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Edited version of private advice

Authorisation Number: 1012618582353

Ruling

Subject: Employment termination payment - genuine redundancy

Questions

Answers

This ruling applies for the following periods:

Year ending 30 June 2013.

The scheme commences on:

1 July 2013.

Relevant facts and circumstances

Up until towards the end of the relevant income year, you were an 'aggregate employee' for your employer. That is, you held two separate, part-time positions within the same organisation, namely:

The features of aggregate employment with your employer are:

During the relevant income year, expressions of interest letters were distributed for voluntary redundancies. You applied for a voluntary redundancy for one of your two positions within the organisation, that being Position A.

Several months later an offer of voluntary redundancy was made to you. However, the offer was made for both positions instead of the one you had requested.

After you notified the employer of the issue, you received a letter confirming that the offer you received was incorrectly inclusive of both positions.

The letter stated that in order for an estimate to be generated that was based solely on one position, the current offer of voluntary redundancy would be withdrawn. Further, the letter stated that once a new estimate was completed a new offer would be reissued.

Some months later, you were advised that Position A has been abolished. You were given the option to accept a voluntary redundancy package or pursue transfer opportunities.

Together with this letter was advice from the employer stating that as you were an aggregate employee and only one of your positions was being made redundant, you are not ceasing employment with your employer entirely. As such, the termination payment was to be taxed at the marginal rates.

You accepted the redundancy offer and signed the document titled 'voluntary redundancy - estimate of entitlements' and the notice of separation several days later.

Confusion arose with regards to the correct PAYG withholding tax as the employment separation certificate indicates a tax-free redundancy payment whereas the PAYG payment summary for the relevant income year includes the severance payment in gross payments.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 82-135.

Income Tax Assessment Act 1997 Section 82-10.

Income Tax Assessment Act 1997 Section 82-130.

Income Tax Assessment Act 1997 Subsection 82-130(1).

Income Tax Assessment Act 1997 Subparagraph 82-130(1)(a)(i).

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

Income Tax Assessment Act 1997 Subparagraph 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 Section 83-170.

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 Subsection 83-175(3).

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

Reasons for decision

Summary

No part of the severance payment made to you by your employer is an employment termination payment or a genuine redundancy payment. This is because your employment has not been terminated as you have retained one of your part time positions with your employer.

Therefore, the payment has been correctly included in your PAYG payment summary for the relevant income in gross payments.

Detailed reasoning

Employment termination payment

Section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997) states that:

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

Section 82-135 of the ITAA 1997 provides that certain payments are not employment termination payments, including:

To determine if a payment constitutes an employment termination payment, all the conditions in section 82-130 of the ITAA 1997 must be satisfied.

Failure to satisfy any of the conditions under subsection 82-130(1) of the ITAA 1997 will result in the payment not being considered an employment termination payment. Furthermore, any termination payments received outside of the 12 months will be taxed as ordinary income at marginal tax rates, unless the taxpayer is covered by a determination exempting them from the 12 month rule.

Paid as a consequence of the termination of your employment

For a payment to be treated as an employment termination payment, the first condition that needs to be met is that there must be a payment that is made in consequence of the termination of employment of the taxpayer (see subparagraph 82-130(1)(a)(i) of the ITAA 1997).

In this case, the severance payment was made in consequence of the abolishment of Position A.

However, given a key fact of this case is that you retained one part-time employment position with your employer at the same time as your other part-time position was abolished, the critical issue for determining if the severance payment is an employment termination payment is whether or not the your employment was terminated in accordance with section 82-130 of the ITAA 1997.

We do not consider the facts of your case to be sufficiently different for Taxation Ruling TR 2009/2 to not apply. Our view that the severance payment is not an employment termination payment is consistent with the view set out in TR 2009/2.

Our view is also consistent with the overarching legislative scheme of Part 2-40 of Chapter 2 of the ITAA 1997 that seeks to deal cohesively with all payments made in consequence of the termination of a person's common law employment. This legislative scheme means that while TR 2009/2 is concerned with genuine redundancy payments, the views expressed in the Ruling with respect to the concept of 'termination of employment' apply equally in the context of employment termination payments. In this regard, paragraph 235 of TR 2009/2 states:

Paragraph 240 of TR 2009/2 further provides:

Broadly speaking, treatment as an employment termination payment is the default for payments made in consequence of the termination of employment under Part 2-40 of Chapter 2 of the ITAA 1997. Although separately defined from an employment termination payment, the Commissioner's view expressed at paragraph 232 of TR 2009/2 is that a genuine redundancy payment is an employment termination payment unless and to the extent that it is tax-free. That is, a genuine redundancy payment is a special type of eligible termination payment with the requisite purpose and features. This view is consistent with the note to section 83-170.

As paragraph 16 (and paragraph 241) of TR 2009/2 provides, the loss of a particular position with an employer is not a dismissal (a particular type of termination of employment) for the purposes of subsection 83-175(1) of the ITAA 1997 unless all employment with the employer is severed. The only exception to this is the case of a dual capacity employee who holds an office with the employer at the same time as having a common law employment relationship. This exception arises because of the operation of section 80-5 as explained in TR 2009/2. This exception does not apply if the person is employed only in the capacity of a common law employee.

Examples 13 and 14 of TR 2009/2 are synonymous with the facts of this case and illustrate that the loss of a particular position with an employer is not a dismissal or termination unless all employment with the employer is terminated:

Example 14 - Business acquisition, acceptance of demotion

Unless all employment with the employer is terminated there cannot be an employment termination payment.

Genuine redundancy payment

A payment made to an employee is a genuine redundancy payment if it satisfies all criteria set out in section 83-175 of the ITAA 1997.

This section states:

Payments not covered

Section 82-135 of the ITAA 1997 lists payments that are not employment termination payments. Paragraph 82-135(e) provides that the part of a genuine redundancy payment worked out under section 83-170 is not an employment termination payment.

Dismissal and redundancy

A genuine redundancy payment is defined under subsection 83-175(1) of the ITAA 1997 as a payment resulting from both:

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 of the Income Tax Assessment Act 1936 (ITAA 1936), the predecessor to section 83-175 of the ITAA 1997, states at page 91:

As noted above, the Commissioner has issued TR 2009/2 which 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:

The payment is in consequence of the termination of employment

As noted previously, it has been determined that the severance payment was not received in consequence of the termination of your employment. Therefore, the requirement in subsection 83-175(1) of the ITAA 1997 that the payment is in consequence of your termination of employment has not be satisfied. Accordingly, the severance payment cannot be classified as a genuine redundancy payment.

Conclusion

It is considered that no part of the severance payment constitutes an employment termination payment or a genuine redundancy payment within the meaning of the ITAA 1997.

Therefore, the total payment is to be included in your assessable income as gross payments for the relevant income year.


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