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Ruling

Subject: Genuine redundancy payment

Question:

Does the payment made to you in accordance with a Scheme qualify as a genuine redundancy payment?

Answer:

Yes.

This ruling applies for the following period

Year ending 30 June 2013

The scheme commenced on

1 July 2012

Relevant facts and circumstances

You commenced employment with (the Employer) several years ago.

During the 2011-12 income year the Employer, to ensure its continuing operations, implemented a retention scheme (the Scheme) which was offered to almost all of its employees.

The Employer provided you with a letter which stated:

(a) the Scheme had been implemented;

(b) the Payment you would received under the Scheme, and how it was calculated, provided you continued employment with the Employer up to a specified date;

(c) the Payment would:

(i) not attract superannuation contributions; and

(ii) would be paid to you after deduction of the required PAYG withholding taxes.

(d) if notice of resignation is given to the Employer prior to the specified date you will not receive the payment even if the last day of employment with the Employer is after the specified date; and

(e) if your position is made redundant prior to the specified date then you will receive the Payment as a redundancy payment and this payment would be payable in addition to any other contractual payments or carried entitlements due to you.

In the 2011-12 income year Company Y was successful in a take over of the Employer and your position with the Employer became redundant.

Your employment was accordingly terminated in the 2012-13 income year.

You have provided details of the amount made upon your termination of employment.

You state that had you terminated employment voluntarily you would only have received your accrued annual leave entitlements.

You state there is no agreement between you and the Employer or Company Y, or between the Employer or Company Y and another party, to re-employ when you terminate employment.

Payments have been made under the Scheme only to terminating employees.

No payments have or will be made to continuing employees.

You are less than 65 years of age.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 82-130

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

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

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

Income Tax Assessment Act 1997 Section 82-135

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

Income Tax Assessment Act 1997 Subsection 83-170

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)

Summary

The Payment made on the termination of your employment is considered to be a genuine redundancy payment.

The portion of the Payment and any other GRP you receive as result of the redundancy in excess of the tax-free amount is the taxable component of an employment termination payment and is to be included in your assessable income for the 2012-13 income year.

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:

(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.

In consequence of the termination of your employment

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

While TR 2003/13 considered the meaning of the phrase 'in consequence of' in the context of the eligible termination payments (ETPs), 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. It should be noted that the eligible termination payments ceased to exist from 1 July 2007 and were 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.

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.

In Case No M 101/1976 (1977) 77 ATC 475; (1977) 22 CTBR (NS) 41 (Case M 101) 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.

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 similar in some respects to those in Case M 101.

Though there is nothing to indicate a project had to be completed in your case, it is noted that the Employer implemented a scheme (the Scheme) to retain its employees due to the uncertainty of a take over and to ensure its continuing operations. In view of this, and the Scheme as explained below indicated there could be redundancies, it could be construed that the Employer wanted to retain its employees until they were no longer required or their positions were made redundant.

Under the Scheme, which was available to most employees, a Payment would be paid if the employees continued their employment with the Employer up to a specified date.

Further the Employer stated that the Payment would not be paid if:

(i) an employee resigned from employment prior the specified date; or

(ii) an employee gave notice of their resignation prior the specified date and their last day of employment is after the specified date.

However, the Payment would be paid to an employee as a redundancy payment entitlement if their position was made redundant by the Employer prior to the specified date.

In your case, you are one of the employees that was covered by the Scheme and in a letter from Company Y, the Company which took over your Employer, you were informed in a letter that your position will be made redundant in the 2012-13 income year.

From the facts provided it is considered a sufficient nexus exists between the Payment and your termination of employment for it to be treated as a payment in consequence of termination of employment particularly as:

(i) the Payments made under the Scheme were only made to terminating employees; and

(ii) no Payments were made, or will be made, to any employees simply by staying employed with the Employer up to the specified date.

Accordingly, it is considered that there is sufficient nexus between the making of the Payment and the termination of your employment to say that the Payment is made in consequence of your termination of employment.

In view of the above, subparagraph 82-130(1)(a)(i) of the ITAA 1997 is satisfied.

Payment received no later than 12 months after termination

In addition to meeting the other conditions for a payment to be an employment termination payment, 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'.

As the facts show your employment was terminated in the 2012-13 income year and there is nothing to indicate that the Payment would not be made within 12 months of the termination of your employment, it is considered that the requirement in paragraph 82-130(1)(b) of the ITAA 1997 will be satisfied.

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

· capital payments for personal injury

· the tax-free amount of a genuine redundancy payment.

In your case, the facts provided show that the issue of whether any part of the Payment is a genuine redundancy payment requires consideration.

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 ITAA 1997 will need to be satisfied.

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 four criteria:

· the payment is in consequence of the employee's termination of employment;

· 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.

Payment in consequence of termination

The issue of whether the Payment you received in the 2012-13 income year is in consequence of the termination of your employment was discussed above. It was determined that the Payment was made in consequence of your termination of employment. Therefore the criterion that the payment must be received in consequence of a termination is met.

Dismissal from employment

Dismissal from employment usually means that the termination of employment is involuntary on the part of the employee concerned and is instigated by the employer.

From the facts provided, it is evident that your termination of employment resulted from a dismissal which was instigated by the Employer.

Therefore, the termination of your employment is clearly a dismissal for the purposes of subsection 83-175(1) of the ITAA 1997.

Genuine redundancy

Having established that the Payment is in consequence of termination of employment, and there was 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 was 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.

In your case the facts show that your dismissal was not be for any reasons such as inefficiency or misbehaviour but due to Company Y having taken over your Employer which resulted in your position being made redundant.

In view of the above it is evident that your employment is due to a genuine redundancy and the Payment is made as a result of the genuine redundancy.

Accordingly, it is considered that this third criterion under subsection 83-175(1) of the ITAA 1997 is satisfied.

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

The last 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 GRP.

In your case it is considered that the Payment is in excess of the amount you would have received had you voluntarily terminated employment as:

(a) you state had you terminated employment voluntarily you would only have received your accrued annual leave entitlements; and

(b) the Employer's letter which stated that the Payment is in addition to any other contractual payments or accrued entitlements that may be due to you.

In view of the above, it is considered that the Payment is in excess of what you would receive had you voluntarily terminated employment.

Conclusion in relation to subsection 83-175(1) of the ITAA 1997

It is considered that all the criteria stipulated in subsection 83-175(1) of the ITAA 1997 are satisfied.

Consequently it is considered that 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 65th 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 nor is there 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 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 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 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)

Because your dismissal occurs during the 2012-13 income year, the base amount will be $8,806 and the service amount will be $4,404. 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 has been calculated.

The tax-free amount calculated is applied against the Payment and any other GRP received by you as a result of the redundancy. The combined amount of the Payment and any other GRP received by you which is in excess of the tax-free amount is taxed as an employment termination payment (ETP).

Conclusion

The Payment you will receive under the Scheme is a GRP. The tax-free amount of a GRP available to you, has been calculated in accordance with subsection 83-170(3) of the ITAA 1997.

Accordingly, the Payment and any other GRP received by you as a result of the redundancy is not required to be included in your income tax return for the 2012-13 income year.

In relation amount of the Payment and any GRP received by you in excess of the tax-free amount, it represents an ETP which is to be included as assessable income in your tax return for the 2012-13 income year.

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