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Ruling

Subject: Genuine redundancy

Question

Is any part of the payment made on termination of your client's employment exempt from tax as the tax-free amount of a genuine redundancy payment?

Answer:

No

This ruling applies for the following period

30 June 2012

The scheme commenced on

1 July 2011

Relevant facts

Your client is under 55 years of age.

In the 2001-02 income year, your client commenced employment with Company A in a senior position (the position).

As a result of a reorganisation, Company A was to cease operations in the 2011-12 income year.

During a transition period, Company C was established, and plans were made for the cessation of business of Company A and other related entities.

Company A continued to operate with the intention being to transition from the various entities to one consolidated Company C by a specific date.

Company C effectively took over the employment responsibilities of the various entities and as such, your client was employed by Company C in a specific role for the transitional period.

Your client's employment agreement with Company C was for a specific period. Your client was employed to take care of the restructuring of the business during the transitional period.

Company C intended to advertise for someone to permanently occupy your client's position once the restructuring of the organisation had been completed. Company A had the option to choose to offer your client a further employment contract for this or another position within the organisation. If no offer was made, your client would receive the balance of their entitlements under the employment contract.

Company C made no offer to your client to undertake another role at the organisation. Your client's employment contract was terminated prior to the expiry date of the contract.

Your client's employment was terminated in the 2011-12 income year.

The PAYG payment summary - employment termination payment shows the entire amount as a taxable component and tax was withheld.

Relevant legislative provisions

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 Section 82-135.

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 83-175.

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

Income Tax Assessment Act 1936 Section 27F.

Reasons for decision

Summary

The Payment received by your client is an employment termination payment as the Payment has been made in consequence of the termination of your client's employment.

The Payment does not include the tax-free amount of a genuine redundancy payment as it is considered that the prevailing, or most influential, cause of the termination of your client's employment was not redundancy.

The Payment is a life benefit employment termination payment.

Detailed reasoning

Employment termination payment

A payment 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 of the ITAA 1997.

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

(1) 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.

Based on the information provided, the Payment was made to your client in consequence of the termination of their employment. There is a clear nexus between the termination of your client's employment in the 2011-12 income year and the Payment made to your within 12 months of the termination date.

Further, with the possible exception of the tax-free amount of a genuine redundancy payment, discussed below, the payment does not include any of the payments mentioned in section 82-135 of the ITAA 1997.

Accordingly, the Commissioner accepts the Payment is an employment termination payment.

The payment constitutes a life benefit termination payment

Subsections 82-130(1) and 82-130(2) of the ITAA 1997, provide that where an employment termination payment is made during the life of a taxpayer, the payment is known as a life benefit termination payment (LBTP).

In particular, 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:

Because the Payment is an employment termination payment to which subparagraph 82-130(1)(a)(i) of the ITAA 1997 applies, the Payment constitutes a LBTP within the meaning of subsection 82-130(2) of the ITAA 1997.

Genuine redundancy payment

A payment made to an employee is a genuine redundancy payment if it satisfies all the 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 previously referred to as bona fide redundancy payments.

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 employees 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 arms length the payment does not exceed the amount that could reasonably be expected to be made if the dismissal were at arms 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)).

Dismissal and Redundancy

Under subsection 83-175(1) of the ITAA 1997, a genuine redundancy payment is a payment resulting from:

(i) a dismissal; and

(ii) a redundancy.

The terms 'dismissal' and 'redundancy' are not defined in the ITAA 1997. 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 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 has issued Taxation Ruling TR 2009/2, titled 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.

Paragraph 11 of TR 2009/2 states:

11. There are four necessary components within the basis genuine redundancy requirement:

· The payment being tested must be received in consequence of a termination.

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

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

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

Each of the requirements will be discussed individually.

The payment is in consequence of the termination of employment

It was previously determined that the Payment was made in consequence of your client's termination of employment. Therefore, the first requirement that the payment must be received in consequence of a termination is met.

Dismissal from employment

Paragraph 18 of TR 2009/2 discusses 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.

A payment is classified as a genuine redundancy payment only upon meeting all of the requirements set under section 83-175 of the ITAA 1997 and dismissal only forms part of those requirements.

On the basis of the facts as presented in this case, it is considered your client was dismissed from employment at the initiative of the employer. The employer terminated your client's employment before the expiration of the employment contract. Therefore, this second requirement of subsection 83-175(1) of the ITAA 1997 has been satisfied.

