Edited version of your private ruling

Authorisation Number: 1012587551797

Ruling

Subject: Genuine redundancy payment

Question 1

Is any part of the termination payment of $[amount] a tax-free part of a genuine redundancy payment under section 83-170 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

Question 2

Is your client entitled to a tax offset under section 83-15 of the ITAA 1997 in respect of the unused annual leave of $[amount] paid on termination of employment?

Answer

No.

This ruling applies for the following period:

2012-13 income year.

The scheme commences on:

1 July 2012

Relevant facts and circumstances

Your client was employed with the Employer.

A copy of the 'Offer of Employment' (the Offer) which your client accepted on in late 20XX stated your client's position and construction phase for which they are employed under. It stated that the continuation of your client's employment will depend on the requirement for their particular discipline and their assessed performance.

Included in the attachments with the Offer was a copy of the Agreement.

The Agreement stated amongst other matters the scope of the Agreement and the contract of employment, including the calculation of termination payments.

In late 20XX, your client's employment with the Employer commenced.

Approximately one month after your client commenced employment, they ceased work due to an injury and entered into a compensation claim with the Employer.

In the second quarter of 20ZZ, your client was declared fit for work again.

Immediately after being declared fit for work again, your client's employment was terminated by the Employer. No letter of termination was received from the Employer.

Your client received a PAYG payment summary - employment termination payment showing a taxable component of $[amount]. The date of payment was in the second quarter of 20ZZ.

A calculation sheet from the Employer titled '[Project title] - Non Genuine Redundancy Termination' shows the employment termination payment of $[amount] and its components.

Your client has been unable to obtain documentation from the Employer to indicate the commencement and cessation dates of the relevant project phase they were working under. However, the Employer reiterated that the termination of employment was not due to genuine redundancy.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 82-10

Income Tax Assessment Act 1997 Section 82-130

Income Tax Assessment Act 1997 Section 82-135

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

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 Subsection 83-175(3)

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

Reasons for decision

Summary

The $[amount] payment your client received is not a genuine redundancy payment. It is an employment termination payment and has been correctly treated as such by the Employer.

Detailed reasoning

Your client received an employment termination payment of $[amount] in the second quarter of 20ZZ.

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.

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'.

Further, it should be noted that a payment made when an employee's position no longer exists or an employer no longer desires to have it performed by anyone does not in itself mean any part of that payment is a genuine redundancy payment for income tax purposes.

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 also be met. These conditions include:

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

· the termination is 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.

For the purposes of your client's case, specific attention will turn to subsection 83-175(2) of the ITAA 1997 which states:

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 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);…

The Commissioner has issued Taxation Ruling TR 2009/2 (TR 2009/2), titled Income Tax: genuine redundancy payments, which provides guidance on the factors to be considered in the interpretation of section 83-175 of the ITAA 1997.

Paragraphs 36 and 38 of TR 2009/2 state:

36. Under subparagraph 83-175(2)(a)(ii), a payment made at the end of a fixed period of employment cannot normally be a genuine redundancy payment.

38. In some cases, particularly those involving multi-disciplinary project-based work, an employee's period of service may be determined by reference to the achievement of a particular outcome rather than a specified period of time. The employee's period of service in these circumstances concludes on the achievement of that outcome.

In relation to project based work TR 2009/2 provides an example at paragraphs 148 to 154, which state:

148. Buildcorp makes contributions to an industry trust on behalf of its workers to cover the company for future termination payments (other than unused annual leave payments) it might be required to make under industry awards. The workers are all employed on a daily hire basis.

149. Buildcorp has a major construction contract to build an office block. Buildcorp's employees, its subcontractors and their employees have all been advised that they can expect to be employed on the project for at least six months, depending on their trade or other qualifications.

150. Three months into the project, all workers are terminated with a day's notice as required under their contracts because Buildcorp becomes insolvent and cannot meet its ongoing commitments.

151. The mutual intentions of the parties is that Buildcorp's employees will be employed until the completion of their tasks on the project, even though in form the contracts are made on a daily hire basis. Accordingly, in these circumstances, there is a dismissal caused by redundancy prior to the expiration of a fixed period of employment.

152. In contrast, if the workers had all completed their allotted tasks in keeping with the mutual intentions of the parties, any payments accruing on their termination of employment would not be eligible to be genuine redundancy payments. In these circumstances, the employees are terminated at the expiry of a fixed period of employment. (emphasis added)

Further, paragraphs 288 and 289 of TR 2009/2 state:

288. In some industries workers are employed on a project basis. The fact that a project is completed, even where the project is completed before a designated time, is not a situation where workers are redundant. For these purposes, the Commissioner considers that termination on completion of a particular task or outcome represents a particular period of service for the purposes of subparagraph 83-175(2)(a)(ii). If the completion of the task or outcome gives rise to a payment, such a payment would normally be an employment termination payment, not a genuine redundancy payment. (emphasis added)

289. It is also common in these types of project based industries for workers to be employed on a weekly or daily hire basis. Once again, the outcome here may be that there is not a genuine redundancy payment because a termination payment is made at the end of a limited period of time of employment. This is so even if the payments are referred to as redundancy payments….

In your client's case, the Employer made an Offer of Employment (the Offer) for your client to work in a certain position on the Project. Your client accepted the Offer in late 20XX and commenced employment.

In the Offer, though no date or period was specified, it was evident that your client's employment was for a finite period of time as the Offer stated that the continuation of employment will depend on the requirement of your client's discipline and their assessed performance.

In view of the above and the paragraphs referred to in TR 2009/2 it is considered that the continuation of your client's employment was not necessarily tied in with the completion of the Project but also the phase of the Project for which your client's skills were required.

In this case your client was injured during employment and received worker's compensation. Upon being deemed fit for employment, your client's employment was terminated immediately. Therefore we consider the particular phase on which your client was employed had ceased by the time they were ready for re-employment in the second quarter of 20ZZ.

From the facts provided there has been no documentary evidence to indicate the duration of the structural phase or the cessation date. But it should be noted that a calculation sheet from the Employer notifying your client of the components of the employment termination payment indicate it was a non-genuine redundancy.

From this it can only be concluded that your client's employment was terminated for reasons other than redundancy. That is, it is considered that the payment did not represent a termination of your client's employment before the end of their contracted period of employment.

On the basis of the information provided, it is considered that subsection 83-175(2) ITAA 1997 has not been satisfied as the payment your client received on termination was made at the end of the achievement of a particular outcome/and or fixed period of employment.

Accordingly, the payment of $[amount] your client received on termination is not a genuine redundancy payment.

The taxable component of $[amount] is an employment termination payment and is included in full as assessable income in your client's income tax return for the relevant income year.

Further, it is not necessary to consider whether your client is entitled to a tax offset under section 83-15 of the ITAA 1997 in respect of unused annual leave as the employment termination payment was not a genuine redundancy payment.

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