Edited version of your private ruling

Authorisation Number: 1012129111033

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Subject: Genuine redundancy payment and transitional termination payment

Question 1

Is any part of an out of court settlement payment a genuine redundancy payment?

Answer: No.

Question 2

Is any part of an out of court settlement payment a transitional termination payment?

Answer: No.

This ruling applies for the following period:

Year ended 30 June 2011

The scheme commenced on:

1 July 2010

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

Your client commenced employment with the Employer (the Employer) over 15 years ago.

During the 2008-09 income Employer's Chief Executive Officer (CEO) stated in a letter to your client that:

(a) the Employer became aware of a number of serious concerns relating to your client's conduct (allegations); and

(b) the allegations were being investigated in accordance with the employer's policy relating to misconduct (the Misconduct Policy).

In the letter your client was also provided particulars of the allegations and what would occur if the allegations were proven to have occurred.

Subsequent to your client's response to the allegations and a meeting, in which your client denied the allegations, the CEO provided your client with a letter wherein it was stated, amongst other matters that:

(a) your client's employment was terminated for serious misconduct pursuant to your client's contract of employment which was entered into after 10 May 2006 (the Contract);

(b) the Employer had decided to terminate the employment by reason that your client had failed to act in the best interests of the Employer; and

(c) the Employer had agreed to pay your client a payment in lieu of notice in accordance with the Contract'

At the time your client's employment was terminated, your client was less than 55 years of age.

A copy of your client's Contract has been provided which shows the terms relating to termination of employment and redundancy.

During the 2008-09 income year your client was paid a lump sum payment in relation to the payment in lieu of notice.

Your client subsequently commenced legal action against the Employer.

In the 'Statement of Claim' (the Statement) your client sought damages, interest, costs and such further or other orders as the court deemed fit and that, amongst other matters:

(a) your client had been made redundant; and

(b) the Employer should have paid your client in accordance with the Employer's redundancy policy (the Policy).

In the Statement it was also stated that:

(a) your client's employment with the Employer was on a permanent, full-time basis under a series of employment contracts;

(b) the Contract in place at the time of termination was entered after 10 May 2006;

(c) the Policy applicable at the time of your client's termination of employment was issued by the Employer after 10 May 2006;

(d) the entitlements your client sought;

(e) the Contract contained a term of implied mutual trust and confidence owed by the Employer to your client;

(f) the amount your client sought and how it was calculated;

(g) in addition to the amount at (f) interest and costs were also claimed; and

(h) in addition, or in the alternative, your client also claimed damages for financial loss resulting from the breach of the implied term of mutual trust and confidence;

A copy of the witness statement signed by your client has been provided wherein your client states a denial of the allegations made by the Employer, that the Employer made a number of lesser positions redundant subsequent to your client's termination and counter claims to the Employer's allegations.

In the 2010-11 income year your client's solicitors made an Offer of Compromise (the Offer) to the Employer for a sum which was less that what your client would ahve been entitled to receive on redundancy under the Contract.

The amount in the Offer was accepted by the Employer and your client was accordingly paid the Compromise amount (the Payment) in the 2010-11 income year.

A 'PAYG payment summary - employment termination payment' was issued to your client in relation to the Payment.

Position at time of termination of employment and after

Your client held a management position (the Position) with the Employer when your client's employment was terminated in the 2008-09 income year.

Your client states that the Employer:

· did not engage any other person to act in the Position in a full time capacity but another senior employee acted in the Position in addition to their own; and

· the duties of the Position were shared amongst a number of employees.

A copy of the Employer's annual report (the Report), which was made several months after your client's termination of employment, has been provided. In the Report it was stated amongst other matters that a restructure had been made in relation to staff and savings made as a result of the restructure.

You have also provided copies of other documentation which shows that the Employer had undertaken a restructure at this time.

A letter prepared by a former employee has also been provided which basically restates your client's statements that there was restructure involving staff and what had happened to your client's position.

A press release made by the Employer in the 2009-10 income year has also been provided.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 82-10(2).

Income Tax Assessment Act 1997 Subsection 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 Subsection 82-130(2).

Income Tax Assessment Act 1997 paragraph 82-130(4)(a)

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

Income Tax Assessment Act 1997 Section 82-135.

Income tax (Transitional Provisions) Act 1997 Section 82-10.

Income tax (Transitional Provisions) Act 1997 Subsection 82-10(1).

Income tax (Transitional Provisions) Act 1997 Subsection 82-10(3).

Reasons for decision

Summary

The employment termination payment (the Payment) your client received is not a genuine redundancy payment as the prevailing cause of dismissal was due to alleged unsatisfactory performance.

