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Ruling

Subject: Genuine redundancy

Question 1

Is any part of the termination payment you received, considered to be a genuine redundancy payment in accordance with section 83-175 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

This ruling applies for the following period:

2011-12 income year

The scheme commences on:

1 July 2011

Relevant facts and circumstances

You are under 65 years of age.

You commenced employment with the Employer more than 8 years ago, in Position 1.

Several years later you were promoted to Position 2 with the Employer. This senior appointment also involved you continuing to perform some of the duties of Position 1.

Some time later, the Employer advised that your employment would be terminated as the senior executive leadership team needed to be restructured to operate efficiently.

The Employer provided you with notice of termination of employment, effective on the 'Termination Date'.

A Deed of release (Deed) was executed between the Employer and yourself.

An amount was paid to you prior to your 'termination date'. The total amount you were paid included several entitlements including a termination payment.

Following your termination, the company's executive leadership team was restructured. The new structure includes Position 1.

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 83-170.

Income Tax Assessment Act 1997 section 83-175.

Reasons for decision

The termination payment received is a genuine redundancy payment.

The tax-free part of a genuine redundancy payment has been calculated in accordance with the formula in subsection 83-170(3) of the ITAA 1997.

The balance is an employment termination payment and treated as assessable income.

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) 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 employer termination payments. These include (among others):

· superannuation benefits

· unused annual leave or long service leave payments

· foreign termination payments covered under Subdivision 83-D of the ITAA 1997 and

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

Based on the information provided, your employment was terminated on the 'Termination Date'.

'Termination payment'

A termination payment was paid to you (amongst other entitlements) prior to your termination date. This amount represents a payment in lieu of notice.

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' states that:

5. ...the Commissioner considers that 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.

6. The phrase requires a causal connection between the termination and the payment, although the termination need not be the dominant cause of the payment.

This amount was made to you in consequence of the termination of your employment. There is a clear causal connection between the termination of your employment and the payment of this amount. The payment followed as an effect or result of the termination of your employment. In other words, but for the termination of employment this payment would not have been made to you. Had you voluntarily resigned, you would not have been entitled to the payment in lieu of notice.

Therefore, the 'termination payment' was made in consequence of the termination of employment as defined in subparagraph 82-130(1)(a)(i) of the ITAA 1997.

Further, this 'termination payment' was paid to you:

· within 12 months of your termination (thereby satisfying paragraph 82-130(1)(b)) of the ITAA 1997, and

· apart from the possible exception of paragraph 82-135(e) of the ITAA 1997, which is discussed below, it is not a payment excluded from being an employment termination payment under section 82-135.

Genuine redundancy payment

Under subsection 83-175(1) of the ITAA 1997 a genuine redundancy payment is one 'received by an employee who is dismissed from employment because the employee's position is genuinely redundant'.

In Taxation Ruling 2009/2 Income tax: genuine redundancy payments (TR 2009/2), the Commissioner has outlined the requirements to be satisfied before any payment made to a person whose employment is terminated qualifies for treatment as a genuine redundancy payment under section 83-175 of the ITAA 1997.

There are four necessary components within this termination requirement:

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

2. That termination must involve the employee being dismissed from employment.

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

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

Component 1: Payment being tested must be received in consequence of an employee's termination.

It has been established previously that the termination payment has been received in consequence of the termination of your employment. Therefore the requirement of the first component of subsection 83-175(1) of the ITAA 1997 has been satisfied.

Component 2: That termination must involve the employee being dismissed from employment.

On the basis of the facts as presented in your case, it is evident you were dismissed from your employment at the initiative of your employer. The prevailing cause of termination was the structural reorganisation, as confirmed in a letter from the Employer.

The Deed executed between the Employer and yourself confirms that the Employer provided you with notice of termination of your employment with an effective date of termination.

Therefore, the second component of subsection 83-175(1) of the ITAA 1997 has been satisfied.

Component 3: That dismissal must be caused by the redundancy of the employee's position.

