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Ruling

Subject: Genuine redundancy payment

Question

Is any part of the lump sum ex-gratia payment made to you, on the termination of employment with the employer a tax-free part of a genuine redundancy payment in accordance with section 83-170 of the Income Tax Assessment Act 1997 (ITAA1997)?

Answer:

No.

This ruling applies for the following period

1 July 2009 to 30 June 2010

The scheme commenced on

1 July 2009

Relevant facts and circumstances

You are under 65 years of age.

You commenced work with the employer and subsequently entered into a contract of employment (the contract) for a senior position.

In the contract, under the clause regarding termination, it stated either party could terminate the appointment by giving to the other notice in writing. The employer could also terminate your appointment without notice under other specific circumstances, including neglect and acts causing damage or discredit to the employer.

After a number of years you had concerns regarding your superior and this issue was brought to the attention of, and dealt with by, the Board of the Employer.

Later you and your co-workers put forward a restructuring proposal to the Board because of your anxiety on the direction and future of the entity.

Subsequently, you and the other staff members were informed that the entity was to be restructured.

Other staff members resigned subsequent to the restructuring announcement.

The Board decided to employ temporary staff to cover vacant positions while the restructure was occurring.

You attended conflict resolution meetings concerning other staff.

Some of your duties were reallocated prior to the termination of your employment.

You and a co-worker apparently both believed your section would be split and this question was asked if this was the case or would you all remain as a working unit. No one was able to advise you of the form of the new structure.

You stated you had met with a manager to discuss your employment contract. You acknowledged that the employer was willing to terminate your employment in exchange for a severance payment.

You were provided with a draft deed of release and you requested some time to consider your position and seek advice. You advised that you were taking advice re the deed concerning the effect terminating employment 'by mutual agreement' may have on your access to social security.

You accepted the offer of the severance payment and stated you will wait to hear about the details of the offer.

You acknowledged to the employer that you were making the decision to accept the offer to terminate your employment as it was in your best interests to do so, in light of the uncertain future

You attempted to negotiate the format of your termination payment, because of the circumstances you found yourself in at that time.

You reached a mutual agreement with the employer and signed the Deed to terminate your employment.

Your superior confirmed in an email that your termination of employment was by mutual agreement.

Emails to you from the employer, and the separation certificate you received both state that your position was not made redundant.

There was no agreement between you and the employer or between your employer and any other person or entity to provide you with employment, at the time of your termination.

A PAYG payment summary - employment termination payment from the employer states you were paid a taxable component from which tax was withheld.

The payment did not include an amount in lieu of superannuation benefits.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 27F.

Income Tax Assessment Act 1997 Section 82-130.

Income Tax Assessment Act 1997 Subsection 82-130(1).

Income Tax Assessment Act 1997 Subparagraph 82-130(1)(a)(i).

Income Tax Assessment Act 1997 Paragraph 82-130(1)(b).

Income Tax Assessment Act 1997 Paragraph 82-130(1)(c).

Income Tax Assessment Act 1997 Section 83-170.

Income Tax Assessment Act 1997 Section 83-175.

Income Tax Assessment Act 1997 Subsection 83-175(1).

Income Tax Assessment Act 1997 Subsection 82-175(2).

Income Tax Assessment Act 1997 Subsection 83-175(3).

Income Tax Assessment Act 1997 Subsection 82-175(4).

Income Tax Assessment Act 1997 Section 995-1.

Reasons for decision

Summary

The taxable component in the PAYG payment summary is an employment termination payment and should be included as assessable income in your 2009-10 income tax return.

No part of this payment is a tax-free genuine redundancy payment as you were not dismissed from your employment and your position was not made genuinely redundant.

Detailed reasoning

From 1 July 2007 the taxation treatment of payments, made in consequence of the termination of any employment of a taxpayer have changed. Payments, formerly known as eligible termination payments, are now called employment termination payments.

Employment termination payment

Payments made in consequence of the termination of a taxpayer's employment are known as employment termination payments.

Section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997) states that:

employment termination payment has the meaning given by section 82-130.

Employment termination payments are defined in section 82-130 of the ITAA 1997. Subsection 82-130(1) of the ITAA 1997 states:

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 the termination (but see subsection (4)); and

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

To be an employment termination payment, the amount received by you must satisfy all the conditions listed above, including not being specifically excluded under section 82-135 of the ITAA 1997.

Based on the information provided, the Commissioner considers that the payment, received from the employer, was received in consequence of the termination of your employment, within 12 months of that termination.

Section 82-135 of the ITAA 1997 excludes certain payments from being employment termination payments. This includes payments for unused annual and long service leave, superannuation benefits and the tax-free part of a genuine redundancy payment.

