Edited version of your written advice

Authorisation Number: 1012857984642

Ruling

Subject: Genuine redundancy payment

Questions

1. Is the incentive payment, severance and time in lieu components of the termination payments made to Employee A a genuine redundancy payment under section 83-175 of the Income Tax Assessment Act 1997 (ITAA 1997)?

2. Is the incentive payment, severance and time in lieu components of the termination payment made to Employee B a genuine redundancy payment under section 83-175 of the ITAA 1997?

Answers

1. No.

2. No.

This ruling applies for the following periods:

2014-15 income year

The scheme commences on:

1 July 2014

Relevant facts and circumstances

The Employer is part of a group of companies.

The Employer engaged two particular employees (Employee A and Employee B) over a number of projects.

Employee A was employed by the Employer on three projects. Each project included a separate contract of employment. The projects included Project 1, Project 2 and Project 3. Employee A's period of employment on each project is as follows:

Employee B was employed on Project 3 as follows:

The wording used to indicate the length of the employment in the three projects differed in each contract. The relevant wording in each contract may be summarised as follows:

• For Project 1, the employee will be employed for a specific role. Also the employee may be required to perform other duties within their level of skill and competence to meet project needs.

• For Project 2, the employee will be employed from the relevant income year and will cease on the completion of the task assigned to them and agreed with the Employer.

• For Project 3, Employee A's employment is transferred to Project 3. Employee A will be employed for a specific role on a full time basis.

• For Project 3, Employee B will be employed for a specific role on a full time basis.

Due to parts of Project 3 nearing completion and subsequent operational changes, the positions of Employee A and Employee B were no longer required as the employees had finished the tasks and duties that they were employed to complete under their contracts. As a result, the termination of the employment of Employee A and Employee B became effective on the dates outlined above (that is, during the 2014-15 income year for Employee A and during the 2014-15 income year for Employee B) and the employment of the employees ceased on those days.

The employment of the employees was not transferred to any other Employer group company.

You advised that at the time of termination of employment, Employee A and Employee B had completed all the tasks and duties assigned to them by the Employer in Project 3.

On termination of employment, Employee A was under 65 years of age and Employee B was under 65 years of age.

In the contract of employment for Employee A for Project 1 the principal conditions of employment are prescribed in Agreement A.

A clause in Agreement A for Project 1 refers to a payment of an incentive payment on termination of employment. Under a clause, an amount is accrued by an employee for each completed week of service on the site and is paid out on completion of the employees' employment on the project.

A clause in Agreement A for Project 1 refers to a severance payment on the termination of employment. Under a clause, employees will be entitled to a severance payment for each completed week of service. The severance payment will accrue weekly and be paid out to the employee at the completion of the employee's term on the Project. An employee who terminates their employment before the completion of four weeks continuous service will not be entitled to the provisions of the clause.

Agreement B covers both Project 2 and Project 3.

A clause in Agreement B for Project 2 and Project 3 refers to a payment of an incentive payment on the termination of employment. Under a clause, an amount is accrued by an employee for each completed week of service on the site and is paid out on completion of the employees' employment on the project.

A clause in Agreement B for Project 2 and Project 3 refers to a severance payment on the termination of employment. Under a clause, employees will be entitled to a severance payment for each completed week of service. The severance payment will accrue weekly and be paid out to the employee at the completion of the employee's term on the Project. An employee who terminates their employment before the completion of four weeks continuous service will not be entitled to the provisions of the clause.

Employee A and Employee B were paid an amount for time in lieu on the termination of employment. The time in lieu was paid in accordance with the National Employment Standards (NES) that includes pay in lieu of notice when an employer pays an employee out instead of working out the notice period when an employer terminates an employee's employment.

On termination of employment, Employee A and Employee B received a termination payment, which included an incentive payment, severance payment and time in lieu payment.

For Employee A, the amounts for the incentive payment, severance payment and time in lieu payment related to all three projects and all of the amounts were paid at the same time after the end of the Project.

