Edited version of your written advice

Authorisation Number: 1013101576988

Date of advice: 30 September 2016

Ruling

Subject: Genuine redundancy

Question 1

Is the 'Cash Termination Indemnity' payment you received on the termination of your employment a genuine redundancy payment in accordance with section 83-175 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

This ruling applies for the following periods:

Year ended 30 June 20YY

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

On a date in a relevant income year, you commenced employment with an offshore contractor (the Employer), on an offshore rig.

The rig you were based on was sold by the Employer to another contractor (the purchaser) and as a result, your employment with the Employer was terminated on a date in the 20XX-YY income year.

At the time of transition from the Employer to the purchaser, you were part of the list of 'selected' employees to be transferred and as such you could not remain with the Employer.

Consequently, on a date in the 20XX-YY income year, you commenced employment with the purchaser. At that time you held two roles.

As a result of the termination of your employment with the Employer, you received a Cash Termination Indemnity (CTI) payment in 20XX.

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 Paragraph 83-175(2)(c).

Reasons for decision

Summary

At the time of the termination of your employment with the Employer, there was an arrangement between the Employer and the purchaser to employ you after the dismissal from the Employer.

Therefore, the CTI payment which you received from the Employer on the termination of your employment is not a genuine redundancy payment for the purposes of section 83-175 of the ITAA 1997.

Detailed reasoning

A payment made to an employee is a genuine redundancy payment (GRP) if it satisfies all the criteria set out in section 83-175 of the ITAA 1997.

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

(a) so much of a payment received by an employee who is dismissed from employment because the employees position is genuinely redundant;

(b) 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 dismissal.

The Commissioner of Taxation has issued Taxation Ruling TR 2009/2 Income tax: genuine redundancy payments (TR 2009/2), which outlines the requirements to be satisfied before any payment made to a person whose employment is terminated qualifies for treatment as a GRP under section 83-175 of the ITAA 1997.

In discussing what constitutes a GRP in accordance with subsection 83-175(1) of the ITAA 1997, paragraph 11 of TR 2009/2 states:

There are four necessary components within this requirement:

• The payment being tested must be received in consequence of an employee's termination.

• That termination must involve an employee being dismissed from employment.

• That dismissal must be caused by the redundancy of the employee's position.

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

Based on the information provided, it is accepted that all the components of subsection 83-175(1) of the ITAA 1997 have been satisfied in this case.

However, subsection 83-175(2) of the ITAA 1997 lists further conditions that a genuine redundancy payment must meet and, as far as relevant, states:

…

(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.

*To find definition of asterisked terms, see the Dictionary, starting at section 995-1.

Paragraphs 50 and 51 of TR 2009/2 discuss the requirement under paragraph 83-175(2)(c) of the ITAA 1997 and state:

50. Under paragraph 83-175(2)(c), an arrangement to employ an employee after his or her termination prevents a dismissal giving rise to a genuine redundancy payment if that arrangement is entered into between either:

• the employer and the dismissed employee; or

• the employer and another entity.

51. In the second of these two cases, the other entity would commonly be the new employer, although this need not necessarily be the case. For instance, there could be an arrangement between a subsidiary company, the employer, and a holding company, the other entity, to employ the terminating employee in another subsidiary company within the group.

Further, paragraphs 306 to 309 of TR 2009/2 state:

306. Under paragraph 83-175(2)(c), an arrangement to employ an employee after his or her termination may prevent a dismissal giving rise to a genuine redundancy payment. An arrangement in this context is defined widely:

arrangement means any arrangement, agreement, understanding, promise or undertaking, whether express or implied, and whether or not enforceable (or intended to be enforceable) by legal proceedings.

307. In the Commissioner's view, the phrase 'arrangement...to employ' is confined to common law employment relationships. The apparent purpose of paragraph 83-175(2)(c) is to limit access to concessional tax treatment where an employee is terminated but is certain of continuing remuneration in the future under a common law employment contract because of an arrangement to which the employer is a party. (emphasis added)

308. For the condition in paragraph 83-175(2)(c) to fail, it is necessary for the employment arrangement to be entered into between either:

• the employer and the employee; or

• the employer and another entity.

309. Accordingly, if the employee has independently entered into an arrangement with another entity for that entity to employ him or her after the time of the dismissal from the original employer, the condition in paragraph 83-175(2)(c) will still be met. On the other hand, given the breadth of the meaning of 'arrangement', an implied understanding between two related companies at the time of an employee's dismissal with one of those companies to the effect that the employee will be employed at a later time with the other is sufficient for this condition not to be met.

At the time of the termination of your employment with the Employer, there was an arrangement for the purchaser to employ you after the termination. Accordingly, paragraph 83-175(2)(c) of the ITAA 1997 has not been satisfied and the CTI payment is not as a genuine redundancy payment under section 83-175 of the ITAA 1997.

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