Relevant to your application is whether any part of the payment represents the tax free part of a genuine redundancy payment.

Genuine redundancy payment

A payment made to an employee, after 30 June 2007, is a genuine redundancy payment (GRP) if it satisfies all criteria set out in section 83-175 of the ITAA 1997. Section 83-175 of the ITAA 1997 replaces former section 27F of the Income Tax Assessment Act 1936 (ITAA 1936), where such payments were previously referred to as bona fide redundancy payments.

Section 83-175 of the ITAA 1997 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 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 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 employees 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)).

Subsection 83-175(1) of the ITAA 1997 refers to a genuine redundancy payment as one that exceeds the amount that an employee would normally receive when resigning from employment. Under the relevant clause, if you had resigned you may have received a payment of up to four weeks of your total remuneration package for the notice period.

A genuine redundancy payment is a payment as defined under subsection 83-175(1) of the ITAA 1997 resulting from:

(i) a dismissal; and

(ii) a redundancy.

The terms 'dismissal' and 'redundancy' are not defined in the ITAA 1997. Therefore, it is necessary to consider the ordinary meaning of the terms and the meaning the courts have ascribed to each word.

The Commissioner has issued Taxation Ruling TR 2009/2, titled Income Tax: genuine redundancy payments. The Ruling 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 states:

11. There are four components within the basis genuine redundancy requirement:

· The payment must be received in consequence of a termination.

· The termination must involve an employee being dismissed from employment.

· The dismissal must be caused by the redundancy of the employee's position.

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

As noted above, it is considered that the payment was received in consequence of the termination of your employment. Consequently, this requirement in subsection 83-175(1) of the ITAA 1997 is satisfied.

Section 83-175 of the ITAA 1997 also requires that there is a dismissal which was caused by the redundancy of the employee's position, and not for some other reason.

Consequently, it is necessary to consider the ordinary meaning of the terms 'dismissal' and 'redundancy' and the meaning the judicial authorities have ascribed to them.

'Dismissal' and 'redundancy'

The Explanatory Memorandum to the Income Tax Assessment Amendment Act (No.3) 1984, which inserted former section 27F into the ITAA 1936 states, at page 91:

The terms "dismissal" and "redundancy" are not defined in the legislation and, therefore, should be given their ordinary meanings. "Dismissal" carries with it the concept of the involuntary (on the taxpayer's part) termination of employment. "Redundancy" carries the concept that the requirements of the employer for employees to carry out work of a particular kind, or for employees to carry out work of a particular kind in the place where they were so employed, have ceased or diminished or are expected to cease or diminish. Redundancy, however, would not extend to the dismissal of an employee for personal or disciplinary reasons or for reasons that the employee was inefficient.

Dismissal from employment

Dismissal implies a termination of employment at the initiative of the employer without the consent of the employee.

Paragraphs 18 and 22 of TR 2009/2 discuss what constitutes a dismissal:

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.

22. Cases of 'constructive dismissal' are a dismissal for the purposes of subsection 83-175(1). Constructive dismissal is currently recognised to occur where the actions or behaviour of the employer in relation to the employment relationship effectively curtails the element of consent on the employee's behalf. The simplest example of constructive dismissal is where an employee resigns under threat (explicit or implicit) of dismissal. Another example is where the employee resigns after the employer offers work in an alternative position which is inappropriate given the employees particular circumstances (for example, their skills or experience). While in form this appears to be a termination at the employee's initiative, it is recognised at law to be a dismissal.

The Commissioner expands on the issue of determining the cause of dismissal at paragraphs 268 to 273 of TR 2009/2:

268. There are various reasons why an employee may be dismissed from employment. Redundancy may be only one of these reasons.

269. In circumstances where more than one reason can be identified for the dismissal, the Commissioner considers that redundancy must be the primary cause of the dismissal. This suggests an analysis of what is the prevailing or most influential cause of the dismissal. This question is to be answered in light of the facts and circumstances of each case.

270. The classic context for redundancy is the closure, downsizing or reorganisation of part or all of the employer's operations. Redundancy can readily be established as the prevailing or most influential cause of dismissal in the first two of these scenarios.

271. Where an employer dismisses an employee after a reorganisation of duties, functions and responsibilities, a more careful analysis is required. A restructure of an organisation does not necessarily import redundancy where employees are dismissed following the reallocation or restructure. In these circumstances, it is necessary to consider what impact the restructure had on the duties, functions and responsibilities formerly fulfilled by the dismissed employee.

