Edited version of your written advice

Authorisation Number: 1013050380203

Date of advice: 11 August 2016

Ruling

Subject: Genuine redundancy

Question

Is any part of the transition bonus payments received by you a genuine redundancy payment under section 83-175 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

This ruling applies for the following period:

20XX-XX income year

20XX-XX income year

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You commenced employment with the Employer during the relevant income year.

You terminated employment with the Employer during the subsequent income year.

During the subsequent income year your team was advised that following a review it was decided to close your team and transfer the team's responsibility offshore.

As part of this process the team was offered a 'transitional bonus' to encourage you to remain at work until the date of termination.

In the subsequent income year you received a letter from your Employer that advised that there had been an organisational review and a restructure. As a result, your position was redundant and your employment would terminate during the subsequent income year. You were also advised that you were eligible for a transition bonus. The details of the Transition Assignment and Bonus Eligibility were provided in a memorandum during the subsequent income year.

The memorandum advised that you are eligible for a transition bonus payment on satisfactory complete of all transition assignment KPI's by a specific date during the subsequent income year. A portion of the transition bonus will be paid during the subsequent income year if you remain employed on a specific date during the subsequent income year and if you achieve the relevant KPIs. The remaining portion of the transition bonus will be paid after you terminate employment on a specific date during the subsequent income year if you achieve the relevant KPIs. If you terminate employment with the Employer prior to that date for example by resignation, then you will not be eligible for the remaining portion of the transition bonus.

A pay advice from the Employer stated that you received a portion of the transition bonus during the subsequent income year.

A pay advice from the Employer stated that you received the remainder of the transition bonus during the 20XX-XX income year.

You are under 65 years of age.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 82-130

Income Tax Assessment Act 1997 section 83-10

Income Tax Assessment Act 1997 section 83-175

Reasons for decision

Summary

The transition bonus payments that you received during the subsequent and the 20XX-XX income years are not genuine redundancy payments for the purposes of section 83-175 of the Income Tax Assessment Act 1997 (ITAA 1997) as they were not made in consequence of the termination of employment.

Further, as the transition bonus payments are not made in consequence of the termination of employment they do not satisfy subparagraph 82-130(1)(a)(i) of the ITAA 1997, one of the main criteria that must be satisfied for a payment to be treated as an employment termination payment.

Accordingly, the transition bonus payments are assessable as ordinary income.

Detailed reasoning

Genuine redundancy payments

Section 83-175 of the ITAA 1997 sets out the various requirements for a genuine redundancy payment.

In accordance with subsection 83-175(1) of the ITAA 1997, a genuine redundancy payment is so much of a payment that:

• is received by an employee who is dismissed from employment because the employee's 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 their employment at the time of the dismissal.

Further, the requirements to be satisfied before any payment made to a person whose employment is terminated qualifies for treatment as a genuine redundancy payment under section 83-175 of the ITAA 1997 are discussed in Taxation Ruling TR 2009/2 (TR 2009/2).

With regard to the first requirement set out in subsection 83-175(1) of the ITAA 1997, the Commissioner considers that there are four necessary components within this requirement:

• the payment must be received in consequence of an employee's termination;

• the termination must involve the employee being dismissed from employment;

• dismissal must be caused by the redundancy of the employee's position; and

• the redundancy payment must be made genuinely because of a redundancy.

Meaning of received 'in consequence of' the termination

The phrase 'in consequence of' is not defined in the ITAA 1997. However, the courts have interpreted the phrase in a number of cases. Taking into account the courts decisions on the meaning of the 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 (TR 2003/13).

In paragraph 5 of TR 2003/13 the Commissioner states:

… 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.

As further stated by the Commissioner in paragraph 6 of TR 2003/13, there must be:

… a causal connection between the termination and the payment, although the termination need not be the dominant cause of the payment. 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.

The phrase in consequence of 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)  133 CLR 45 (Reseck) and the Full Federal Court in McIntosh v. Federal Commissioner of Taxation (1979) 25 ALR 557; (McIntosh).

In Reseck Justice Gibbs stated:

Within the ordinary meaning of the words, a sum is paid in consequence of the termination of employment when the payment follows as an effect or result of the termination... It is not in my opinion necessary that the termination of the services should be the dominant cause of the payment....

While Justice Jacobs stated:

It was submitted that the words 'in consequence of' import a concept that the termination of the employment was the dominant cause of the payment. This cannot be so. A consequence in this context is not the same as a result. It does not import causation but rather a 'following on'.

In looking at the phrase 'in consequence of' the Full Federal Court in McIntosh considered the decision in Reseck. Justice Brennan considered the judgments of Justice Gibbs and Justice Jacobs in Reseck and concluded that their Honours were both saying that a causal nexus between the termination and payment was required, though it was not necessary for the termination to be the dominant cause of the payment.

Suffice it to say that 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.

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

From the facts, the Employer notified you in a letter during the subsequent income year that there had been an organisational review and a restructure was necessary. As a result your position was made redundant on a specific date during the subsequent income year.

A memorandum during the subsequent income year from your Employer offered to pay you a transition bonus payment to secure your employment services until a specific date during the subsequent income year. The Employer offered to pay you a portion of the transition bonus if you remain in employment until a specific date during the subsequent income year and you achieve the relevant KPIs. As a result you were paid a transition bonus during the subsequent income year. The Employer also offered to pay you the remaining portion of the transition bonus after termination if you achieve the relevant KPIs. You terminated employment during the subsequent income year and were paid a transition bonus during the 20XX-XX income year.

In this case, while one of the payments coincided with the termination of employment, both payments were not made in consequence of the termination of employment. Rather, the transition bonus payments were made as a financial incentive to ensure that your employment continued for an agreed period until a specified date. The payment of a portion of the transition bonus during the subsequent income year further supports this as the payment was made a few months prior to the termination of employment.

The offer of the transition bonus was conditional on you completing all transition assignment KPI's and remaining employed until a specific date during the subsequent income year. You were not eligible for the remaining portion of the transition bonus if you terminated employment with the Employer, for example by resignation, prior to the specified date.

Accordingly, there is no causal connection between the termination and the transition bonus. The transition bonus payments were not conditional on the termination of your employment. It cannot be said that the transition bonus payments followed on as an effect or a result of the termination of employment. Therefore the transition bonus payments are not considered to be made in consequence of the termination of employment.

Ultimately, a distinction has been made between the transition bonus payments being paid as a consequence of retaining your employment as opposed to being paid as a consequence of the termination of that employment.

Notwithstanding that your position was made redundant; a payment made to an employee is a genuine redundancy payment only if it satisfies all criteria set out in section 83-175 of the ITAA 1997. One of the main requirements of a genuine redundancy payment that must be satisfied (as discussed in TR 2009/02) is that the payment must be made in consequence of the termination of employment.

In this case as the transition bonus payments are not made in consequence of the termination of employment, the payments cannot be treated as genuine redundancy payments.

Further matter for consideration

A payment is an employment termination payment if it satisfies all the requirements in section 82-130 of the ITAA 1997.

One of the main requirements that must be satisfied is that the payment must be made in consequence of the employee's termination of employment (subparagraph 82-130(1)(a)(i) of the ITAA 1997).

In this case, as previously mentioned, the transition bonus payments are not considered to be received in consequence of the termination of employment. Hence, the requirement under subparagraph 82-130(1)(a)(i) of the ITAA 1997 has not been satisfied and the transition bonus payments are not considered to be employment termination payments.

Accordingly, the transition bonus payments that you received during the subsequent income year and the 20XX-XX income year are assessable as ordinary income.

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