Edited version of your written advice

Authorisation Number: 1012713709687

Ruling

Subject: Genuine redundancy

Question

Will any part of the payment your client received on termination of their employment under a deed of release be a tax-free part of a genuine redundancy payment under section 83-170 of the Income Tax Assessment Act 1997?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 2014.

The scheme commenced on:

1 July 2013.

Relevant facts and circumstances

Your client is under 65 years of age.

From the 19XX income year to the 20XX income year your client was employed by an employer (the Employer) as a full time musician within the employer's band unit.

During the relevant income year, a decision was made by the employer to close the band unit.

The Employer offered five options to redeploy impacted staff. Four options involved re-deployment in other areas of the business. The fifth option was a Career Transition Incentive package (CTIP).

Those who accepted the CTIP were required to agree not to seek or accept re-employment of any other fee for service from any SPS employer for a period of either three calendar years or one calendar year depending on the employer.

Your client has stated the CTIP arose due to there being no provision for redundancy within the Enterprise Agreement or the Act under which they were hired.

Your client accepted the CTIP and resigned their position. The effective date of resignation being during the relevant income year.

Shortly after, your client received their CTIP payment which comprised of the following:

Accrued long service leave	A
Accrued annual leave	B
Normal salary	C
Uniform allowance	D
Life benefit ETP	E
Total	F

From the above, X was withheld as tax.

Your superable salary as at release date was Y.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 83-10.

Income Tax Assessment Act 1997 Section 83-15.

Income Tax Assessment Act 1997 Section 83-80.

Income Tax Assessment Act 1997 Section 83-85.

Income Tax Assessment Act 1997 Section 83-170.

Income Tax Assessment Act 1997 Subsection 83-170(2)

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

Income Tax Assessment Act 1997 Section 83-175.

Reasons for decision

Summary

The amount that your client received as a life benefit employment termination payment is a genuine redundancy payment. As the payment is below the tax-free amount of a genuine redundancy payment, the entire amount is non-assessable, non-exempt income.

Detailed reasoning

Genuine redundancy payment

A payment made to an employee is a genuine redundancy payment (GRP) if it satisfies all the conditions set out in section 83-175 of the Income Tax Assessment Act 1997 (ITAA 1997).  This section states:

(1) A genuine redundancy payment is so much of a payment received by an employee who is dismissed from employment because the employees position is genuinely redundant and 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 dismissal.

(2) 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 employees 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 arms-length the payment does not exceed the amount that could reasonably be expected to be made if the dismissal were at arms-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 dismissal.

(3) However, a genuine redundancy payment 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 the payment was received or at a later time.

Payments not covered

(4) A payment is not a genuine redundancy payment if it is a payment mentioned in section 82-135 (apart from paragraph 82-135(e)).

Subsection 82-135 includes (among others):

_ superannuation benefits;

_ the payment of a pension or annuity; and

_ unused annual leave (paragraph 82-135(c)) or long service leave payments (paragraph 82-135(d)).

As such, the payments your client received for unused annual leave and long service leave do not constitute part of a genuine redundancy payment pursuant to subsection 82-135(4) of the ITAA 1997. The taxation treatment of these payments will be discussed in due course.

Similarly, the payments for normal salary and uniform allowance do not constitute a genuine redundancy payment. These are taxable on an assessment basis at marginal tax rates.

Whether the life benefit ETP your client received will constitute a genuine redundancy payment will be addressed below.

In order to satisfy the definition of a genuine redundancy payment under subsection 83-175(1) of the ITAA 1997 there must be a dismissal from employment and the dismissal must result from the positions being made genuinely redundant.

The term dismissal is not defined in the ITAA 1997. Therefore, it is necessary to consider the common law or ordinary meaning of the term and the meaning the judicial authorities have ascribed to it.

Dismissal from employment

Taxation Ruling TR 2009/2, titled Income Tax: genuine redundancy payments, which outlines the Commissioners view of the requirements for a payment to qualify as a GRP under section 83-175 of the ITAA 1992, discusses what constitutes a 'dismissal'. In particular:

18. Dismissal is a particular mode of employment termination. It requires a decision to terminate employment at the employer's initiative without the consent of the employee. This stands in contrast to employment that is terminated at the initiative of the employee, for example in the case of resignation.

22. Cases of 'constructive dismissal' are a dismissal for the purposes of subsection 83-175(1). Constructive dismissal is currently recognised to occur where the actions or behaviour of the employer in relation to the employment relationship effectively curtails the element of consent on the employee's behalf. The simplest example of constructive dismissal is where an employee resigns under threat (explicit or implicit) of dismissal. Another example is where the employee resigns after the employer offers work in an alternative position which is inappropriate given the employee's particular circumstances (for example, their skills or experience). While in form this appears to be a termination at the employee's initiative, it is recognised at law to be a dismissal.

30. In circumstances where an employee resigns after being offered alternative employment with an employer following an organisational restructure, it will be necessary to assess whether the termination of employment amounts to a constructive dismissal

In your client's case, the Employer decided to close the Band Unit of which your client was employed. As there was no provision for redundancy within the Enterprise Agreement or Act under which your client was hired, the Employer offered five different options for impacted staff, one of which was the Career Transition Incentive package (CTIP).

