Edited version of your written advice

Authorisation Number: 1051251420877

Date of advice: 13 July 2017

Ruling

Subject: Employment termination payments- genuine redundancy.

Question

Is any part of the payment to be received by the Taxpayer from the Company a genuine redundancy payment under section 83-175 of the Income Tax Assessment Act 1997?

Answer

No.

This ruling applies for the following periods:

Income year ended 30 June 2017

The scheme commences on:

1 July 2016

Relevant facts and circumstances

An entity (the Company) was started by a person (the Taxpayer).

The Company operates a retail store.

The Taxpayer is a director of the Company and also performs the roles of Finance Manager, Retail Manager and Human Resources Manager.

The Taxpayer has been employed by the Company for more than twenty years.

Due serious financial difficulties, the Company is to close down.

Most of the staff at the Company had been made redundant.

Staff members were paid their entitlements on termination, including a redundancy payment depending on their length of service with the Company.

The Taxpayer has remained at the Company to manage its winding up.

The Taxpayer is entitled to unused annual leave and unused long service leave.

The Company has insufficient funds to pay the Taxpayer their entitlements and provide a redundancy payment. Instead, rather than paying the Taxpayer their leave entitlements the Company will provide the Taxpayer with a redundancy payment as this is more beneficial for the Taxpayer.

The Company intends to provide the Taxpayer with a redundancy payment (the Payment). This amount is based on the formula for working out the tax free amount of a genuine redundancy payment and the Taxpayer’s length of service at the Company.

You state that there is no requirement to make a redundancy payment to the Taxpayer.

There is no employment agreement between the Company and the Taxpayer.

The Taxpayer’s employment has not been terminated yet.

The Taxpayer is aged less than 65 years.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 83-175

Income Tax Assessment Act 1997 subsection 83-175(1)

Reasons for decision

Summary

The Payment is not a genuine redundancy payment.

Detailed reasoning

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

In accordance with subsection 83-175(1) of the ITAA 1997, a GRP is so much of a payment 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.

The Commissioner of Taxation (the Commissioner) has issued Taxation Ruling TR 2009/2 Income tax: genuine redundancy payments, 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 for the purposes of 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.

Payment 'in consequence of’ 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. 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 contains references to repealed provisions, some of which may have been rewritten, the ruling still has effect 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:

5. ... 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 this instance, the Taxpayer’s employment is to be terminated because the Company will be wound up. The Company intends to make the Payment to the Taxpayer as a result of the termination. If not for the termination, the Payment would not be made. Therefore, the Payment will be received by the Taxpayer in consequence of the termination.

Dismissal’ and 'redundancy’

The Commissioner’s view, as stated in paragraphs 18 and 25 of TR 2009/2 is that:

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 the employment that is terminated at the initiative of the employee…

…

25. An employee’s position is redundant when an employer determines that it is superfluous to the employer’s needs and the employer does not want the position to be occupied by anyone. Accordingly, it is fundamentally the employer’s decision that a position is redundant. On occasion the decision may be unavoidable due to the circumstances surrounding the employer's operations.

Dual capacity employees

A dual capacity employee is a person who, in addition to being engaged as an employee, also holds an office with the employing entity. In this instance, the Taxpayer is a dual capacity employee, being both an employee and a director of the Company.

Paragraphs 83 and 84 of TR 2009/2 discuss the question of consent for dual capacity employees:

83. As consent is reflected in the person’s state of mind, the Commissioner considers that it is not possible for a person to consent to a decision in his or her capacity was a director of the employer, yet not consent to the same decision in his or her capacity as an employee.

84. It follows that the question of consent for a dual capacity employee can be address by considering the following two matters:

● First, did the person agree to or approve the employer’s act or decision to terminate their own employment? If not, the termination is without the person’s consent and is therefore a dismissal.

● Secondly, if the person did agree to or approve the employer’s act or decision to terminate their own employment, were the circumstances surrounding the act or decision such that the person did not have any real or practical choice in terminating their own employment. If so, the termination is without the person’s consent and is therefore a dismissal.

It is clear from the facts that, in this case, the Taxpayer is not voluntarily resigning from their employment. Rather, their employment is to be terminated because the Company is being wound up and the Taxpayer’s position will no longer exist. The circumstances are such that there is no real or practical choice in the termination of the Taxpayer’s employment.

Consequently, it is considered that the Taxpayer will be dismissed from employment because their position was redundant. In addition, there is nothing to indicate that the redundancy will be contrived in any way. Therefore, the redundancy will be genuine.

However, while it is accepted that the Taxpayer was dismissed from their employment because their position was genuinely redundant, subsection 83-175(1) of the ITAA 1997 also requires that the payment received in consequence of redundancy exceeds the amount that the Taxpayer would have received had they voluntarily resigned from employment.

Based on the information provided, had the Taxpayer voluntarily terminated their employment they would have received payment for their entitlement to annual leave and long service leave. The Payment to be made to the Taxpayer does not exceed the amount that they would have received had they voluntarily resigned from employment.

Further, it is only due to the fact that the Taxpayer is a director of the Company that a decision could be made that Taxpayer be paid a redundancy payment rather being paid out their leave entitlements as this is more beneficial for them. In an arm’s length dealing, the Company would have paid the Taxpayer their entitlements first and not the redundancy amount to the Taxpayer despite having insufficient funds.

Consequently, it is considered that subsection 83-175(1) of the ITAA 1997 has not been satisfied. Accordingly, the Payment that the Company intends to provide to the Taxpayer is not a genuine redundancy payment.

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