Edited version of private advice

Authorisation Number: 1051445786500

Date of advice: 05 July 2019

Ruling

Subject: Genuine redundancy

Question 1

Is the lump sum payment a genuine redundancy payment as defined by section 83-175 of the Income Tax Assessment Act 1997?

Answer

No

Question 2

If the lump sum payment is not considered a genuine redundancy payment, would it be classified as an employment termination payment (ETP) as defined by section 82-130 of the Income Tax Assessment Act 1997?

Answer

Yes

This ruling applies for the following period:

Income year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

·   In 20XX, your employment contract was transferred to a different company.

·   Redundancy payments were requested but your previous employer said that you would not receive a redundancy payment because your employment was being transferred and not terminated.

·   In 20XX, an out of court settlement was reached whereby the previous employer agreed to pay a lump sum redundancy payment.

·   The redundancy payment was subsequently classified as an ETP because it was being paid more than 12 months after the redundancy.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 82-130

Income Tax Assessment Act 1997 Section 82-135

Income Tax Assessment Act 1997 Section 83-175

Reasons for Decision

Question 1

Summary

The lump sum payment is not considered to be a genuine redundancy payment as it does not meet the relevant criteria stated in section 83-175 of the Income Tax Assessment Act 1997 (ITAA 1997).

Detailed reasoning

·   A payment will qualify as a genuine redundancy payment if all the requirements under section 83-175 of the ITAA 1997 are satisfied.

·   According to subsection 83-175(1) of the ITAA 1997, a genuine redundancy payment defined as:

"so much of a payment received by an employee who is dismissed from employment because the employee's position is 'genuinely redundant' as exceeds the amount that could have been reasonably be expected to be received by the employee in consequence of the voluntary termination of their employment at the time of the dismissal."

·   The Commissioner has issued Taxation Ruling TR 2009/2 Income Tax: genuine redundancy payments (TR 2009/2), which provides guidance on the factors to be considered in the interpretation of section 83-175 of the ITAA 1997.

·   Paragraph 11 of TR 2009/2 specifies four necessary components within the requirements under subsection 83-175(1) of the ITAA 1997:

-  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.

Component 1: Payment 'in consequence of' termination

·   The phrase 'in consequence of' is not defined in the ITAA 1997 but however paragraph 6 of 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) states the level of connection required between the termination and the payment is as follows:

6. "The phrase requires a causal connection between the termination and the payment, although the termination need not be the dominant cause of the payment."

In the case of Dibb v. Commissioner of Taxation 2003 ATC 461, the taxpayer involved experienced similar circumstances to you, in that substantial delays caused by litigation issues had occurred between the time they terminated their employment and the time they received payment on settlement.

·   In the above mentioned case, Justice Heerey concluded that the payment that taxpayer received was an employment termination payment and stated that:

22. The concept of a payment "in consequence of the termination of any employment'' was expounded by the High Court in Reseck v FC of T 75 ATC 4213; (1975) 133 CLR 45 and by the Full Court of the Federal Court in McIntosh v FC of T 79 ATC 4325; (1979) 25 ALR 557. These authorities are analysed by Goldberg J in Le Grand v FC of T 2002 ATC 4907 at 4911-4913 [25-30] and 4914 [ 33-34]; (2002) 195 ALR 194 at [25] to [30] and [33] to [34]. I adopt his Honour's analysis.

23. In my opinion the Commissioner was correct in ruling that the payment under the Deed was made "in consequence of the termination'' of the applicant's employment with AVCO. True it is there was a substantial lapse in time between the termination and the commencement of Federal Court proceeding and a further period of time until settlement. However the reason for that delay was the time taken up with the litigation first in the Commission and then in the Federal Court itself. The subject matter of the litigation in the Federal Court was clearly the termination, the allegedly wrongful way AVCO effected it and its financial and other consequences for the applicant. The various causes of action, whether breach of contract, conspiracy, breach of fiduciary duty or contravention of the Trade Practices Act were, as Goldberg J would say (Le Grand at ATC 4915 [36]; ALR [36]), ''interwoven and intertwined'' with the termination. The payment was a consequence of the settlement, which was a consequence of the Federal Court proceeding, which in turn was a consequence of the termination.

