Edited version of your written advice

Authorisation Number: 1012930940439

Date of advice: 7 January 2016

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 2015.

The scheme commenced on

1 July 2014.

Relevant facts

Your Client is under 65 years of age.

Your Client was employed by the Employer as a full time musician.

During the 20VV-WW 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.

You state the CTIP arose due to there being no provision for redundancy within the Enterprise Agreement or the Act under which your client was hired.

Your Client accepted the CTIP and resigned from their position. The effective date of resignation being during the 20WW-XX income year.

Shortly after, Your Client received their CTIP payment and tax was withheld from this payment.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 82-130

Income Tax Assessment Act 1997 Section 82-135

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 Section 83-175.

Further issues for you to consider

Not applicable.

Anti-avoidance rules

Not applicable.

Reasons for decision

Summary

As the payment is below Your Client's tax-free amount of a genuine redundancy payment, the payment entire payment represents the tax-free part of a genuine redundancy payment.

Detailed reasoning

A payment is an employment termination payment if it satisfies all the requirements in section 82-130 of the Income Tax Assessment Act 1997 (ITAA 1997) and is not specifically excluded under section 82-135 of the ITAA 1997.

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

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.

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.

Based on the information provided, Your Client's employment was terminated when they were made redundant.

To determine if the Career Transition Incentive package (CTIP) payment constitutes an employment termination payment, all the conditions in subsection 82-130(1) of the ITAA 1997 must be satisfied. Failure to satisfy any of the three conditions under subsection 82-130(1) of the ITAA 1997 will result in the payment not being considered an employment termination payment.

Payment is made in 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, as per subparagraph 82-130(1)(a)(i) of the ITAA 1997.

The phrase 'in consequence of' is not defined in the ITAA 1997. However, the courts have interpreted the phrase in a number of cases. Whilst the courts have divergent views on the meaning of this phrase, the Commissioner's view on the meaning and application of the 'in consequence of' test are set out in 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'.

While TR 2003/13 considered the meaning of the phrase 'in consequence of' in the context of eligible termination payments, TR 2003/13 can still be relied upon as both the former provision under the Income Tax Assessment Act 1936 and the current provision under the ITAA 1997 both use the term 'in consequence of' in the same manner.

In paragraph 5 of TR 2003/13 the Commissioner 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.

In paragraph 6 of TR 2003/13, the Commissioner recognises that:

6. The phrase requires a causal connection between the termination and the payment, although the termination need not be the dominant cause of the payment.

The phrase 'in consequence of' the termination of employment has been interpreted by the courts in several cases.

Of note are the decisions made by the High Court in Reseck v. Federal Commissioner of Taxation (1975) 49 ALJR 370; (1975) 6 ALR 642; (1975) 5 ATR 538; (1975) 75 ATC 4213; (1975) 133 CLR 45 (Reseck) and the Full Federal Court in McIntosh v Federal Commissioner of Taxation (1979) 25 ALR 557; (1979) 10 ATR 13; (1979) 45 FLR 279; (1979) 79 ATC 4325 (McIntosh).

Both Courts views were that for a payment to be made in consequence of the termination of employment it had to follow on as a result or effect of the termination of employment. Additionally, while it is not necessary to show that termination of employment is the sole or dominant cause, a temporal sequence alone would not be sufficient.

There is also a broader view of the meaning of 'in consequence of' the termination of employment. Paragraph 29 of TR 2003/13 provides that a payment will be in consequence of the termination of employment if the termination is either a cause of the payment or an antecedent event.

The question of whether a payment is made in consequence of the termination of employment will be determined by the relevant facts and circumstances of each case.

In Your Client's case, the Employer decided to close the unit of which they were employed to reduce staff. As there was no provision for redundancy within the enterprise agreement or the regulations under which they were hired, the Employer offered five different options for impacted staff. One of which was the CTIP.

It is clear from the facts provided that the CTIP payment is made 'in consequence of' the termination of Your Client's employment. As such, there is a direct causal connection between the termination of Your Client's employment and the making of the payment.

If not for the termination of Your Client's employment the CTIP payment would not have been made. It is therefore considered there is a sufficient causal nexus between the making of the CTIP payment and the termination of employment to say that the payment was made in consequence of the termination of your employment.

Payment is received no later than 12 months after that termination

The second condition for the payment to meet the criteria as an employment termination payment requires the payment in question be received within twelve months of that termination (paragraph 82-130(1)(b) of the ITAA 1997), unless they are covered by a determination exempting them from the 12 month rule.

In this case, paragraph 82-130(1)(b) of the ITAA 1997 has been satisfied as the CTIP payment was paid to Your Client within 12 months of the termination of their employment.

Payment is not a payment mentioned in section 82-135

The final requirement for a payment to qualify as an employment termination payment, as per paragraph 82-130(1)(c) is, that the payment is not a payment mentioned in section 82-135 of the ITAA 1997.

Relevantly in Your Client's case, paragraph 82-135(e) states that the tax-free part of a genuine redundancy payment worked out under section 83-170 of the ITAA 1997, is not an employment termination payment.

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 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)).

Whether the CTIP payment 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 they were 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 from their position, effective in the 20WW-XX income year. As you 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 Your Client was employed as a musician, rendering Your Client's position redundant. However, as there was no provision for redundancy within the Enterprise Agreement or Act under which Your Client was hired, they could not be made redundant. Rather, Your Client was offered options to be redeployed.

As the overall intention was to reduce the number of 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 their skills and experience as a musician as they would require your client 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 the limited positions 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 your 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 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 20WW-XX income year:

Base amount is $X;

Service amount is $X; and

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

The CTIP payment in excess of the tax-free amount of your genuine redundancy payment worked out above will be assessable income and taxed as an employment termination payment.

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