272. In Re Marriott and Federal Commissioner of Taxation [2004] AATA 806; 2004 ATC 2191; (2004) 56 ATR 1265 the employer did not see fit to dismiss the employee after a reallocation of duties, functions and responsibilities within the organisation. In this case, the employee was carrying out duties of a legal nature in the Tax Office. These duties changed upon the reorganisation, in that he was not continuing to directly negotiate settlements or train junior advocates. After carefully considering the evidence before him, Senior Member Lindsay found that there was not a dismissal (in particular there was not a constructive dismissal) and further commented that:

Whether an employee's termination is by reason of redundancy will require an assessment of the changes to determine if they were beyond or beneath the employee's qualifications, skills or experience.

273. In this case it was considered that the prevailing or most influential cause of termination was the employee's own desire not to undertake the duties, functions and responsibilities he was offered following the reorganisation.

Even though some of your duties were reallocated prior to your termination of employment you were still in the position of undertaking many of the duties that you had previously performed. There is no indication that your salary had changed or you were undertaking new duties or responsibilities above or beneath your qualifications, skills or experience.

In this case you were not dismissed from employment by the employer under any clause of your employment contract in any ordinary sense, but by mutual agreement in the deed, a copy of which was provided as evidence of your termination. This is confirmed by your superior in an email.

Further, you acknowledged to the employer that you were making the decision to accept the offer to terminate your employment as it was in your best interests to do so, in light of the uncertain future.

While the circumstances described in the facts certainly influenced your choice to accept voluntary termination, this alone does not automatically mean that you had no choice but to resign. While there was uncertainty surrounding your continued employment, no evidence was produced to show that the employer intended to terminate your employment after the restructure was completed.

Consequently, it is not considered that there was a constructive dismissal in this case.

As you were not dismissed from employment by the employer, the second requirement of a genuine redundancy has not been met.

Dismissal caused by redundancy

A payment can only be classified as a GRP upon meeting all of the requirements set under section 83-175 of the ITAA 1997 and dismissal only forms part of those requirements.

Paragraphs 24, 25 and 28 of TR 2009/2 provide the following comments in relation to the meaning of redundancy:

24. As is the case in determining if there is a dismissal, the reason for a dismissal is to be established in light of the facts and circumstances of each case. The redundancy of the relevant position must be the prevailing or most influential reason for the dismissal if there is more than one contributing cause.

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...

28. A dismissal is not caused by redundancy where personal acts or default are the prevailing or most influential cause for the termination. For example, a person may be dismissed due to unsatisfactory performance or behaviour.

In this case, there is no indication that the restructure by the employer lead to your position being made redundant. There are emails from the employer that states that your position was not made redundant. Your employer still wanted someone to perform the work you were doing at the time of the termination of your employment, and, indeed, you were involved in the training of your replacement.

Therefore, it is considered that the termination of employment was not caused by the redundancy of your position and hence the third requirement of a genuine redundancy has not been satisfied.

The redundancy payment must be made genuinely because of a redundancy

Whether a redundancy is 'genuine' or contrived is determined on an objective basis.

In this case, from the facts provided, it is evident that there has not been a redundancy as discussed above. Therefore the requirement that the redundancy be genuine in order to classify the payment as a genuine redundancy payment does not need to be examined.

Further conditions for a genuine redundancy payment

Subsection 83-175(2) of the ITAA 1997 sets out further criteria that must be satisfied for a payment to be regarded as a genuine redundancy payment.

The first condition requires that the taxpayer is dismissed before the earlier of the day the taxpayer turns 65 or the day they reach a particular age or completed a particular period of service that would have terminated the taxpayer's employment. You were under 65 years of age when you terminated your employment and you therefore satisfy this condition.

The second condition requires that if the dismissal were not at arms length, that the payment does not exceed the amount that could be reasonably expected to be made if the dismissal were at arm's length. However, as evidence by the facts of this case your dismissal was at arm's length.

The third condition is that at the time of 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. The facts you provided state there was no re-employment arrangement in place.

A further requirement, as set out in subsection 83-175(3) of the ITAA 1997, is that no part of the payment 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 date. The facts you provided state the payment did not include provision for your superannuation entitlements.

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

Subsection 83-175(4) of the ITAA 1997 provides that a payment is not a genuine redundancy payment if it is a payment mentioned in section 82-135 (apart from paragraph 82-135(e)). You were not entitled to a redundancy payment and the other types of payments were addressed above. Hence it is not payment mentioned in section 82-135, and the entire payment is an employment termination payment.

Consequently the payment does not satisfy all of the requirements of Section 83-175 of the ITAA 1997 and is therefore not a genuine redundancy payment.