Further, the Payment is not a transitional termination payment because it was not made under a contract, instrument or agreement that came into force on or before 10 May 2006 but the result of a court settlement.

Detailed reasoning

Employment termination payment

A payment made to an employee on or after 1 July 2007 is an employment termination payment if the payment satisfies all the requirements in section 82-130 of the Income Tax Assessment Act 1997 (ITAA 1997) and is not specifically excluded under section 82-135.

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:

· payment 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.

In your client's case the payment (the Payment) made to your client in the 2010-11 income year was made in consequence of the termination of your client's employment with the Employer as the Payment would not have been made were it not for the termination of employment and the court action which resulted from the termination of employment. Thus, subparagraph 82-130(1)(a)(i) of the ITAA 1997 has been satisfied.

Payment received more than 12 months after termination

Paragraph 82-130(1)(b) of the ITAA 1997 specifies that the Payment must be received within 12 months of the employee's termination of employment, unless they are covered by a determination exempting them from the '12 month rule'.

In your client's case it is noted that the Payment was received more than 12 months after the termination of employment. However, a payment is exempted from the 12 month rule by the operation of paragraph 82-130(4)(a) and subsection 82-130(7) of the ITAA 1997.

Paragraph 82-130(4)(a) of the ITAA 1997 states:

Paragraph (1)(b) does not apply to you if:

You are covered by a determination under subsection (5) or (7); …

Subsection 82-130(7) of the ITAA 1997 states:

The Commissioner may, by legislative instrument, determine that paragraph (1)(b) does not apply to either or both of the following, as specified in the determination:

(a) a class of payments;

(b) a class of recipients of payments.

The Employment Termination Payments (12 month rule) Legislative Instrument 2007 is a determination made under subsection 82-130(7) of the ITAA 1997, which has been registered by the Commissioner on the Federal Register of Legislative Instruments.

In accordance with paragraph 3 of the determination entitled 'Application', it will apply to a payment received by a person after 30 June 2007 if the payment is received:

(a) either

(i) in consequence of the termination of that person's employment, or

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

(b) more than 12 months after that termination; and

(c) is not a payment under section 82-135 of the Income Tax Assessment Act 1997.

Where these conditions are satisfied, the payment is referred to in the determination as a late termination payment.

In accordance with paragraph 4 of the instrument entitled 'Determination', paragraph 82-130(1)(b) of the ITAA 1997 will not apply to a late termination payment if the payment is received more than 12 months after the termination of a person's employment because:

(a) legal action was commenced within 12 months of the termination of employment, of which the subject is either or both:

(i) the person's entitlement to the payment;

(ii) the amount of the person's entitlement; or

(b) the payment was made by a liquidator, receiver or trustee in bankruptcy of an entity that is otherwise liable to make the payment, where that liquidator, receiver or trustee is appointed no later than 12 months after the termination of employment.

In your client's case it is considered that subparagraph 4(a) of the Determination applies as legal action was commenced within 12 months of the termination of your client's employment. Further, the legal action was in relation to entitlements which your client considered as being payable to your client as a result of termination of employment.

Accordingly, it is considered that the conditions for the payment to be viewed as a late termination payment are satisfied. Therefore, the payment is exempt from the 12 month rule found in paragraph 82-130(1)(b) of the ITAA 1997.

A payment mentioned in section 82-135 of the ITAA 1997

As previously mentioned, section 82-135 of the ITAA 1997 excludes certain payments from being employment termination payments, These payments include:

· a payment for unused annual leave

· a payment for unused long service leave

· the tax-free part of a genuine redundancy payment

· capital payments for personal injury.

In your client's case, the facts provided, and the discussion below in relation to whether any part of the Payment is a genuine redundancy payment, show that the Payment did not include any of the payments mentioned in section 82-135 of the ITAA 1997 which would preclude any part of the payment from being an employment termination payment.

Consequently, it is considered that the Payment is not of a type mentioned in section 82-135 of the ITAA 1997.

As all the conditions in subsection 82-130(1) of the ITAA 1997 are satisfied, the Payment is considered an employment termination payment (ETP).

Genuine redundancy payment

To determine if any part of the Payment made to your client from the Employer constitutes a genuine redundancy payment (GRP), all the conditions in section 83-175 of the ITAA 1997 will need to be satisfied.

Section 83-175 of the ITAA 1997 states:

(1) A genuine redundancy payment is so much of a payment received by an employee who is dismissed from employment because the employee's position is genuinely redundant as 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 dismissal.