The facts state that your client accepted the CTIP and resigned their position, effective dd/mm/yyyy. As your client resigned after being offered alternative options, it is necessary to determine whether a constructive dismissal took place.

The Commissioner expands on the issue of a constructive dismissal at paragraphs 256 to 258 of TR 2009/2:

256. As recognised in Smith, the concept of dismissal extends to 'constructive dismissal'. This refers to a termination that gives the appearance of employee consent, but in substance reflects the same circumstances as would have been the case if the employee had been dismissed - that is, an employer initiated termination without the employee's consent. In Blaikie v. South Australian Superannuation Board , Olsson J, quoting his own decision in R v. Prince Alfred College stated:

The fact that the act of resignation subsumed the act of dismissal does not alter the essential character of the transactions between the parties. By virtue of the implicit waiver of the original act of formal dismissal by the employer, the applicant was, in reality, in a position in which he had resigned because he had been given virtually no option but to do so ...

257. For example, if an employer is reorganising or downsizing their business or company, an employee may be offered alternative employment that is not appropriate given the employee's qualifications or experience, or is in a particularly inconvenient location for the employee.

258. An employee who chooses to resign in these circumstances may not be considered to freely consent to their resignation as they had no other option other than to resign. This would be an instance of constructive dismissal.

It would appear that as the Employer offered your client four different redeployment options in addition to the CTIP, a constructive dismissal has not taken place. However, it is necessary to first analyse the intention of the Employer and second, assess the appropriateness of each option offered to your client with reference to their qualifications and experience.

According to the facts the employer took steps to reduce the number of staff. In doing so, the Employer closed the band unit of which you were employed as a musician, rendering your position redundant. However, as there was no provision for redundancy within the Enterprise Agreement or the Act under which you were hired, you could not be made redundant. Rather, you were offered options to be redeployed within the organisation.

As the overall intention was to reduce the number of non-operational sworn staff, it is feasible to argue that had there been a redundancy provision available for your client's employment type, their employment would have been terminated under that provision. In the absence of such provision however, the Employer offered your client various redeployment options. As your client accepted the CTIP and subsequently resigned from their employment, it gives the appearance of employee consent. However on the whole, the substance of the arrangement more appropriately reflects an employer initiated termination without employee consent. This is especially the case if the redeployment options offered are considered inappropriate based on qualifications and experience, as discussed below.

From the facts it is clear the first two re-deployment options offered to your client were not related to your client's skills and experience as a musician as they would require them to undergo extensive training and essentially an entire career change.

With regards to the third option, whilst more closely aligned with your client's experience as a musician, it is still considered unreasonable and inappropriate given only X positions were made available for the purposes of redeployment.

The fourth option is also considered inappropriate. Whilst an administrative role would require minimal training, it is not related to your client's role as a musician. Further, this option required your client to resign from their position and be included in a redeployment pool with other employees. From this pool your client would be required to apply for administrative positions when they became available. As this option did not guarantee your client a position with the Employer, the impracticality of choosing this option is clear.

When considering the Employer's intention, together with the redeployment options offered to your client, it is clear the substance of the employment termination more accurately reflects a dismissal. That is, the Employer initiated the termination of your client's employment without their consent. It is feasible to conclude that the redeployment options were only offered to your client as there was no redundancy provision available to the Employer.

It is concluded that the termination of your client's employment constitutes a constructive dismissal and therefore a 'dismissal' for the purposes of subsection 83-175(1) of the ITAA 1997.

The remaining conditions under section 83-175 of the ITAA 1997 are satisfied as:

• Your client's position was made redundant following the closure of the band unit of which they were employed;

• The amount your client received after accepting the CTIP exceeds what they would have received had they voluntarily resigned outside the redeployment process;

• Your client is less than 65 years of age;

• There was no arrangement between your client and the Employer or between the employer and another person, to employ your client following the termination of their employment; and

• According to the payment advice, no amount was received by your client in lieu of superannuation.

Tax-free amount 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 non-assessable, non-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)

For the 2013-14 income year:

Base amount is $9,246;

Service amount is $4,624; and

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

As the payment of E is below the tax-free amount of a genuine redundancy payment, the entire amount of the payment is the tax-free part of a genuine redundancy payment. This tax-free amount is non-assessable, non-exempt income under subsection 83-170(2) of the ITAA 1997.

Consequently the amount of E is not required to be included in your client's income tax return for the relevant income year.

Taxation treatment of long service payments

Unused annual leave would ordinarily be included in assessable income under section 83-10 of the ITAA 1997 and subject to marginal rates of tax. However, as this payment was made in connection with a genuine redundancy payment, section 83-15 allows a tax offset to ensure that the rate of tax on this amount does not exceed 30%.

Similarly, unused long service leave would ordinarily be included in assessable income under section 83-80 of the ITAA 1997 and subject to marginal rates of tax. However, as this payment is made in connection with a genuine redundancy payment, section 83-85 allows a tax offset to ensure that the rate of tax on this amount does not exceed 30%.

Refund of tax withheld

We note $Y was withheld as tax from your client's total payment of $F. As the genuine redundancy payment of $E is not included in your client's income tax return and the tax on their unused annual leave and long service leave is capped at 30%, the excess of tax withheld for the income year will be credited to your client once the tax return is processed.

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