Edited version of your written advice

Authorisation Number: 1051354438517

Date of advice: 19 April 2018

Ruling

Subject: Employer Termination Payments (ETP)

Question 1

Is the employment termination payment (ETP) received by the Taxpayer from the employer on termination of their employment, a genuine redundancy payment in accordance with section 83-175 of the ITAA 1997?

Answer

No

Question 2

Is the ETP received by the Taxpayer from the employer an excluded payment as defined in subsection 82-10(6) of the ITAA 1997?

Answer

No

Question 3

Is the Taxpayer entitled to a tax offset under section 83-15 of the ITAA 1997 in respect of annual leave payment component of the ETP?

Answer

No

This ruling applies for the following periods:

Year ended 30 June 2017

The scheme commenced on:

1 July 2016

Relevant facts and circumstances

1. The Taxpayer was employed by the employer

2. The Taxpayer’s employment contract was in accordance with an Agreement. Relevantly, the Agreement includes the following terms:

● An Employee will accrue a redundancy payment of two hours pay at the ordinary hourly rate of pay for each completed week of service.

● At the time of termination of employment, the redundancy payment will be paid to the Employee.

● The Company will provide notice of termination of employment (or payment in lieu of such notice) to all Employees.

● At the time of termination of employment, all accrued but untaken RDOs shall be paid out at the Employee’s ordinary (all-purpose) hourly rate.

● At the time of termination, all untaken accrued leave shall be paid out at the Employee’s ordinary all-purpose hourly rate together with a loading amount.

● At the time of termination, all untaken accrued personal leave shall be paid out at the Employees ordinary hourly rate (including any all-purpose leave).

3. We received a private ruling application asking whether the employer termination payment the Taxpayer received included a component for a genuine redundancy.

4. In this application we were advised that :

● There was no arrangement between the Taxpayer and the employer or between the employer and another person to employ the taxpayer after the dismissal.

5. Attached to the application were payslips detailing the following payments:

● Leave loading

● Annual leave

● Redundancy

6. We were advised via email that:

● The taxpayer was informed that their position was no longer available after the completion of an onsite meeting on that date and was also advised that there were not alternative positions available.

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 Subsection 83-175(3)

Income Tax Assessment Act 1997 Subsection 83-175(4)

Income Tax Assessment Act 1997 Section 82-135

Income Tax Assessment Act 1997 Section 82-10

Income Tax Assessment Act 1997 Subsection 82-10(6)

Income Tax Assessment Act 1997 Subsection 82-130(2)

Income Tax Assessment Act 1997 Section 83-15

Question 1

Summary

The ETP is not a genuine redundancy payment as defined in section 83-175 of the ITAA 1997 because this amount would have been received by the Taxpayer had they voluntarily terminated their employment at the time of their dismissal.

Consequently, the amount is assessable income and should be taxed as an employment termination payment

Detailed reasoning

Under 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 dismissal.

The payment must also satisfy the conditions outlined within subsections 83-175(2) and (3) of the ITAA 1997 and must not be excluded by subsection 83-175(4) of the ITAA 1997 to qualify as a genuine redundancy payment.

Payment is received by an employee dismissed from their employment because their position has been made genuinely redundant

Taxation Ruling TR 2009/2 Income tax: genuine redundancy payments (TR 2009/2) outlines four necessary components that must be satisfied under subsection 83-175(1) of the ITAA 1997:

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

● that termination must involve the employee being dismissed from employment;

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

● 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: employment termination payments (ETP): payments made in consequence of the termination of any employment: meaning of the phrase 'in consequence of' (TR 2003/13).

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 use the term 'in consequence of' in the same manner.

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

... a payment is received by a taxpayer in consequence of the termination of the taxpayer's employment 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 received by the taxpayer.

In this case, the Taxpayer’s employment was terminated and, as a result of their termination, they were paid an employment termination payment. But for their termination, this payment would not have been made.

Therefore, we consider that the amount of $X paid to the Taxpayer ‘in consequence of’ the termination of their employment with the Employer.