(2) A genuine redundancy payment must satisfy the following conditions:

(a) the employee is dismissed before the earlier of the following:

(i) the day he or she turned 65;

(ii) 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 the age or complete the period of service (as the case may be);

(b) if the dismissal was not at arm's length the payment does not exceed the amount that could reasonably be expected to be made if the dismissal were at arm's length;

(c) 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 dismissal.

(3) However, a genuine redundancy 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 the payment was received or at a later time.

Payments not covered

(4) A payment is not a genuine redundancy payment if it is a payment mentioned in section 82-135 (apart from paragraph 82-135(e)).

The Commissioner has issued Taxation Ruling 2009/2, Income Tax: genuine redundancy payments (TR 2009/2). The Ruling provides guidance on the factors to be considered in the interpretation of section 83-175 of the ITAA 1997.

In discussing what constitutes a GRP in accordance with subsection 83-175(1) of the ITAA 1997, paragraph 11 of TR 2009/2 states:

There are four necessary components within this requirement:

Ÿ The payment being tested must be received in consequence of an employee's termination.

Ÿ That termination must involve an employee being dismissed from employment.

Ÿ That dismissal must be caused by the redundancy of the employee's position.

Ÿ The redundancy payment must be made genuinely because of a redundancy.

For the Payment to be considered a GRP all the criteria set out in section 83-175 of the ITAA 1997 must be satisfied.

Payment in consequence of termination

The issue of whether the Payment received by your client in the 2010-11 income year was in consequence of the termination of your client's employment was discussed above. It was determined that the Payment was made in consequence of your client's termination of employment. Therefore the requirement that the payment must be received in consequence of a termination is met.

Dismissal

Section 83-175 of the ITAA 1997 replaces former section 27F of the Income Tax Assessment Act 1936 (ITAA 1936), and is written using a number of the same terms and concepts. GRPs were previously known as bona fide redundancy payments (BFRP).

The Explanatory Memorandum to the Income Tax Assessment Amendment Bill (No.3) 1984 which, as enacted, inserted former section 27F into the ITAA 1936 states at page 91:

The terms "dismissal" and "redundancy" are not defined in the legislation and, therefore, should be given their ordinary meanings. "Dismissal" carries with it the concept of the involuntary (on the taxpayer's part) termination of employment. "Redundancy" carries the concept that the requirements of the employer for employees to carry out work of a particular kind, or for employees to carry out work of a particular kind in the place where they were so employed, have ceased or diminished or are expected to cease or diminish. Redundancy, however, would not extend to the dismissal of an employee for personal or disciplinary reasons or for reasons that the employee was inefficient.

Consequently, it is necessary to consider the ordinary meaning of the terms 'dismissal' and 'redundancy' and the meaning the judicial authorities have ascribed to them.

Paragraphs 18 and 19 of TR 2009/2 discuss what constitutes a dismissal:

18. Dismissal is a particular mode of employment termination. It requires a decision to terminate employment at the employer's initiative without the consent of the employee. This stands in contrast to employment that is terminated at the initiative of the employee, for example in the case of resignation.

19. Consent in this context refers to the employee freely choosing to agree to or approve the act or decision to terminate employment in circumstances where the employee has the capacity to make such a choice. Determining whether an employee has consented to their termination requires an assessment of the facts and circumstances of each case. Consent may be either expressly stated by the employee or implied by their behaviour or conduct.

From the facts provided, it is evident that your client's termination of employment was a dismissal which was instigated by the Employer. Accordingly, it is considered that the requirement of dismissal from employment has been met.

Redundancy

Paragraphs 24 to 28 of TR 2009/2 provide the following comments in relation to the meaning of redundancy:

24. As is the case in determining if there is a dismissal, the reason for a dismissal is to be established in light of the facts and circumstances of each case. The redundancy of the relevant position must be the prevailing or most influential reason for the dismissal if there is more than one contributing cause.

25. An employee's position is redundant when an employer determines that it is superfluous to the employer's needs and the employer does not want the position to be occupied by anyone. Accordingly, it is fundamentally the employer's decision that a position is redundant. On occasion the decision may be unavoidable due to the circumstances surrounding the employer's operations.

26. In some circumstances, an employer may reallocate the duties and functions attached to a particular position to another position within the employer's organisational structure. In such cases, the former position is redundant. However, if the employee who had been working in that position is still employed by the employer following the reallocation of duties and functions, there will not be a dismissal.

27. On the other hand, if an employer decides after downsizing or some other structural reorganisation to terminate an employee, the former position of the employee is redundant as long as the downsizing or reorganisation is the prevailing or most influential cause of the termination.

