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Ruling

Subject: Genuine redundancy payment

Questions

Is any part of the payments described as a redundancy payment and a loyalty payment to be made on the termination of employment a tax-free part of a genuine redundancy payment (GRP) in accordance with section 83-170 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Will the balance in excess of the tax-free part of a genuine redundancy payment limit for the 2012-13 income year be included in assessable income as an eligible termination payment under subsection 80-10(2) of the ITAA 1997?

Answers

Yes

Yes

This ruling applies for the following period

For the year ended 30 June 2013

This scheme commenced on

1 July 2012

Relevant facts

You commenced full-time employment with the employer a number of years ago.

Your current position includes various duties.

You were advised by the employer that as a result of a restructure, they have determined that the particular collection of functions, duties and responsibilities that are attached to your position will no longer exist. Therefore, your position will become redundant.

The employer advised that as part of the review process, they had identified priorities crucial to the transitional stage and their main priority is retention of key team members during this time. In order to achieve this, the employer made an offer of a one-off loyalty payment to retain your employment up to the estimated completion date. Your normal employment salary would be maintained until your completion date. On the completion date, a redundancy payment based on your period of continuous service would also be made.

The loyalty payment and the redundancy payment are payable on your completion date and contingent upon the successful completion of current projects and your continued employment with the employer until that time.

However, the employer advised a number of conditions which applied in order for you to be eligible to receive the loyalty payment on your estimated completion date.

On voluntary resignation or retirement you are entitled to receive unused accrued long service leave and unused annual leave.

There was no date prior to your sixty fifth birthday when you were required to cease employment.

At the time of termination there were no arrangements between yourself and the employer or any other person to employ you after your termination of employment.

You are under 55 years of age.

Relevant legislative provisions

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

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

Income Tax Assessment Act 1997 Section 83-175.

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

Income Tax Assessment Act 1997 Subsection 83-175(2).

Income Tax Assessment Act 1997 Paragraph 83-175(2)(a).

Income Tax Assessment Act 1997 Paragraph 83-175(2)(b).

Income Tax Assessment Act 1997 Paragraph 83-175(2)(c).

Income Tax Assessment Act 1997 Subsection 83-175(3).

Income Tax Assessment Act 1997 Subsection 83-175(4).

Income Tax Assessment Act 1997 Section 995-1.

Reasons for Decision

Summary

The redundancy payment and loyalty payment to be made on termination of the employment are considered to be genuine redundancy payments as all the conditions have been satisfied. Of this amount, there is an amount represents the tax free part of a genuine redundancy payment.

After deducting the tax free amount of a genuine redundancy payment, the remaining amount is considered as an employment termination payment. This amount to be included in your assessable income for the 2012-13 income year.

The ETP cap amount for the 2012-13 income year is $175,000.

As the remaining balance is under the ETP cap, you will be entitled to a tax offset that ensures that the rate of income tax on the amount up to the ETP cap amount will not exceed 30% plus Medicare levy.

Detailed reasoning

Genuine redundancy payment

To determine if any part of the payment you will receive from the employer constitutes a genuine redundancy payment (GRP), all the conditions in section 83-175 of the Income Tax Assessment Act 1997 (ITAA 1997) will need to be satisfied.

Where a payment is made to an employee after 30 June 2007, a GRP is defined in subsection 83-175(1) of the ITAA 1997 as:

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 the dismissal.

Subsection 83-175(2) of the ITAA 1997 states that for a payment to qualify as a GRP all of the following conditions must be met:

(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 the dismissal.

In addition, subsection 83-175(3) of the ITAA 1997 provides that a GRP 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. In addition, subsection 83-175(4) provides that a payment is not a GRP if it is a payment mentioned in section 82-135.

The Commissioner has issued Taxation Ruling TR 2009/2 which outlines the Commissioner's view of the requirements to be satisfied for a payment to qualify as a genuine redundancy payment under section 83-175 of the ITAA 1997.

It is proposed to examine each of these provisions.

The requirement under subsection 83-175(1) of the ITAA 1997

The first requirement which is specified in subsection 83-175(1) of the ITAA 1997 has three criteria:

· the payment is received by an employee who is dismissed from employment;

· the employee is dismissed because the employee's position is genuinely redundant; and

· 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.

Dismissal from employment

The first criterion is that there has been a dismissal from employment, which usually means that the termination of employment is involuntary on the part of the employee concerned and is instigated by the employer.

According to the facts, your employment will be terminated by your employer on a specific date (the completion date) as the employer determined your position is no longer required due to a restructuring of the organisation.

To assist in facilitating the restructure the employer identified priorities crucial to the transitional stage and their main priority is retention of key team members during this time. In order to achieve this, the employer made an offer of a one-off loyalty payment to retain your employment up to the completion date.

The termination of your employment is clearly a dismissal for the purposes of subsection 83-175(1) of the ITAA 1997, because your employment is being terminated at the instigation of the employer due to a restructuring of the organisation. Therefore, it is considered that you have satisfied the first criterion under subsection 83-175(1) in this instance.