·   Application of paragraph 6 of TR 2003/13 and the decision handed down by Justice Heerey to your situation, we can say that the lump sum payment you received satisfies this component. This is because a sufficient nexus exists between the termination of your employment and the lump sum payment being made, based on the following:

-  the payment followed the termination of your employment; and

-  the legal proceeds would not have occurred if it weren't for the termination of your employment.

Component 2: 'Dismissal' from employment

·   The Commissioner's view about when genuine redundancy payments arise is stated in paragraph 16 of TR 2009/2 as follows:

16. "... a genuine redundancy payment can only arise where there is no suitable job available for the employee with the employer, meaning that he or she must therefore be dismissed."

·   In terms of a genuine redundancy payment only arising from the dismissal of the employee as a result of no suitable job or position being available with the employer, paragraph 18 of TR 2009/2 sets out the Commissioner's view of a 'dismissal' as follows:

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."

·   In your situation, your employer issued you with a letter stating that effective from Thursday 14 July 2011, your position as Specialist Yr 9 is declared excess to need from Saturday 1 October 2011.

·   The application of the principles stated in paragraphs 16 and 18 of TR 2009/2 to your situation would mean that you would satisfy this component. This is because in your situation, your employer initiated the termination of your employment without your consent on the basis that all positions situated at facility operator sites have been identified as excess to need due to the fact that the facility operator decided to contract with another service provider instead of your employer.

Component 3: Dismissal caused by 'redundancy'

·   Paragraphs 25 and 26 of TR 2009/2 sets out the Commissioner's view on when an employee's position is made 'redundant' as follows:

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.

26. In some circumstances, an employer may reallocate the duties and functions attached to a particular position to another position within the employer's organisational structure. In such cases, the former position is redundant. However, if the employee who had been working in that position is still employed by the employer following the reallocation of duties and functions, there will not be a dismissal.

·   In scenarios where there are multiple reasons behind an employee's dismissal, the redundancy of an employee's position must be the prevailing or most influential cause of dismissal. This is because according to paragraph 28 of TR 2009/2, a dismissal is not caused by redundancy where personal acts or default are the prevailing or most influential cause for the termination.

·   Application of the principles stated in TR 2009/2 paragraphs 25, 26 and 28 to your situation would mean that you would satisfy this component. This is because your employer stated in a letter addressed to you that your position will be declared excess to need on Sunday 1 October 2011 due to the fact that the facility operator have decided to contract with another service provider rather than your employer.

Component 4: 'Genuine' redundancy

·   Paragraph 31 of TR 2009/2 sets out the Commissioner's view on contrived (or artificial) cases of redundancy and the determination of whether a redundancy is 'genuine' or not as follows:

31. Contrived cases of redundancy will not meet the conditions in section 83-175. Whether a redundancy is 'genuine' is determined on an objective basis.

·   As there was nothing to indicate that your redundancy was in any way contrived or caused by any personal acts or default, you satisfy this condition.

·   Based on the satisfaction of the 4 components of a genuine redundancy payment prescribed in paragraph 11 of TR 2009/2, we can conclude that the basic requirement for a genuine redundancy payment specified in subsection 83-175(1) of the ITAA 1997 is satisfied.

·   Next we would need to consider the conditions stated in subsection 83-175(2) of the ITAA 1997 regarding genuine redundancy payments as follows:

(a)  the employee is dismissed before the earlier of the following:

i.      the day he or she turned 65; or

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 the dismissal.

·   Although you were aged less than 65 years when your employment was terminated and the termination was at arm's length per the Deed of Settlement, an arrangement had been put in place to transfer your employment to a different employer.