The payments were not treated as genuine redundancy payments.

Relevant legislative provisions

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 subparagraph  83-175(2)(a)(ii)

Reasons for decision

Summary

No part of the incentive payment, severance and time in lieu components of the termination payment made by the Employer to Employee A for Project 1, Project 2, and Project 3 is a genuine redundancy payment under section 83-175 of the Income Tax Assessment Act 1997 (ITAA 1997).

No part of the incentive payment, severance and time in lieu components of the termination payment made by the Employer to Employee B for Project 3 is a genuine redundancy payment under section 83-175 of the ITAA 1997.

It is considered that Employee A and Employee B were employed for a fixed period of employment specified under subparagraph 83-175(2)(a)(ii) of the ITAA 1997.

Detailed reasoning

Genuine redundancy payments

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 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 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)).

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 states:

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 states:

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.
...

152. ... 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.

In the present case, Employee A was employed by the Employer in three different projects, Project 1, Project 2 and Project 3. Although Employee A worked on three projects, each project was covered by a separate contract which limits the period of assignment to that current project. There was no termination date in the contracts of employment, however, the employee completed all the tasks and duties in each of the three projects at the time of the termination of employment.

Employee B was employed by the Employer on Project 3. The contract is limited to the period of assignment of the project. There was no termination date in the contract of employment, however, the employee completed all the tasks and duties in the project at the time of termination of employment.

It was clear from the contracts of employment you provided that the offer of employment is tied exclusively to that specific project and employment would expire on the completion of the particular project, unless the Employee is offered further opportunities with a different project.

In both instances, the final termination payments made to Employee A and Employee B are made at the completion of their scope of work. That is, the payment is made in accordance with their current contract which limits the period of assignment to the present project.

In particular with Employee A, even though they worked on three projects, each project is covered by a separate contract which limits the period of assignment to that current project.

Following on from the above as employment for each project is included under a separate contract, the termination payment made to Employee A and Employee B is a payment made at the end of a fixed period of employment as specified under subparagraph 83-175(2)(a)(ii) of the ITAA 1997. Therefore, no part of the incentive payment, severance and time in lieu payment made to Employee A and Employee B on the termination of employment is a genuine redundancy payment in accordance with section 83-175 of the ITAA 1997.

The payment exceeds what would have been received in consequence of the voluntary termination of employment

Whilst it has already been considered that the termination payment for Employee A and Employee B would not form part of a genuine redundancy payment, it is also relevant to note that subsection 83-175(1) of the ITAA 1997 requires the payment exceeds the amount that an employee could reasonably be expected to receive in consequence voluntarily terminating their employment.

This subsection states:

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 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.

Paragraphs 61 to 63 of TR 2009/2 further state:

61. It would generally be expected that a greater amount would be paid on redundancy than voluntary termination. This recognises the purpose of redundancy payments, being primarily to compensate for loss of non-transferable entitlements (for example accrued sick leave and accrued long service leave prior to 10 years service) and the peculiar hardship associated with being made redundant.

62. Contractual or other entitlements payable by an employee on voluntary termination are generally a sound guide as to what might reasonably be expected…

63. There may be industry norms that could be used as a guide as to what payments would be made on voluntary termination…

Under a clause in Agreement A for Project 1 and a clause of Agreement B for Project 2 and 3 an incentive payment is paid out to all employees on completion of the employee's term on a project.

Similarly under clause in Agreement A for Project 1 and a clause of Agreement B for Project 2 and 3 a severance payment is paid out to all employees on completion of the employees' term on a project.

From the facts, as both the incentive payment and the severance payment is the same amount received by an employee who voluntarily terminate their employment, the incentive payment and the severance payment made to Employee A and Employee B would not meet the requirements of subsection 83-175(1) of the ITAA 1997.

Consequently, the incentive payment and the severance payment made to Employee A and Employee B are not considered to be made in circumstances of a genuine redundancy, and are not in excess of the amount that could reasonably be expected to be received in consequence of a voluntary termination.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).