Edited version of your written advice

Authorisation Number: 1051374915346

Date of advice: 27 July 2018

Ruling

Subject: Termination of employment payment

Question 1

Is the contractual severance compensation payment received by the Client on the termination of their employment a genuine redundancy payment for the purposes of section 83-175 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 2

Is the Client eligible for the tax free treatment of genuine redundancy payment based on their years of employment service with an overseas company?

Answer

Yes.

This ruling applies for the following period:

Income year ended 30 June 2017.

The scheme commences on:

1 July 2016

Relevant facts and circumstances

The Client was employed by an overseas company (Company A).

The Client was seconded from one overseas country to another for a number of years. The terms governing the assignment were set out in an employment agreement.

In subsequent years the Client accepted an assignment with (Company B) and the terms governing the assignment were set out in an employment agreement which, as far as relevant, provided that:

● If the Client wishes to terminate their employment, they must give notice of a set period in advance.

● The Client’s employment/and or assignment may be terminated by at any time, with no cause.

● If the Client’s employment is terminated for any reason other than for cause, the company may elect to pay their salary payments in lieu of notice. Such payments are to be determined solely on the Client’s base salary at the time of termination.

The Client in subsequent years commenced assignments overseas with other companies (Companies C and D) which were based in an overseas country. The terms governing the assignments were set out in employment agreements which as far as relevant were similar to those for Company B in relation to termination of employment and severance pay.

In the 2011-12 income year the Client commenced employment in a new role with Company E (the Employer) which was part of the same group of companies to which Companies A, B, C and D belonged.

In the 2012-2013 income year the Client signed a new agreement with the Employer. The terms set out in that agreement, as far as relevant, provide that:

● If the Client’s employment is terminated by the Employer for any reason other than for cause, the Client is eligible for severance pay. Such payments are to be determined solely on the Client’s base salary at the time of termination.

In the 2015-16 income year, subsequent to discussions held between the Client and the Employer, the Client was advised their employment would be terminated and in accordance with the employment agreement made in the 2012-13 income year.

In the 2015-16 income year a Separation Agreement (the Agreement) was entered into between the Client and the Employer which stated the Client’s employment with the Employer would cease at the end of the 2015 - 16 income year and that and the Client was entitled to the contractual severance payment as compensation (the Payment) for termination of the loss of office.

The Payment made under the Agreement was paid to the Client in the 2016-17 income year.

There is nothing in the Agreement to indicate that the Client would have received the Payment had there been a voluntarily resignation from employment.

A letter from the Employer states that the Client was not replaced as the position was eliminated on the Client’s ceasing employment.

You have provided certain employment contracts and documentation to support the Client’s years of employment with the Employer, its subsidiaries and associated companies.

The Payment was not inclusive of any unpaid wages, long service leave, payment in lieu of notice and others.

You state that no foreign tax was withheld from the Payment.

The Client also did not receive any payments in lieu of superannuation.

At the time of dismissal there was no arrangement between the Client and the Employer or between the Employer and another person, to employ him after the dismissal.

The Client is less than 65 years of age.

Relevant legislative provisions

Income Tax Assessment Act 1997 subsection 82-130(4).

Income Tax Assessment Act 1997 section 82-135.

Income Tax Assessment Act 1997 paragraph 82-135(e).

Income Tax Assessment Act 1997 section 83-170.

Income Tax Assessment Act 1997 section 83-175.

Summary

The Payment satisfies the conditions for it to be treated as a genuine redundancy payment.

The facts provided support the Payment as relating to the Client’s period of service with the Employer, its subsidiaries and associated companies.

Detailed reasoning

Genuine redundancy payment

A payment made to an employee is a genuine redundancy payment if it satisfies all the conditions set out in section 83-175 of the Income Tax Assessment Act 1997 (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 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 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 employee’s 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 arm’s length the payment does not exceed the amount that could reasonably be expected to be made if the dismissal were at arm’s 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)).

In Taxation Ruling 2009/2 Income tax: genuine redundancy payments (TR 2009/2), the Commissioner has outlined 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.

The Commissioner considers that there are four necessary components within this termination requirement:

● The payment being tested 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.

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

Based on the information provided, especially the letter of confirmation from the Employment, it is accepted that the above requirements are satisfied in the Client’s case.

Further conditions for a genuine redundancy payment

In addition to the basic requirements for a genuine redundancy payment in subsection 83-175(1) of the ITAA 1997, the further conditions for genuine redundancy payment treatment in subsections 83-175(2), (3) and (4) of the ITAA 1997 require that:

● the dismissed employee is not older than 65 years;

● the termination is not at the end of a fixed period of employment;

● if the dismissal was not at arm’s length -, the payment is not greater than the amount that could reasonably be expected to be made if the dismissal were at arm’s length;

● there is no arrangement entered into between the employer and the employee or the employer and another entity to employ the dismissed employee after the dismissal;

● the payment is not in lieu of superannuation benefits to which the employee may have been entitled to;

● the payment is not mentioned in section 82-135 of the ITAA 1997 (none of which apply in this case).

In this case all the additional conditions for genuine redundancy have also been satisfied as:

● at the time of dismissal the Client was less than 65 years of age;

● the dismissal was not at the end of a fixed term of employment. As stated by the letter from the Employer, the position was made redundant;

● the dismissal was at arm’s length;

● at the time of dismissal, there was no arrangement between the Client and the Employer, or between the Employer and another person, to employ the Client after the dismissal; and

● the Payment was not received in lieu of superannuation benefits.

Consequently, it is considered that the Client was dismissed from employment with the Employer because their position was redundant

However, while it is accepted that the Client 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 Client would have received had they voluntarily resigned from employment.

In this case, there is nothing to indicate that the Client would have received the Payment if they resigned from their employment with the Employer. As such, all the conditions under section 83-175 of the ITAA 1997 have been satisfied. Accordingly, Payment is a genuine redundancy payment as defined in section 83-175 of the ITAA 1997.

Tax-free amount

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) of the ITAA 1997 is not assessable income and is not 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:

a. Base amount + (Service amount × Years of service)

For the 2016-17 income year:

b. Base amount means $9,936;

c. Service amount means $4,969; and

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

The documentation provided shows that Employer recognised the Client’s employment with the parent company and its subsidiaries, of which the Employer is one, and indicates the ‘years of service’ to which the genuine redundancy payment relates is X whole years of service.

Accordingly, the tax-free part of the genuine redundancy payment received in the 2016-17 income year under subsection 83-175(3) of the ITAA 1997 is:

$9,936 + ($4,969 × X) = $Y

The tax-free amount is non-assessable and non-exempt income under subsection 83-170(2) of the ITAA 1997. Any amount of the Payment in excess of the tax-free amount is an employment termination payment, to be included in the Client’s assessable income for the 2016-17 income year.

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