28. A dismissal is not caused by redundancy where personal acts or default are the prevailing or most influential cause for the termination. For example, a person may be dismissed due to unsatisfactory performance or behaviour.

In your client's case, it is noted your client and a former employee, state that subsequent to your client's termination of employment the position (the Position) your client formerly held was not readvertised or occupied by another employee. Further, your client and the former employee state a senior employer, in addition to that senior employee's own role, took on your client's former position in an acting capacity and that ultimately your client's duties were distributed to other employees.

Though paragraph 26 of TR 2009/2 states the reallocation of duties and functions attached to a particular position to another position within the employer's organisational structure can be viewed as making the former position redundant, it is noted that your client was the subject of unsatisfactory performance and behaviour issues (the allegations), which were fully documented, were raised by the Employer shortly before and at the time of dismissal.

As shown in paragraph 28 of TR 2009/2, a dismissal is not considered to be caused by redundancy where the dismissal is caused by an employee's performance or behaviour.

It is noted that your client denies the allegations and also denied them before and at the time of dismissal. Further, your client states that the dismissal was the result of a restructure undertaken by the Employer which included the reduction of senior managers, of which your client was one.

Documentation provided, for example, the Report and other documentation, made several months after your client's dismissal, indicate a restructure was undertaken by the Employer. The important matter which requires attention however is whether 'the prevailing or most influential cause of dismissal' in your client's case is the restructure or the allegations.

In paragraph 29 of TR 2009/2 it states:

29. In some cases, an employer may decide to restructure their organisation at the same time as identifying underperformance of particular members of staff or areas within the existing organisational structure. In the event that employees are dismissed in these circumstances, careful consideration will need to be given to what was the prevailing or most influential cause of dismissal.

Further to the above, Example 16 in TR 2009/2 provides a scenario dealing with 'Dismissal for mixed reason'. In that example, an Employer was unsuccessful in dismissing an employee for disciplinary reasons. However, six months later, as a result of a drop in business, the Employer had to reduce his workforce by one employee. Though the employee who was subsequently dismissed was the person whom the Employer tried to dismiss six months previously, it was considered that the 'influential' reason for the dismissal was the redundancy of the position.

The set of facts in Example 16 are not similar to those of your client's but what the example does reiterate is, subject to meeting the other conditions for a GRP, a payment cannot be a GRP if the 'prevailing or most influential reason' for the dismissal is due to disciplinary reasons.

In your client's case, as previously mentioned, the documentation shows that a restructure was undertaken by the Employer. However, taking all the facts into account, it is considered that the immediate cause for your client's dismissal was not the restructure but the allegations which the Employer brought against your client.

Notwithstanding your client's denying the allegations, it is considered that:

(a) given the number of allegations raised by the Employer;

(b) the period of time prior to the dismissal over which the allegations relate;

(c) the Employer's letter made in the 2008-09 income year, which reiterated the allegations and responses to your client's counter claims; and

(d) the action taken by the Employer to immediately terminate your client's employment;

show that the Employer's immediate decision to dismiss your client was not a decision necessarily based on a restructure but one where the 'prevailing or most influential reason' for dismissal was due to the allegations.

In view of the above the conclusion that must be drawn is that your client's dismissal was not caused by redundancy.

Accordingly, it is considered that your client has not satisfied one of the criterion under subsection 83-175(1) of the ITAA 1997 in this instance.

As it has been determined that your client does not meet one of the basic redundancy requirements, in this case, your client's dismissal was not due to redundancy, it is not necessary to determine if all other conditions under section 83-175 of the ITAA 1997 have been met.

Transitional termination payment

Subsection 82-130(2) of the ITAA 1997 states:

A life benefit termination payment is an employment termination payment to which subparagraph (1)(a)(i) applies.

A life benefit termination payment (LBTP) made between 1 July 2007 and 30 June 2012 may be a transitional termination payment under section 82-10 of the Income Tax (Transitional Provisions) Act 1997 (IT(TP)A).

Subsection 82-10(1) of the ITTPA states that:

This Division applies in relation to a life benefit termination payment received by you on or after 1 July 2007 if:

(a) the payment is received by you because you are entitled to it under a written contract, a law of the Commonwealth, a State, a Territory or another country, an instrument under such a law, a collective agreement within the meaning of the Fair Work (Transitional Provisions and Consequential Amendments) Act 2009 or an AWA within the meaning of that Act; and

(b) the entitlement is provided for under that contract, law, instrument or agreement as in force just before 10 May 2006. (emphasis added)

Furthermore, at subsection 82-10(3) of the ITTPA it states:

This Division applies in relation to a life benefit termination payment only to the extent that the contract, law or agreement as in force just before 10 May 2006 specifies the amount of the payment, or a way to work out a specific amount of the payment.

