Edited version of your written advice

Authorisation Number: 1012746823525

Ruling

Subject: Employment termination payments - genuine redundancy payment

Question 1

For an employee aged XX years when notified of likely termination of employment by redundancy, who is aged 65 years at the time of when formal notice of termination of employment is given, and who is 65 years when employment is, in fact, terminated by redundancy, does the employee qualify as aged under 65 for the purposes of section 83-175 of the Income Tax Assessment Act 1997 (ITAA 1997) to access a genuine redundancy payment?

Answer

No.

Question 2

Is the date of dismissal from employment in section 83-175 of the ITAA 1997, the date of the notification when an employee is notified that employment is likely to end?

Answer

No.

Question 3

Is the date of dismissal from employment in section 83-175 of the ITAA 1997, the date of the formal notification document that employment will end on a specified date?

Answer

No.

Question 4

Is the date of dismissal from employment in section 83-175 of the ITAA 1997, the date that an employee ceases to work for the employer and has severed all ties with the employer?

Answer

Yes.

Question 5

For an employee aged X years when notified of likely termination of employment by redundancy, who is aged 65 years at the time of when formal notice of termination of employment is given, and who is 65 years when employment is, in fact, terminated by redundancy, does the payment qualify as an employment termination payment under section 82-130 of the ITAA 1997?

Answer

Yes.

This ruling applies for the following periods:

Income tax year ending 30 June 20XX

Income tax year ending 30 June 20YY

The scheme commences on:

On or after 1 March 20XX

Relevant facts and circumstances

As an employer, you reviewed your administration and finance functions and identified that certain positions were likely to be no longer required.

One employment position identified as likely to not be required. The person working in this position was aged X years, on or after 1 March 20XX when receiving a letter from you, titled 'Redundancy advice and notice of consultation' advising that they were likely not be required in employment beyond 30 June 20XX. The letter stated that it was not a formal notice of termination as there were some alternative employment options to be discussed.

The employee turned XX years of age during June 20XX.

In June 20XX the administration and finance review were finalised and the employee was requested by the employer to continue employment for another X months to meet operational needs. The employee agreed to this continuation of employment until 30 September 20XX.

On or after 1 June 20XX the employee was notified by a letter titled 'Formal termination notice' that their employment would end on 30 September 20XX.

The employee separated from employment in September 20XX and was aged XX years.

The employer stated, "In this case the redundancy was made as a result of a genuine restructure that had been contemplated by our Board for some time and not made with reference to the individual employees age at the time of deciding to restructure, at the time of notification to the employee or at the time the decision to extend the notice period was made."

Relevant legislative provisions

Income Tax Assessment Act 1997 section 82-130

Income Tax Assessment Act 1997 Paragraph 82-130(1)

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

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 section 83-175(1)

Income Tax Assessment Act 1997 section 83-175(2)(a)

Income Tax Assessment Act 1997 Section 995-1

Income Tax Assessment Act 1936 Section 27F

Reasons for decision

Issue 1

Question 1, 2 3 4 and 5

Summary

The employee was dismissed in September 20XX when over the age of 65 years. The payment that was made to this staff member in relation to the employment position being abolished is an employment termination payment for subsection 82-130(1) of the ITAA 1997, provided all the requirements in that section are met, and it is not a genuine redundancy payment as defined in section 83-175 of the ITAA 1997.

Detailed reasoning

Employment termination payment

Payments made in consequence of the termination of a taxpayer's employment are known as employment termination payments.

Section 995-1 of the ITAA 1997 states that an employment termination payment has the meaning given by section 82-130. Employment termination payments are defined in subsection 82-130(1) of the ITAA 1997:

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.

To be an employment termination payment, the amount received by your staff member must satisfy all three conditions listed above.

A. The payment is in consequence of employment

The first condition requires that there is a payment received by your employee in consequence of the termination of their employment.

The phrase 'in consequence of' is not defined in the ITAA 1997. However, the words have been interpreted by the courts in several cases. The Commissioner has also issued 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) which discusses the meaning of the phrase. Paragraph 5 of TR 2003/13 states:

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.

B. The payment is received no later than 12 months after termination

The condition in paragraph 82-130(1)(b) of the ITAA 1997 is that the employment termination payment is paid to the taxpayer no later than 12 months after the taxpayer's employment was terminated.

C. Not a payment mentioned in section 82-135 of the ITAA 1997

Payments that are not employment termination payments in section 82-135 of the ITAA 1997 include (among others):

• superannuation benefits;

• unused annual leave or long service leave payments; and

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

In this case:

Your employee became entitled to a payment due to their position of employment with you being abolished and the employment relationship ending. Therefore, the payment made to your employee was made in consequence of your employee's termination of employment. The payment would not have been made if there was no termination of employment.

If part of the payment represents the tax free part of a genuine redundancy payment then that part would not be an employment termination payment.