Dismissal caused by redundancy

As stated by the Commissioner in paragraph 23 of TR 2009/2, section 83-175 of the ITAA 1997 requires that the dismissal be caused only by redundancy of the employee's position, and not for some other reason. It follows, therefore, that redundancy must be the reason for termination of employment by way of dismissal.

Paragraphs 24 and 25 of TR 2009/2 provide the following 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.

It is evident from the above that if the prevailing or most influential cause of the termination of a person's employment was not redundancy of the position they occupied, the dismissal would not constitute a redundancy.

The Commissioner expands on the issue of determining the cause of dismissal at paragraphs 268 to 269 of TR 2009/2:

268. There are various reasons why an employee may be dismissed from employment. Redundancy may be only one of these reasons.

269. In circumstances where more than one reason can be identified for the dismissal, the Commissioner considers that redundancy must be the primary cause of the dismissal. This suggests an analysis of what is the prevailing or most influential cause of the dismissal. This question is to be answered in light of the facts and circumstances of each case.

In the present case, an examination of your client's employment agreement, with Company C, shows that the employment contract was for a specific period (i.e. a fixed term contract).

You stated that the employment arrangement was for your client to continue in their senior role in Company A. However, the employment agreement states it covers the senior role, or equivalent position with Company C. There is no mention of maintaining the role of the senior position of Company A. In fact, Company A was not mentioned at all in the employment agreement.

The employer terminated your client's employment in the 2011-2012 income year which was a few months prior to the expiration of your client's employment contract.

The terms of the employment contract clearly indicate that your client's appointment to the position in Company C was for a specific period, after which the role would continue with either your client or another person. Therefore, your client was not terminated because the position was redundant. Rather your client's employment was terminated when the employer decided to terminate your client's contract few months early.

You stated that your client's position was made redundant however the employment agreement did not support your claim. As stated in the facts, during the term of your client's employment agreement, Company C intended to advertise the position once a restructuring of the organisation had been completed. It is also stated that the Board may choose to offer your client a further employment contract for the position or a comparable position within the organisation. If the Board chose not to offer a further employment contract to your client, your client would receive the balance of their entitlements under the employment contract.

Company C made no offer to your client to undertake another role at the organisation and your client's employment was terminated in the 2011-2012 income year.

It is clear from the above, that the role in Company C was to be advertised once a restructuring of the organisation has been completed. As such, the role in Company C still existed after your client's termination of employment.

As a general rule, employers determine whether an employee's position has been made redundant and then tax the payment accordingly. In this instance, the payment summary your client received indicates the employer has not treated this payment as a genuine redundancy payment.

While your client's previous position of Company A is being abolished in the restructure, this was not the position they occupied when their employment was terminated. At that time, your client occupied a position in Company C, a position that has not been made redundant.

Given the above evidence, the conclusion that must be drawn is that your client dismissal was not caused by a genuine redundancy.

Consequently, it is considered that the prevailing, or most influential, cause of the termination of your client's employment was not redundancy.

As it is considered that the dismissal was not caused by the redundancy of your client's position, the third requirement of a genuine redundancy has not been satisfied. Consideration of the other requirements under section 83-175 of the ITAA 1997 is therefore not necessary.

Tax Treatment of the payment as an LBTP

An employment termination payment will be comprised of the following components:

· Tax free component - as provided in section 82-140 of the ITAA 1997, this includes an invalidity segment within the meaning of section 82-150 of the ITAA 1997 (if any) and/or a pre-July 83 segment within the meaning of section 82-155 of the ITAA 1997 (if any); and

· Taxable component - the amount remaining after deducting the tax free component calculated in accordance with section 82-140 from the total payment, as prescribed in section 82-145 of the ITAA 1997.

The period of employment to which the Payment relates commenced after 1 July 1983. Hence, the LBTP does not have a pre-July 83 segment within the meaning of section 82-155 of the ITAA 1997.

As the LBTP contains neither a pre-July 83 segment nor an invalidity segment within the meaning of section 82-150 of the ITAA 1997, the LBTP has no tax free component as defined in section 82-140 of the ITAA 1997. Rather the entire LBTP is a taxable component of an employment termination payment as defined in section 82-145 of the ITAA 1997. Accordingly, the entire payment should be included in your client's income tax return for the 2011-12 income year.

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 client's employment was not redundancy.

The Payment is a life benefit employment termination payment.

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