Genuine redundancy

Having established that there will be a dismissal from employment for the purposes of subsection 83-175(1) of the ITAA 1997, the next criterion that needs to be considered is whether you were dismissed because your position is genuinely redundant.

Redundancy is a situation where the dismissal of an employee is not caused by any consideration peculiar to the employee. Redundancy does not extend to a situation where an employee is dismissed for personal or disciplinary reasons or because the employee was inefficient, but rather because an employer no longer requires employees to carry out work of a particular kind or to carry out work of a particular kind at the same location.

At paragraph 27 of TR2009/2 the following comment is made:

… 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.

As stated in the facts the employer advised, that as a result of the company restructuring its organisation your duties and responsibilities that are attached to your position will no longer exist. Therefore your position will become redundant.

The termination of your employment will not be on account of any personal act or default on your part, and will not be due to the ordinary and customary turnover of labour. Rather the employer no longer requires anyone to perform the job you had been doing. Therefore the employer's decision to terminate your employment is due to a redundancy.

Accordingly, it is considered that you have also satisfied the second criterion under subsection 83-175(1) of the ITAA 1997 in this instance.

The payment exceeds what you would have received in consequence of the voluntary termination of your employment at the time of your dismissal

The third criterion that needs to be considered is whether the payment exceeds the amount that you could reasonably be expected to receive in consequence of the voluntary termination of your employment will be treated as a genuine redundancy payment.

The meaning of the phrase 'in consequence of'

The phrase 'in consequence of' is not defined in the ITAA 1997. However, the courts have interpreted the phrase in a number of cases. Whilst the courts have divergent views on the meaning of this phrase, the Commissioner's view on the meaning and application of the in consequence of test are set out in Taxation Ruling TR 2003/13 entitled 'Income tax: eligible termination payments (ETP): payments made in consequence of the termination of any employment: meaning of the phrase in consequence of'.

While TR 2003/13 considered the meaning of the phrase 'in consequence of' in the context of the eligible termination payments, TR 2003/13 can still be relied upon as both the former provision under the Income Tax Assessment Act 1936 and the current provision under the ITAA 1997 both use the term 'in consequence of' in the same manner. As previously noted, eligible termination payments ceased to exist from 1 July 2007, being replaced by employment termination payments.

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.

In paragraph 6 of TR 2003/13, the Commissioner recognises that:

The phrase requires 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.

There is also a broader view of the meaning of 'in consequence of the termination of employment'. Paragraph 29 of TR 2003/13 provides that a payment will be in consequence of the termination of employment if the termination is either a cause of the payment or an antecedent event.

Furthermore, in Case No M 101/1976 (1977) 77 ATC 475; (1977) 22 CTBR (NS) 41 (Case No M 101/1976) the No. 2 Board of Review considered whether a production completion bonus was made in consequence of termination of employment. The facts of the case were that on the day he was retrenched, the taxpayer received a production completion bonus of $2,750 from his employer. In a letter to the Deputy Commissioner, the taxpayer's former employer explained that the bonus payment was designed as an incentive to keep the employee on a particular project until he was no longer needed. Payment of the bonus was conditional on the employee remaining on the job until retrenched. The taxpayer gave evidence that had he resigned at any time before the retrenchment date he would have received no part of the bonus.

The No. 2 Board of Review held that the payment constituted an allowance or compensation paid in a lump sum in consequence of the termination of the taxpayer's employment within the meaning of former paragraph 26(d) of the ITAA 1936 (the precursor to the ETP provisions). In making the decision the judgement of the majority of the Full High Court in Reseck was followed.

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 circumstances of the present case are almost identical to the circumstances in Case No M 101/1976 considered by the No 2 Board of Review.

In the facts of this case, the employer has advised that, as a result of a restructure, your position will become redundant.

The employer advised that as part of the review process, they had identified priorities crucial to the transitional stage and their main priority is the retention of key team members during this time. In order to achieve this, the employer made an offer of a one-off loyalty payment to retain your employment up to the estimated completion date. In addition you were entitled to receive redundancy payment.

The employer advised a number of conditions that would apply and confirmed that both the loyalty payment and the redundancy payment are payable on your completion date.

It is clear from the facts provided that the payment of the redundancy pay and the loyalty payment will be made to you on the termination of your employment with the employer on the completion date. Therefore, the payment is made as 'in consequence of' your termination of employment. As such, there is a direct causal connection between the termination of employment and the making of the payment.

The termination of employment and the payment are all intertwined and connected. If not for the termination of employment the payment would not have been made. In particular, the payment of the loyalty payment is conditional on you remaining in employment with the employer until the completion date.

It is considered that there is sufficient nexus between the making of the payment and the termination of employment to say that the payment is made in consequence of your termination of employment.

The Commissioner considers that it is necessary to show how the amount an employee is entitled to be paid exceeds the amount that is payable to employees who voluntarily terminate their employment.