Dismissal caused by ‘redundancy’

The terms ‘dismissal’ and ‘redundancy’ are also not defined in the ITAA 1997. Therefore, consistent with the basic principles of statutory interpretation, their meaning must be determined according to the ordinary meaning of the words, having regard to the context in which they appear.

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 employment that is terminated at the initiative of the employee, for example in the case of resignation.

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.

No alternative positions were made available for the Taxpayer and they have not commenced work with the same Employer or any of its related entities since their position was made redundant and they were dismissed.

‘Genuine’ redundancy

The need for an employee's position to be genuinely redundant establishes that contrived cases of redundancy will not meet the conditions in section 83-175 of the ITAA 1997. Whether a redundancy is ‘genuine’ is determined on an objective basis.

The fact that an employer and employee have an understanding that a payment on termination is caused by redundancy or that the employer treats the payment as a redundancy payment for tax purposes does not of itself establish genuine redundancy.

In this case, it is clear that the Taxpayer’s redundancy was not contrived and that their redundancy was genuine.

Payment must exceed the amount that would reasonably expected to be received had the employee voluntary terminated their employment

Subsection 83-175(1) of the ITAA 1997 also requires that the payment received by the Taxpayer must exceed the amount that could reasonably be expected to have been received by the Taxpayer had they voluntarily terminated their employment at the time of their dismissal.

In this case, the Agreement states that all accrued payments in relation to redundancy (including the payment of the special leave), leave loading leave and annual leave were payable on termination. Therefore, it is considered the Taxpayer could reasonably have expected to have received these payments had they voluntarily terminated their employment at the time of their dismissal.

Consequently, the amount is assessable income and should be taxed as an employment termination payment.

Question 2

Summary

The ETP received by the Taxpayer is not an excluded payment for the purposes of Subdivision 82A of the ITAA 1997.

Detailed reasoning

The taxation of life benefit termination payments is outlined in section 82-10 of the ITAA 1997.

A ‘life benefit’ termination payment is an ETP received by a person in consequence of the termination of that person's employment. For tax purposes, it consists of two components:

● a tax free component, and

● a taxable component

Subsection 82-10(1) of the ITAA 1997 states that the ‘tax free component’ of a life benefit termination payment is not assessable income and is not exempt income. In accordance with subsection 82-10(2) of the ITAA 1997, the ‘taxable component’ of a life benefit termination payment is assessable income.

However, subsection 82-10(6) of the ITAA states that if a life benefit termination payment includes:

● genuine redundancy payments

● early retirement scheme payments

● an invalidity component; or

● payments that:

● are paid` in connection with a genuine dispute; and

● are principally compensation for personal injury, unfair dismissal, harassment, discrimination or a matter prescribed by the regulations; and

● exceed the amount that could, at the time of the termination of your employment, reasonably be expected to be received by you in consequence of the voluntary termination of your employment.

It will be an excluded payment for the purposes of subsection 82-10(4) of the ITAA 1997.

However, as the ETP received by the Taxpayer is not a genuine redundancy payment, and is not a payment of the type listed in paragraphs (b) to (d) of subsection 82-10(6) of the ITAA, it is not considered to be an excluded payment for the purposes of Subdivision 82A of the ITAA 1997.

Question 3

Summary

The Taxpayer is not entitled to a tax offset under section 83-15 of the ITAA 1997 in respect of their unused annual leave payments.

Detailed reasoning

Under section 83-15 of the ITAA 1997, an employee will be entitled to a tax offset to ensure that the rate of tax on an unused annual leave payment does not exceed 30% if the payment was made in connection with a payment that includes:

● a genuine redundancy payment;

● an early retirement scheme payment;

● the invalidity segment of an employment termination payment or superannuation benefit: or

● the payment was made in respect of employment before 18 August 1993.

The Taxpayer received a payment for unused annual leave upon the termination of their employment with their employer.

As the ETP received by the taxpayer is not a genuine redundancy payment, and is not a payment of the type outlined in 82-10(6) of the ITAA, the Taxpayer is not entitled to a tax offset in respect of the unused annual leave payment under section 83-15 of the ITAA 1997.

Therefore, the unused annual leave payment is subject to tax at the Taxpayer’s marginal rate of tax.

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