Edited version of private advice

Authorisation Number: 1051611202684

Date of advice: 3 January 2020

Ruling

Subject: Employment termination payment

Question 1

Is any part of the settlement sum a genuine redundancy payment under section 83-175 of the Income Tax assessment Act 1997 (ITAA 1997)?

Answer

Yes, part of the settled sum represents a genuine redundancy.

Question 2

Is any part of the settlement sum of an employment termination payment (ETP) under section 82-130 of the ITAA 1997?

Answer

Yes,see our Reasons for Decision.

This ruling applies for the following period:

Year ended 30 June 2019

The scheme commences on:

1 July 2018

Relevant facts and circumstances

·        You provided copies of your employment agreements listing the commencement date of your employment and terms and conditions of your employment.

·        In the 2015-16 income year you were given a termination letter that details the date of your termination and benefits you were entitled upon this termination.

·        As you disagreed with the amount of benefits offered under the termination you commenced a legal action against your employer in the 2015-16 income year.

·        This dispute was resolved in the 2018-19 income year when you accepted a settlement sum.

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 83-170

Income Tax Assessment Act 1997 section 83-175

Reasons for decision

Summary

You are entitled to genuine redundancy amount. This tax-free component is not included in your assessable income.

The remaining settlement payment satisfies all the conditions listed in subsection 82-130(1) of the ITAA 1997 and as is not an excluded payment under section 82-135 of the ITAA 1997, it is considered to be an ETP.

Detailed reasoning

Genuine redundancy payment

Under 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' that exceeds the amount that could reasonably be expected to be received by the employee in consequence of voluntary termination.

The Commissioner has issued Taxation Ruling TR 2009/2 Income tax: genuine redundancy payments (TR 2009/2), which outlines the requirements to be satisfied before any payment made to a person whose employment was terminated qualifies for treatment as a genuine redundancy payment under subsection 83-175(1) of the ITAA 1997.

In the Commissioner's view, this requirement consists of four necessary components:

·        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.

In addition to the basic requirement listed under subsection 83-175(1) of the ITAA 1997, subsections 83-175(2) and (3) of the ITAA 1997 also 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; and

·        the payment is not in lieu of superannuation benefits.

At paragraphs 18 and 25 of TR 2009/2, the Commissioner further states:

18. Dismissal is a particular mode of employment termination. It requires a decision to termination the employment at the employer's initiative without the consent of the employee. This stands in contrast to the employment that is termination 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...

The termination letter given to you in the 2015-16 income year, and a Clause captured in the provided Deed of Settlement support that part of the settled sum represents a genuine redundancy payment.

A genuine redundancy payment made to you in the 2015-16 income year also supports that part of the settlement sum can be treated as a genuine redundancy.

Subsection 83-170(3) of the ITAA 1997 provides the following formula:

Base amount + (Service amount x Years of service)

Based on the provided information we are satisfied that you met all requirements imposed under section 83-175(1) of the ITAA 1997. Accordingly, you are entitled to further genuine redundancy payment calculated in accordance with formula under subsection 83-170(3) of the ITAA 1997.

Employment Termination Payment (ETP)

A payment is an ETP if the payment satisfies all the requirements in section 82-130 of the ITAA 1997 and is not specifically excluded under section 82-135.

Subsection 82-130(1) of the ITAA 1997 states that:

A payment is an employment termination payment 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.

Payment 'in consequence of' the termination of employment

The facts need to show there is a direct causal connection between the payment and a termination of employment. If a termination of employment does not occur, then an employee is not entitled to the payment.

In this case, the termination letter you provided with your application and the Deed of Settlement support that the settlement payment satisfies the first ETP condition as it was paid in connection with the termination of your employment.

Payment received no later than 12 months after termination

Paragraph 82-130(1)(b) of the ITAA 1997 specifies that the payment must be received within 12 months of the employee's termination of employment, unless they are covered by a determination exempting them from the 12 month rule.

Commonwealth determination made by James O'Halloran, Deputy Commissioner of Taxation on 28 March 2018 under reference ETP 2018/1 states that:

Paragraph 82-130(1)(b) of the ITAA 1997 does not apply to a late termination payment if the payment is received more than 12 months after the termination of a person's employment because:

(a)   legal action was commenced within 12 months of the termination of employment, of which the subject is either or both:

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

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

(b) the payment was made by a liquidator, receiver or trustee in bankruptcy of an entity that is otherwise liable to make the payment, where that liquidator, receiver or trustee is appointed no later than 12 months after the termination of employment.

Based on the provided information we are satisfied that you commenced legal action within 12 months of the termination of your employment.

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

Section 82-135 of the ITAA 1997 lists payments that are not employment termination payments. These include (among others):

·        superannuation benefits;

·        unused annual leave or long service leave payments;

·        foreign termination payments covered under Subdivision 83-D of the ITAA 1997; and

·        the part of a genuine redundancy payment or an early retirement scheme payment that is not covered by subsection 83-170(3) of the ITAA 1997.

Based on the terms listed in the Deed of Settlement, the settlement sum is not considered to be one of the excluded payments referred to in section 82-135 of the ITAA 1997.

Accordingly, we are satisfied that the settlement sum, less the genuine redundancy amount, meets requirements of ETP under section 82-130 of the ITAA 1997.

Conclusion

The genuine redundancy amount is a tax-free component that is not included in your assessable income.

As the settlement payment, less the genuine redundancy amount, satisfies all the conditions listed in subsection 82-130(1) of the ITAA 1997 and is not an excluded payment under section 82-135 of the ITAA 1997, it is considered to be an ETP.

The taxable component of an ETP is included in your assessable income. A tax offset applies under section 82-10 of the ITAA 1997 to effectively limit the concessional tax treatment to the applicable cap. Amounts over the cap are taxed at the top marginal rate.

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