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.

You were entitled to only an amount of accrued annual leave and long service leave had you resigned or retired from your employment.

The payment of both the redundancy payment and the loyalty payment is to be made on the termination of your employment due to your role being abolished. The payment is paid in circumstances of genuine redundancy, and is in excess of the amount that could reasonably be expected to be received by a worker in consequence of voluntary termination.

According to the facts, you will receive a total payment (part redundancy payment and part loyalty payment). It is accepted that this payment exceeds the amount you could reasonably expect to receive if you had resigned or retired from employment in the position you held at the time of the dismissal. Therefore, it is considered that you have satisfied the third criterion under subsection 83-175(1) of the ITAA 1997 in this instance.

Conclusion

All the criteria stipulated in subsection 83-175(1) of the ITAA 1997 have been satisfied.

Consequently it is considered that the amount of the payment constitutes a GRP within the meaning of subsection 83-175(1) of the ITAA 1997. However, a GRP must also satisfy the conditions in subsections 83-175(2) to 83-175(4).

The requirements under paragraphs 83-175(2)(a) and (b) of the ITAA 1997

As already noted previously, paragraph 83-175(2)(a) of the ITAA 1997 prescribes that the employee must be 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 the age or complete the period of service (as applicable).

It is accepted that there was no date prior to your 65^th birthday on which you were required to terminate employment, and that you were not required to terminate employment before you were dismissed on the effective date. Also given that you were under 65 years of age at the time of your dismissal, you have satisfied the requirements of paragraph 83-175(2)(a) of the ITAA 1997.

Additionally, it is accepted that all dealings between yourself and the employer were at arm's length. Therefore it follows that you have also satisfied the requirement under paragraph 83-175(2)(b) of the ITAA 1997.

The requirement under paragraph 83-175(2)(c) of the ITAA 1997

Also as noted previously, paragraph 83-175(2)(c) of the ITAA 1997 requires that 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.

In the present case, there was no re-employment by your employer or evidence of any re-employment arrangement with another entity, so it is accepted that you have satisfied the requirement under paragraph 83-175(2)(c) of the ITAA 1997 in this case.

The requirements under subsections 83-175(3) and 83-175(4) of the ITAA 1997

Subsection 83-175(3) of the ITAA 1997 provides that a GRP does not include any part of a payment that is received in lieu of superannuation benefits. No part of the payment to be made to you is in lieu of superannuation benefits. Therefore it is accepted that the requirement under subsection 83-175(3) is satisfied.

Also as noted previously, subsection 83-175(4) of the ITAA 1997 provides that a payment is not a GRP if it is a payment mentioned in section 82-135 (other than a GRP or early retirement scheme payment).

Section 82-135 of the ITAA 1997 includes payments such as pensions, foreign termination payments, unused annual leave and unused long service leave.

An examination of the payment to be made to you shows that the requirement in subsection 83-175(4) of the ITAA 1997 has been satisfied.

A GRP under sections 83-170 and 83-175 of the ITAA 1997

You have satisfied all the criteria set out in section 83-175 of the ITAA 1997 and consequently it is considered that the amount of the payment constitutes a GRP for the purposes of section 83-170.

Tax free treatment of a GRP

Subsection 83-170(2) of the ITAA 1997 provides that so much of the GRP that does not exceed the amount worked out using the formula prescribed in subsection 83-170(3) is not assessable income and is not exempt income. Any amount in excess of the tax-free amount is taxed as an employment termination payment. The formula for working out the tax-free amount is:

Base amount + (Service amount × Years of service)

You were employed for X whole years of service.

Because your dismissal will occur during the 2012-13 income year, the base amount will be $X and the service amount will be $Y. Therefore in accordance with subsection 83-175(3) of the ITAA 1997, the tax free part of a GRP you can receive in the 2012-13 income year equals:

$X + ($Y × whole years of service) = the tax free amount.

This tax free amount is not assessable income and is not exempt income in accordance with subsection 83-170(2) of the ITAA 1997.

After deducting the tax-free amount of a genuine redundancy payment the remaining amount of considered to be an employment termination payment.

The employment termination payment will consist entirely of a taxable component which is included in your assessable income under subsection 82-10(2) of the ITAA 1997.

For the 2012-13 income year the ETP cap amount is $175,000.

As you are under preservation age you will be entitled to a tax offset under paragraph 82-10(3)(b) of the ITAA 1997 that ensures that the rate of income tax on the amount up to the ETP cap amount will not exceed 30% plus Medicare levy.

PAYG payment summary

The PAYG payment summary- employment termination payment for the 2012-13 income year should therefore consist of the taxable component and the tax free component.

With regard to the PAYG payment summary for the 2012-13 income in relation to amounts of salary or wages and other payments, the tax free amount should be shown as a Lump sum D amount and the lump sum amount for unused annual leave should be shown as a Lump sum A amount.

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