The first issue for consideration is whether the payment made to the employee satisfies the requirement of being an entitlement under a written contract, law or agreement.

The explanatory memorandum to the Tax Laws Amendment (Simplified Superannuation) Act 2007 which introduced section 82-10 states:

4.68 In order to ensure that the transitional provisions are not open to abuse, they are only available in situations where the payment was able to be determined as at 9 May 2006. This will encompass arrangements where the contract refers to the amount of the payment by way of a formula which can be objectively determined, or to payments made in kind (eg, shares). [Schedule 2, item 2, subsections 82-10(3) and (4)]

In this case the ETP your client received satisfies the definition of a life benefit termination payment found in subsection 82-130(2) of the ITAA 1997 and it is was made after 1 July 2007 and before 30 June 2012.

Though the ETP arose from your client's termination of employment, and there existed a written contract (the Contract) between your client and the Employer, the issues which are crucial are whether the entitlement to the Payment arose from that Contract and whether that Contract was in force before 10 May 2006.

Contract in force before 10 May 2006

Paragraph 82-10(1)(b) of the ITTPA requires that 'the entitlement is provided for under that contract, law, instrument or agreement as in force just before 10 May 2006' [emphasis added]. Furthermore, subsection 82-10(3) of the ITTPA provides that the division applies to a payment only to the extent that the contract in force just before 10 May 2006 specifies the amount of the payment, or a way to work out a specific amount of the payment.

In your client's case, the facts show that a Contract was entered into between your client and the Employer which was dated after 10 May 2006. The Contract provided the terms and conditions of your client's employment in relation to your client's position.

Notwithstanding the fact that the Contract was entered into after 10 May 2006, it should be noted that the actual amount of the Payment that is made must have been specified, or could be ascertained by way of a formula, from a contract which was in force before 10 May 2006.

The explanatory memorandum to the Tax Laws Amendment (Simplified Superannuation) Act 2007 (the EM) which introduced section 82-10 states:

4.68 In order to ensure that the transitional provisions are not open to abuse, they are only available in situations where the payment was able to be determined as at 9 May 2006. This will encompass arrangements where the contract refers to the amount of the payment by way of a formula which can be objectively determined, or to payments made in kind (e.g. shares). [Schedule 2, item 2, subsections 82 - 10(3) and (4)] (emphasis added)

As indicated by subsection 82-10(3) of the ITTPA and the EM, a payment received by a taxpayer must be the same objectively determined amount which he or she would have received under the contract. Therefore, this objective requirement indicates that there should be no intention of a payment being made by way of a compromise.

It is noted that you state the Payment made to your client relates to your entitlements which were provided in a Policy incorporated in a written contract which was in force before 10 May 2006. Though the Statement of Claim (the Statement), shows that your client sought a amount which your client determined as being their entitlements under the contract, it is noted that in the Statement your client also sought:

(a) in addition to the entitlement amount, interest and costs; and

(b) in addition, or in the alternative, damages for financial loss resulting from the breach of the implied term of mutual trust and confidence.

In your client's case it is considered that the Payment is not a transitional termination payment as it does not satisfy subsections 82-10(1) and 82-10(3) of the ITTPA as:

(a) the payment does not arise from a contract which was in place as at 9 May 2006, but from a compromise reached by your client and the Employer which was formalised in a Court Order in the 2010-2011 income year;

(ii) the Statement shows the court action undertaken was not solely for the amount of the entitlements relating to your client's contact of employment; and

(ii) the actual Payment made as a result of the compromise is not the same objectively determined amount to have been received under the contract. In other words, the amount received by your client could not be calculated under either your client's employment contract or the employer's redundancy policy.

Further it should be noted that in view of the above, it is clear that the facts of this case in respect of the calculation of entitlements on termination of employment are not similar to those in Perfrement v Commissioner of Taxation 2011 AATA 264, 2011 ATC 10-179 (Perfrement), and so that decision does apply to your client's situation.

In view of the above, the Payment your client received is not considered to be a transitional termination payment for the purposes of section 82-10 of the ITTPA.

Conclusion:

The Payment does not include a genuine redundancy payment as it is considered that the prevailing, or most influential, cause of the termination of your employment was not redundancy.

The Payment received by your client from the termination of his employment is not a transitional termination payment because it was not provided for under a contract, instrument or agreement that came into force prior to 10 May 2006.

The Payment is a life benefit employment termination payment which is taxed according to its components.

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