Based on the information provided it is evident that your employer made the ultimate decision that the then senior executive leadership arrangements were hindering the executive team's ability to operate efficiently and therefore, to correct this operational issue the Employer's operations were reorganised. Consequently, Position 2 was no longer needed and this was the prevailing reason you were dismissed from your employment.

Your employer clearly did not want Position 2 to be a part of the new senior executive leadership arrangements and the restructure (after your termination) shows Position 2 does not exist.

As per TR 2009/2 paragraph 263, in the consideration of genuine redundancy cases, the focus must be on the underlying reality or substance of the position, that is, the existence of the functions, duties and responsibilities attached to a position. The focus must not be on whether the position, in terms of a name or position number, has been abolished.

Whilst it is acknowledged that you undertook some of duties relating to Position 1 whilst in the Position 2 role, the focus must be on the actual duties and functions of Position 2 and not the skills attached to the employee. The duties, functions and responsibilities of the equivalent Position 1 role in the new structure, vary significantly to the duties, functions and responsibilities of former Position 2. Accordingly, it is on this basis, that Position 2 is redundant following the Employer's reorganisation.

The actual functions, duties and responsibilities attached to former Position 2 were superfluous to the current needs and purposes of the organisation. Even though the Employer may have reallocated the duties and functions attached to Position 2 to another position(s) within the organisational structure, former Position 2 is nevertheless redundant.

The third requirement of a genuine redundancy has therefore been satisfied.

Component 4: The redundancy payment must be made genuinely because of a redundancy.

The need for an employee's position to be genuinely redundant establishes that contrived cases of redundancy will not meet the conditions in section 83-175 of the ITAA 1997.

In your case, there is nothing to indicate that the redundancy is not genuine. Therefore, the fourth component of a genuine redundancy has been satisfied.

Further conditions for a genuine redundancy payment

Before a payment that meets the basic redundancy requirement in subsection 83-175(1) of the ITAA 1997 qualifies as a genuine redundancy payment, all other conditions in subsections 83-175(2) and (3) must be met. These conditions include:

· The payment must be made before a person turns 65 or an earlier mandatory age;

· The termination was not at the end of a fixed period of employment;

· the actual amount that was paid is not greater than the amount that could reasonably be expected to be paid had the parties been dealing at arm's length;

· the amount that was paid was in excess of what a person would have been entitled to receive if they had voluntarily resigned;

· there was no arrangement for re-employment with the employer or a related party after the termination date; and

· the payment was not in lieu of superannuation benefits.

On the basis of the information provided, it is considered that all the conditions of subsections 83-175(2) and 83-175(3) of the ITAA 1997 are also satisfied.

Consequently, it can be concluded that the 'termination payment' you received is a genuine redundancy payment as defined in section 83-175 of the ITAA 1997.

Section 83-170 then applies to treat so much of the relevant payment (that does not exceed the amount worked out under a specified formula) as tax-free. That is, the tax-free part 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.

Taxation of a genuine redundancy payment

Subsection 83-170(2) of the ITAA 1997 provides that so much of the genuine redundancy payment 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.

The formula for working out the tax-free amount is:

Base amount + (Service amount × Years of service)

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

For the 2011-12 income year:

Base amount means $8,435; and

Service amount means $4,218.

Years of service refers to each whole year of completed employment service to which the redundancy payment relates. It should be noted that, 6 months, 8 months or even 11 months do not count as a whole year for the purposes of this calculation.

In your case, the tax-free part of a genuine redundancy payment you can receive in the 2011-12 income year has been calculated in accordance with subsection 83-170(3) of the ITAA 1997. This tax-free amount is not assessable income and is not exempt income in accordance with subsection 83-170(2) of the ITAA 1997.

The amount remaining after deducting the tax-free part of the genuine redundancy payment we have calculated from your total redundancy payment is an employment termination payment and treated as assessable income.

Conclusion:

The 'termination payment' received is a genuine redundancy payment.

The tax-free part of your total redundancy payment in the 2011-12 income year has been calculated in accordance with subsection 83-170(3) of the ITAA 1997. The remaining amount in excess of the tax-free part is an employment termination payment and treated as assessable income.

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