Edited version of private ruling

Authorisation Number: 1011680803553

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Ruling

Subject: Genuine redundancy payment

1. Is any part of the payment received by you on the termination of employment the tax-free part of a genuine redundancy payment in accordance with section 83-170 of the Income Tax Assessment Act 1997 (ITAA 1997)?

No.

2. Should the payment for accrued annual and long service leave received by you on the termination of employment be taxed concessionally?

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

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You are less than 50 years of age.

You signed an agreement that stipulated your conditions of employment when you commenced employment with the employer.

The agreement provided for the employer to terminate the agreement immediately if certain conditions prevailed or at other times by giving one months notice to you.

The employer is a company. The company is owned and controlled by four Directors who each initially held all the issued shares.

Recently a small percentage of the shares were allocated to senior employees, who were then described as Partners. The Partners were not partners in the legal sense of a partnership.

You were initially employed in a junior position and you were later promoted to a Partner, which is the position you held on the termination of your employment.

The employer notified you of your pending termination of employment one month prior to your termination. You then had to surrender all building access passes, keys and so on on that day.

You state you were repeatedly asked and encouraged over a four week period to sign a Deed of Release which you believed was not in your best interests.

You finally received a letter from the employer advising you of the termination of your employment. This letter also stated you were to paid four months salary in lieu of notice and your leave entitlements less tax.

Prior to your termination an article by two commentators was posted on a particular website stating that the joint chief executive officer of the company, exited on a date prior to your termination.

You received a PAYG payment summary - employment termination payment that stated you were paid a taxable component less tax. Your employer did not treat this payment as a genuine redundancy payment.

A commentator's article on that same website later stated you were replaced by one of your staff.

Another commentator provided an article on this website stating two partners had left the employer. Those partners were named and one was said to be yourself.

The employer issued a PAYG payment summary - individual non-business that certifies you were paid a particular amount for the 2009-10 income from which tax was withheld.

Another article again on the same website later declared two new partners were appointed.

No part of the payments paid to you by the employer were in lieu of superannuation benefits.

As a permanent employee you would have ordinarily ceased employment at 65 years of age under the terms and conditions of your employment with the employer.

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

You would have normally only been entitled to receive four weeks notice and were expected to work during that period, as well as your statutory leave entitlements, if you had resigned voluntarily at any other time.

You and the employer were dealing at arm's length in respect of the termination of your employment.

You have provided an email from a former director of the employer, in support of your application that states your position was redundant.

You provided an article by a commentator again from the same website stating you were made redundant.

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 Subsection -130(2).

Income Tax Assessment Act 1997 Section 82-135.

Income Tax Assessment Act 1997 Section 82-140.

Income Tax Assessment Act 1997 Section 82-145.

Income Tax Assessment Act 1997 Section 82-155.

Income Tax Assessment Act 1997 Subsection 83-80(1).

Income Tax Assessment Act 1997 Subsection 83-85(1).

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 Section 995-1.

Reasons for decision

These reasons for decision accompany the Notice of private ruling.

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

Summary

The payment is assessable as the taxable component of your employment termination payment. No amount of the payment received on termination of employment represents a tax-free genuine redundancy payment.

Your unused long service leave and unused annual leave accrued after 18 August 1993 and it is to be included in your assessable income and subject to tax at your marginal rate of tax.

Detailed reasoning

Employment termination payment

Payments made in consequence of the termination of a taxpayer's employment are known as employment termination payments. Where the payment is made during the life of a taxpayer the employment termination payment will be known as a life benefit termination payment (subsection 82-130(2) of the ITAA 1997).

Section 995-1 of the 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) 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 three conditions listed above.

The first condition subparagraph 82-130(1)(a)(i) of the ITAA 1997 requires that the payment received by you is made in consequence of the termination of your employment.

In this case, as detailed in the employer's letter, as a result of the termination of your employment you were to receive certain payments. These payments would not have been made if there was no termination of employment therefore the first condition is satisfied.

The payment is received no later than 12 months after termination

The condition in paragraph 82-130(1)(b) of the ITAA 1997 is that the employment termination payment is paid to the taxpayer no later than 12 months after the taxpayer's employment was terminated. The payments were made in consequence of the termination of your employment and were paid in the same month as the termination. This condition has therefore been satisfied.

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

Paragraph 82-130(1)(c) of the ITAA 1997 precludes any payments listed in section 82-135 of the ITAA 1997. 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 tax free part of a genuine redundancy payment or an early retirement scheme payment.

The termination letter provides for a number of separate payments. The leave payments and the salary payment are precluded from employment termination payments because they are normal statutory entitlements.