Genuine redundancy payment

A payment made to an employee, after 30 June 2007, is a genuine redundancy payment if it satisfies all criteria set out in section 83-175 of the ITAA 1997. The section replaces former section 27F of the Income Tax Assessment Act 1936, where such payments were previously referred to as bona fide redundancy payments.

Section 83-175 of the ITAA 1997 states:

(1) A genuine redundancy payment is 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 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 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 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)).

Under subsection 83-175(1) of the ITAA 1997, a genuine redundancy payment is a payment resulting from:

(i) a dismissal; and

(ii) a redundancy.

Taxation Ruling TR 2009/2 Income tax: genuine redundancy payments (TR 2009/2) outlines the ATO view of the requirements to be satisfied for a payment made to a person in consequence of a termination of employment to qualify as a genuine redundancy payment under section 83-175 of the ITAA 1997.

a) Dismissal

"Dismissal" is not specifically defined in the ITAA 1997. "Dismissal' has the normal meaning of being discharged or removed from an office or a type of service or employment - Smith v Director-General of School Education [1993] 31 NSWLR 349 (Smith's case). TR 2009/2 gives more detail on the Taxation Commissioner's view of dismissal from employment:

Component 2: 'Dismissal' from employment

16. Subject to the exception recognised in paragraph 17 of this Ruling, the loss of a particular position with an employer is not a dismissal for the purposes of subsection 83-175(1) unless all employment with the employer is severed. The Commissioner's view is that a genuine redundancy payment can only arise where there is no suitable job available for the employee with the employer, meaning that he or she must therefore be dismissed.

17. The exception to this general principle is the case of a person holding an office with the employer at the same time as having a common law employment relationship with the same employer. In this case dismissal from either the office or common law employment involves a dismissal from employment for the purposes of subsection 83-175(1). An example is a person who is both a director of the employer company and a common law employee of the company who is terminated from one of these two capacities.

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.

Paragraph 16 above states 'all employment with the employer is severed'. This means that there is no longer an employment relationship between the person and the employer. The involuntary nature of dismissal on the employee's part is confirmed in Smith's case.

TR 2009/2 continues,

20. A dismissal can still occur even where an employee has indicated that they would be interested in having their employment terminated, provided that the final decision to terminate employment remains solely with the employer. Such a case may arise where expressions of interest in receiving a redundancy package are sought from employees as part of a structured process undertaken by the employer as a means of promoting industrial harmony.

The agreement between yourself, as employer and the employee for this particular employee to cease employment in September 20 does not of itself jeopardise a redundancy from being treated as genuine.

An agreement to cease employment on a particular day in the future means that employment will continue until that particular day. The date the agreement is made is not the date of dismissal. At the date the agreement is made the employment relationship is still in place and the employee is expected to work under the terms of employment until the nominated employment end date.

The dismissal occurs went all employment with the employer is severed so this will be the date that the employee's employment is terminated, the day that the employment relationship ceases.

b) Age based limits

Your employee's position may have been made redundant as confirmed in the letter from you, to the employee. The main issue is the age when your employee was terminated from employment.

An employee must be less than 65 years old at the time of dismissal for a redundancy payment to qualify as a genuine redundancy payment, as required in paragraph 83-175(2)(a) of the ITAA 1997.

The Commissioner states his view on this subject in TR 2009/2 at paragraphs 34 and 35 as follows:

34. Under paragraph 83-175(2)(a), an employee must be less than 65 years old at the time of dismissal for a redundancy payment to qualify as a genuine redundancy payment.

35. However, if the employment of a particular employee would have otherwise terminated at a younger age than 65, the employee must be dismissed before that time. This younger age becomes the employee's age-based limit in these circumstances.

The redundant position may have been identified and your staff member may have been notified of the impending redundancy before their XX birthday, but the cessation of employment occurred a number of months later in September 20XX when the staff member was 65 years of age.

The age based limit for a genuine redundancy payment has been tested in the courts.

In Coker and Commissioner of Taxation [2010] AATA 367 a person aged 76 years did not receive a genuine redundancy payment under section 83-175 of the ITAA 1997 because the dismissal from employment did not occur before the employee was aged 65 years.

In Harste v FCT 2013 ATC 10-331 the employee was aged 67 and did not receive a genuine redundancy payment under section 83-175 of the ITAA 1997 as he could not meet the aged based limit of 65 years at the date of dismissal.

With regard to your concern about the age discrimination, the decision in Harste provides commentary about the Income Tax Assessment Act 1997 its exemption from the Age Discrimination Act 2004.

TR 2009/2 paragraph 283 focuses on payments made to a taxpayer after the age of 65 at paragraph 283:

283. A termination payment made to a person who has reached age 65 or another age of compulsory retirement at the time of dismissal would be an employment termination payment if the conditions in section 82-130 are satisfied.

In this case:

The employee was dismissed in September 20XX when over the age of 65 years. The payment that was made to this staff member in relation to the employment position being abolished is an employment termination payment for subsection 82-130(1) of the ITAA 1997, provided all the requirements in that section are met, and it is not a genuine redundancy payment as defined in section 83-175 of the ITAA 1997.

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