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Ruling

Subject: Genuine redundancy

Questions:

Is the payment in lieu of notice an employment termination payment?

Was the termination of employment the result of genuine redundancy?

Advice/Answers:

Yes.

Yes.

This ruling applies for the following period:

1 July 2010 to 30 June 2011

The scheme commenced on:

1 July 2010

Relevant facts:

Your client is under 55 years of age.

In the 2010-11 income year, your client was advised that your client's employment had been terminated, handed the termination paper work to sign and asked to pack up and leave. A letter from the employer advised your client that your client's position was redundant from that date.

Your client received a payment in lieu of notice from which tax was withheld. Your client's conditions of employment stated in relation to 'Termination' that notice would be a particular number of weeks by either the employee or the company. Further it stated the basis of the calculation of a payment in lieu of notice.

You have advised that:

· the termination was not on account of any personal act or default by your client;

· no portion of the amount received on termination of employment is in lieu of superannuation benefits;

· there was no agreement between your client and the employer or the employer and another person to employ your client after termination of employment; and

· your client and the employer were dealing with each other at arm's length.

Relevant legislative provisions:

Income Tax Assessment Act 1997 Section 82-130.

Income Tax Assessment Act 1997 Section 82-135.

Income Tax Assessment Act 1997 Section 83-175.

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

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 83-170.

Reasons for decision

Summary

The payment in lieu of notice is made in consequence of your client's termination of employment. The total payment represents the tax free part of a genuine redundancy payment.

Detailed reasoning

Employment termination payment

A payment made to an employee 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:

· it is received by you:

· in consequence of the termination of your employment; or

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

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

· it is not a payment mentioned in section 82-135.

Payment is made in consequence of the termination of employment

The first condition to be met is that there must be an employment termination payment that is made in consequence of the termination of employment of the taxpayer.

The phrase 'in consequence of' is not defined in the ITAA 1997. However, the Commissioner has issued Taxation Ruling TR 2003/13 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) 49 ALJR 370; (1975) 6 ALR 642; (1975) 5 ATR 538; (1975) 75 ATC 4213; (1975) 133 CLR 45 (Reseck) and the Full Federal Court in McIntosh v Federal Commissioner of Taxation (1979) 25 ALR 557; (1979) 10 ATR 13; (1979) 45 FLR 279; (1979) 79 ATC 4325 (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.

Your client's employment ceased and your client received various payments. Included in these payments was an amount paid as a payment in lieu of notice which is the subject of the ruling.

The payment has been classified as an employment termination payment by the employer as shown in a 'Pay as you go payment summary'. Therefore it is evident that the payment was made in consequence of your termination of employment. The payment would not have been made had there been no termination of employment. The termination of employment and the payment are intertwined and connected.

Therefore the requirement of subparagraph 82-130(1)(a) of the ITAA 1997 has been met.

The payment is received no later than 12 months after termination of employment

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 terminated employment and the employment termination payment was paid on the same day. Therefore the payment was made within 12 months after termination of employment. Therefore the requirement under paragraph 82-130(1)(b) of the ITAA 1997 has been met.

Payments excluded from being employment termination payments

Paragraph 82-130(1)(c) of the ITAA 1997 requires that an employment termination payment is not a payment under section 82-135 of the ITAA 1997.

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

· an unused annual leave payment;

· an unused long service leave payment; or

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

Clearly the payment is not for unused annual leave or unused long service leave. We will now consider if any of it is a tax free part of a genuine redundancy payment.

Genuine redundancy payment

A payment made to an employee is a genuine redundancy payment (GRP) if it satisfies all criteria set out in section 83-175 of the ITAA 1997. Section 83-175 of the ITAA 1997 replaces former section 27F of the Income Tax Assessment Act 1936 (ITAA 1936) where such payments were referred to as bona fide redundancy payments.

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 Explanatory Memorandum to the Income Tax Assessment Amendment Act (No.3) 1984 which 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.

The Commissioner's view as stated in Taxation Ruling TR 2009/2 - Income tax: genuine redundancy payments (TR 2009/2) 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.

Therefore the questions to be answered are whether the position your client occupied was abolished and whether your client was dismissed from employment.

Your client received a letter from the employer advising your client that your client's position was made redundant effective that day. Consequently, it is concluded that your client's position was abolished and your client was dismissed from employment.

The Commissioner's view is that a genuine redundancy payment can only arise where there is no suitable job available for the employee with the employer and therefore the employee must be dismissed.

In light of these factors it is considered that your client's termination of employment is a genuine redundancy.

As your client's position was abolished 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 GRP, 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

The termination work sheet provided show the various payments your client received on termination of employment. These include a payment described as a payment in lieu of notice in addition to outstanding leave entitlements.

The termination clause in your client's employment conditions provides that either party must provide some weeks notice of termination. In this case your client was dismissed from employment.

Clearly the payment in lieu of notice would not have been paid if your client had resigned voluntarily. Consequently, the amount paid is in excess of what your client could have received on voluntary termination of employment and the first condition is satisfied.

Termination occurred before age 65 or expiration of fixed term

The second condition is that the termination time was a date before the taxpayer attained age 65 or such earlier date on which his or her employment would have necessarily terminated under the terms of employment because of the employee attaining a certain age or completing a certain period of service.

Your client's employment commenced and his employment terminated when your client was well below the retirement age of 65 years. Therefore this condition is satisfied.

Dealing at arm's length

The third condition is that if the employer and the employee were not dealing with each other at arm's length in relation to the termination of employment, the amount of the eligible termination payment must not be greater than the amount that could reasonably be expected to have been paid if the parties had been at arm's length. In this case there is no evidence that your client and the employer did not deal with each other at arm's length.

No agreement to employ after date of termination

The final condition is that at the termination time, there was no agreement in force between your client and the employer or the employer and another person, to employ your client after the date of termination.

You have advised that at the time of termination there was no agreement between your client and the employer or the employer and another person to employ your client after his termination of employment. Therefore this condition is satisfied.

Therefore all requirements of subsection 83-175(2) of the ITAA 1997 have been satisfied.

Further requirements

In addition to the requirements discussed above, subsection 83-175(3) of the ITAA 1997 requires that no part of the payment which represents a payment in lieu of superannuation benefits will be included as part of a GRP. As no part of the payment is in lieu of superannuation benefits, this condition is satisfied.

The last requirement is that the payment must not be a payment covered by section 82-135 of the ITAA 1997 apart from paragraph 82-135(e) i.e. a GRP. As noted earlier, none of the paragraphs of section 82-135 (apart from paragraph 82-135(e)) apply. Therefore, this requirement has been satisfied.

All conditions must be satisfied before the payment is considered a GRP. In this case as all the conditions have been met, the payment is a GRP under section 83-175 of the ITAA 1997.

Tax-free part of a genuine redundancy payment

Section 83-170 of the ITAA 1997 applies to determine the tax-free treatment of a GRP. Section 83-170 places a limit on the amount of a GRP that is eligible for concessional tax treatment.

So much of the GRP that does not exceed the amount worked out using the prescribed formula is not assessable income and is not exempt income. The formula for working out the tax free amount (subsection 83-170(3) of the ITAA 1997) is:

Base amount + [ Service amount × Years of service]

For the 2010-11 income year:

Base amount means $8,126;

Service amount means $4,064; and

Years of service means the number of whole years in the period, or sum of periods, of employment to which the payment relates

As the amount your client has received is below the base amount the whole amount will be the tax free amount.

The payment of the tax-free amount of a GRP and is not required to be included in your client's income tax return for the 2010-11 income year.

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