However, relevant to your application is whether any part of the other payment represents the tax free part of a genuine redundancy payment.

Genuine redundancy payment

A payment made to an employee 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 your employment conditions if you had resigned voluntarily you would have been paid and worked your four weeks notice period. You were, in this case, paid for the four weeks prior to your termination but were absent from work at the direction of the employer.

As stated above, the one payment in those listed in your termination of employment letter that you would not normally receive on resignation was the four months salary in lieu of notice.

Dismissal and redundancy

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 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.

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

Each of the requirements will be discussed individually.

The payment is in consequence of the termination of employment

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

Dismissal from employment

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

In this case, you were dismissed from employment by the employer after prior discussions and notice of the impending termination. This is confirmed in the letter from the employer which advised you that your employment termination was effective from that day.

As you were dismissed from employment by the employer, the second requirement of a genuine redundancy has been met.

Dismissal caused by redundancy

Section 83-175 of the ITAA 1997 requires that the dismissal be caused by redundancy of the employee's position and not for some other reason. Redundancy must be the primary reason for termination of employment by way of dismissal.

At paragraphs 25 of TR 2009/2, the Commissioner makes the following comments regarding dismissal and redundancy:

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 of the employer's operations.

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) 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.

As a general rule, employers determine whether an employee's position has been made redundant and then tax the payment accordingly. In your case, the payment summaries you have received indicate the employer has not treated this payment as a genuine redundancy payment.

You have provided an email from a former director, who states you were made redundant. However, the former director has not had the authority to comment on the actions of the employer for a number of months.

You also provided an article written by a commentator on a website that states you were made redundant. It should be noted that it does not state your position was made redundant.

However, other articles on the same website state two partners left and two partners were promoted. One commentator in an article wrote the employer confirmed two partners had left recently and then the same author later stated two new partners had been promoted. This would imply the duties you were previously performing were still required to be performed by someone, that is, your position was not redundant.

Therefore, these articles on the same website contradict each other and in any case cannot be an authoritive statement on whether your position was made redundant.

As a result, the third requirement to confirm there has been a dismissal because of a redundancy cannot be 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.

Tax Treatment of the payment as a Life Benefit Termination Payment (LBTP):

An employment termination payment will be comprised of the following components:

· Tax fee component this includes the post-June 1994 invalidity or pre-July 83 component (if any), and

· Taxable component is the amount remaining after deducting the tax free component from the total payment.

As the period of employment to which the payment relates occurred after 1 July 1983, the LBTP does not have a pre-July 83 segment within the meaning of section 82-155 of the ITAA 1997.

As the payment does not contain a pre-July 83 segment within the meaning of section 82-155 of the ITAA 1997, the LBTP does not have a tax-free component as provided for in section 82-140 of the ITAA 1997. The LBTP in excess of the tax-free ($0.00) component is a taxable component of an employment termination payment as defined in section 82-145 of the ITAA 1997.

The taxable component is subject to tax, depending on the person's age, as follows:

Preservation age is the age at which retirees can access their superannuation benefits. This will be 55 for persons born before 1 July 1960 and between 55 and 60 for persons born after 30 June 1960.

As you have not reached preservation age, the tax on the taxable component is calculated as follows:

Up to $150,000 taxed at a maximum rate of 30%.

Amount over $150,000 taxed at top marginal tax rate plus Medicare levy.

The $150,000 cap on concessionally taxed employment termination payments is indexed annually to average weekly ordinary time earnings.

The taxable components of all life benefit employment termination payments received in an income year are counted towards this cap. Any tax-free amounts are not counted towards the cap.

Unused annual leave and long service leave payments on termination of employment

When your employment is terminated, you may receive lump sum payments for:

· unused annual leave (including leave loading), and/or

· unused long service leave.

How these payments are taxed will generally depend on when the relevant leave was accrued and the reason for the termination of employment.

Unused long service leave and unused annul leave that accrued on or after 18 August 1993

Unused long service leave and unused annual leave that accrued on or after 18 August 1993 is included in your assessable income (subsection 83-80(1) of the ITAA 1997) and is subject to tax at your marginal rate of tax. This amount is shown as part of your salary and wages on the PAYG payment summary.

However, where the payment is made in conjunction with a payment that includes a genuine redundancy payment, then a tax offset applies to ensure that the rate tax applicable on this amount does not exceed 30% (subsection 83-85(1) of the ITAA 1997). This amount is shown at Label A on the PAYG payment summary.

In your case, there is no genuine redundancy payment and therefore your unused long service leave and unused annual leave that accrued on or after 18 August 1993 is included in your assessable income and is subject to tax at your marginal rate of tax.