specified paragraphs of the public ruling state:

The amount that accrues to a particular worker (and therefore, becomes payable from a particular account) is in no way dependent on the nature of the termination of employment or the account to which the amounts are credited. The worker's entitlement is always to the balance of the account. There is no additional amount as contemplated by paragraphs 61 to 63 of TR 2009/2.

Given this, the Commissioner considers that a payment from a Genuine Redundancy Account does not exceed the amount that the worker could have expected to receive had they voluntarily terminated their employment.

Whilst it is acknowledged that your client's employment was terminated because of a shortage of work or redundancy, it is also clear that your client would have been entitled to these payments if your client had voluntarily terminated the client's position with the employer.

Therefore, as one of the conditions under section 83-175 of the ITAA 1997 have not been met, the payments made by entity B from the redundancy fund are not genuine redundancy payments for the purposes of section 83-175 and the exclusion under section 82-135 of the ITAA 1997 does not apply.

These payments are employment termination payments under section 82-130 of the ITAA 1997 as they are made in consequence of the termination of employment and were made within 12 month's of your client's termination of employment.

Tax treatment

In light of the foregoing, the payments from entity B will satisfy all the requirements in section 82-130 of the ITAA 1997 for them to be considered life benefit termination payments (employment termination payments).

An employment termination payment may comprise a:

· Tax free component this includes the pre-July 83 segment (if any) and/or the invalidity segment (if any); and

· Taxable component the amount remaining after deducting the tax free component from the total payment.

The tax free component is not assessable income and is not exempt income. In your client's case there will not be a tax free component as your client's employment with the employer commenced during therelevant income year and the payments do not contain any invalidity segments within the meaning of section 82-150 of the ITAA 1997.

The taxable component is included, in full, as assessable income (subsection 82-10(2) of the ITAA 1997).

The taxable component is subject to tax, depending on the person's age when the payment is received (subsection 82-10(3) of the ITAA 1997).

As your client is under 55 years of age and the payment will not exceed the $145,000 ETP cap amount that is specified for the income year under section 82-160 of the ITAA 1997, your client will be entitled to a tax offset under subsection 82-10(3) of the ITAA 1997 that will ensure that the rate of tax payable on the life benefit termination payment does not exceed 30% plus Medicare levy.

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