·   Therefore, the lump sum payment does not meet all of the conditions stated in subsection 83-175(2) of the ITAA 1997. It follows that the payment is not a genuine redundancy payment under section 83-175 of the ITAA 1997.

Question 2

Summary

The lump sum payment is classified as an ETP as per the definition under section 82-130 of the Income Tax Assessment Act 1997 (ITAA 1997).

Detailed reasoning

·   Section 995-1 of the ITAA 1997 states that employment termination payment has the meaning given by section 82-130 of the ITAA 1997.

·   Subsection 82-130(1) of the ITAA 1997 states that a payment is an employment termination payment (ETP) if:

(a)              it is received by you:

             i.    in consequence of the termination of your employment; or

            ii.    after another person's death, in consequence of the termination of the other person's employment; and

      (b)    it is received no later than 12 months after that termination (but see subsection (4)); and

      (c)    it is not a payment mentioned in section 82-135.

·   The lump sum payment received by you from your employer will be an ETP only if all the conditions in section 82-130 of the ITAA 1997 are satisfied. Failure to satisfy any of the conditions will result in the payment not being considered an ETP.

Paid as a consequence of the termination of employment

·   Paragraph 82-130(1)(a) of the ITAA 1997 requires that the payment must be received 'in consequence of' the termination of your employment, or that of another person after their death.

·   When we determined whether or not the lump sum payment you received from your employer was a genuine redundancy payment, one of the aspects we considered was whether you received your payment 'in consequence of' the termination of your employment.

·   Based on the circumstances surrounding the receipt of your payment, we concluded that you received this payment in consequence of terminating your employment.

·   This was because if you had not terminated your employment, the legal proceedings would have not taken place against your employer and hence you would have not received the lump sum payment as stated in the Deed of Settlement. Hence we can establish that there is a sufficient nexus between the termination of your employment and the receipt of your lump sum payment.

·   This is consistent with the Commissioner's view in paragraph 6 of the TR 2003/13 and the decision handed down by Justice Heerey in Dibb v. Commissioner of Taxation 2003 ATC 461.

The payment is received no later than 12 months after termination

·   Paragraph 82-130(1)(b) of the ITAA 1997 requires that the payment must be received within 12 months of the employee's termination of employment.

·   However, paragraph 82-130(4)(a) of the ITAA 1997 states that the 12 month rule prescribed in paragraph 82-130(1)(b) of the ITAA 1997 does not apply if:

(a)  a person is covered by a determination made by the Commissioner under subsection 82-130(5) or (7) of the ITAA 1997; or

(b)  the payment is a genuine redundancy payment.

·   The Employment Termination Payments (12 month rule) Legislative Instrument 2007 is a legislative instrument made by the Commissioner of Taxation pursuant to subsection 82-130(7) of the ITAA 1997. It applies to employment termination payments received after 30 June 2007 and provides that a payment received more than 12 months after termination of person's employment will be an ETP if the delay in the payment was due to the commencement of legal action concerning either or both:

           (i).        the person's entitlement to the payment;

          (ii).        the amount of the person's entitlement;

and the legal action was commenced within 12 months of the termination of employment.

·   In this case, your employment was terminated on 30 September 2011 without any redundancy payment. However, on 22 July 2011, the HSU lodged an application with the Fair Work Commission which had the authority to adjudicate legal disputes between parties at that time.

·   As this legal action had commenced prior to terminating your employment, it follows that the 12 month rule stated in paragraph 82-130(1)(b) of the ITAA 1997 does not apply in this case.

Not a payment mentioned in section 82-135 of the ITAA 1997

·   Paragraph 82 130(1)(c) of the ITAA 1997 requires that the payment is not a type of payment mentioned under section 82-135 of the ITAA 1997.

·   In this case, the payment does not include any of the payments mentioned in the relevant provision such as unused annual leave or long service leave.

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