Edited version of private advice

Authorisation Number: 1051530373593

Date of advice: 3 July 2019

Ruling

Subject: Genuine redundancy payment

Question 1

With regard to your PAYG withholding obligations, will the lump sum termination payment made to an Executive Director (ED).be a genuine redundancy payment under section 83-175 of the Income Tax Assessment Act 1997 (ITAA 1997), where there is an arrangement to employ the Executive Director with a new employer?

Answer

No, the lump sum will not be a genuine redundancy payment and will be classed as an employment termination payment. You will be required to withhold an amount of tax in accordance with section 12-85 of the Taxation Administration Act 1953 (TAA).

Question 2

If no, will the lump sum be considered a genuine redundancy payment where the Executive Director does not accept the offer of employment with the new employer?

Answer

No, where there is an arrangement for the Executive Director to be employed by the new employer, the lump sum will not meet the definition of a genuine redundancy payment, regardless of whether the ED does not accept the employment offer.

This ruling applies for the following period:

1 July 2018 to 30 June 2020

Relevant facts and circumstances

·         After a strategic review of its business, the Employer has reached an agreement to sell certain elements of the business to an unrelated entity (the Purchaser).

·         In accordance with the sale agreement, the Purchaser will be required to make offers of employment to certain employees affected by the sale, on terms and conditions which are comparable overall to those they currently have with the Employer. Offers of employment will also recognise each transferring employee's service entitlements, which will be paid for by the Employer.

·         On the basis that these offers of employment will be comparable and service recognised, redundancies will not be payable by the Employer to the relevant employees, including any employee who does not accept an offer of employment with the Purchaser.

·         Sign-on bonuses will be paid to employees as an incentive for staff to transfer to the Purchaser.

·         The Purchaser advised that under the terms of the sale agreement they will not make an equivalent employment offer to the Executive Director (ED).

·         It is stated that the Purchaser intends to make an offer of employment to the ED, however the sale agreement does not compel them to do so. They will only offer the ED employment at a lower package than he was paid by the Employer and they are not prepared to recognise past service.

·         The Employer and the Purchaser have agreed under a 'sign-on bonus letter' that where the Purchaser does decide to offer the ED employment, the Purchaser will pay the ED a sign on bonus subject to certain terms and conditions. The 'sign-on bonus letter' will be an agreement involving the ED, the Employer and the Purchaser, with all parties having obligations with regard to the terms and conditions.

·         As the Employer has no on-going requirement for the ED's role on completion of the sale to the Purchaser, the ED's employment with the Employer will come to an end. On termination of employment a lump sum payment will be made to the ED, together with a payment in lieu of notice. The payment will not be in lieu of superannuation benefits. The ED is under 65 years of age.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 82-130

Income Tax Assessment Act 1997 section 83-175

Taxation Administration Act 1953, Schedule 1, section 12-85

We followed these ATO view documents

Taxation Ruling TR 2009/2: Income tax: genuine redundancy payments

Reasons for decision

Detailed reasoning

A payment made to an employee is a genuine redundancy payment if it satisfies all of 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 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 reasonably be expected to be received by the employee in consequence of the voluntary termination of his or her employment at the time of the dismissal.

Paragraph 11 of Taxation Ruling TR 2009/2: Income tax: genuine redundancy payments (TR 2009/2), outlines the requirements to be satisfied under subsection 83-175(1) of the ITAA 1997. 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.

While the essential components of subsection 83-175(1) of the ITAA 1997 appear to have been satisfied in this case, there are further conditions that must be satisfied before the payment can be treated as a genuine redundancy. Conditions in subsections 83-175(2) and (3) of the ITAA 1997 require that:

·         the dismissed employee is not older than specified age limits

·         the termination is not at the end of a fixed period of employment

·         the actual amount paid is not greater than the amount that could reasonably be expected had the parties been dealing at arm's length, in the event that the employer and employee are in fact not dealing at arm's length in relation to the dismissal

·         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 termination (paragraph 83-175(2)(c)); and

·         the payment is not in lieu of superannuation benefits.

A primary issue in this case is whether at the time of the ED's dismissal, was there an arrangement between the employee and the employer, or between the employer and another person, to employ the employee after the dismissal?

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 in subsection 995-1(1) as:

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.

Paragraphs 307 to 309 of TR 2009/2 provide the Commissioner's view on an 'arrangement...to employ':

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.

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.

Under the terms of the sale agreement the Purchaser is under no obligation to make an employment offer to the Employer's ED and has made it clear that if it ultimately does offer employment to the ED it will not be on comparable terms and conditions to those the ED currently has with the Employer. Despite there being no formal obligation for the Purchaser to make an employment offer, you have stated that it is your understanding an employment offer will be made to the ED.

Furthermore, the Employer and the Purchaser have agreed under a draft 'sign-on bonus letter' that where the Purchaser does decide to offer the ED employment, the Purchaser will pay the ED a sign on bonus subject to certain terms and conditions. The 'sign-on bonus letter' will be an agreement involving the ED, the Employer and the Purchaser, with all parties having obligations with regard to the terms and conditions.

The fact that a 'sign-on bonus letter' has been drafted indicates that negotiations have taken place between the parties with a view to the ED being employed by the Purchaser. This is similar to the sign-on bonuses offered to all other employees who will be transferring to the Purchaser as per the terms of the sale agreement.

While there is no formal offer in the sale agreement between the Employer and the Purchaser to employ the ED, the expectation that an employment offer will be made by the Purchaser, together with a sign-on bonus, implies there is an understanding between the parties of an imminent employment offer, which would subsequently fall under the definition of an 'arrangement to employ'.

Although the ED will be offered employment with the Purchaser on less favourable terms and conditions, this does not affect the operation of paragraph 83-175(2)(c) of the ITAA 1997. The issue is whether there is an arrangement in place for the Purchaser to employ the ED as a common law employee.

As there will be an arrangement in place to employ the ED at the time of employment termination, paragraph 83-175(2)(c) of the ITAA 1997 is not satisfied and the lump will not be a genuine redundancy payment under section 83-175 of the ITAA 1997. This conclusion will be the same even where the ED does not accept the employment offer from the Purchaser. The key factor is that there is currently an arrangement in place for the ED to be employed by the Purchaser.

Conclusion

As the lump sum payment will not meet the definition of a genuine redundancy payment it will be classed as an 'employment termination payment' (ETP), as defined in section 82-130 of the ITAA 1997. An ETP includes any payment made in consequence of termination of any employment of a taxpayer other than certain specified payments. An employer is required to withhold an amount of tax for an ETP in accordance with section 12-85 of the TAA.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).