Edited version of private ruling

Authorisation Number: 1011739418035

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Ruling

Subject: Genuine redundancy payment

Question

Is any part of the payment received on termination of employment exempt from tax as a genuine redundancy payment?

Answer:

No

This ruling applies for the following period

Year ending 30 June 2010

The scheme commenced on

1 July 2010

Relevant facts and circumstances

You commenced employment with the employer a number of years ago.

You were employed in an executive position (the position) with the employer.

You were employed under an employment contract, having previously been appointed to the position in an interim capacity.

You attended a meeting with the Chief Executive Office (CEO) of the employer to discuss alleged performance issues related to the duties and responsibilities set out in your contract of employment.

At the meeting the CEO formally raised particular issues with you relating to suspected alleged misconduct and performance issues..

You and the employer subsequently entered into a Deed of separation and release (the Deed).

The Deed stated that the employer had discussed performance concerns with you.

Your employment was terminated during of the 2009-10 income year.

According to a PAYG payment summary - employment termination payment, you received an employment termination payment within a month of your termination of employment. The payment comprised a taxable component and a tax-free component. Tax was withheld from that employment termination payment.

Your PAYG payment summary - individual non-business shows an amount at lump sum A (unused annual and long service leave).

You state that your former position was abolished at the time of your termination of employment, with a Director taking over many of your functions.

Copies of the employer's organisation structure charts from the employer's website show that:

· you occupied the position prior to your unofficial termination of employment,

· the position was listed as vacant shortly after the official termination of your employment, and

· the position was still listed as vacant several months after the official termination of your employment).

You advised that the employer has recently refilled your position.

You are under 55 years of age.

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 Section 82-135

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 Section 995-1

Reasons for decision

Summary of decision

The settlement payment is an employment termination payment as:

· it was made in consequence of the termination of your employment

· it was received within 12 months of the termination of your employment

· it is not payment which is excluded from being an employment termination payment.

Your former position was not abolished immediately after the termination of your employment, and was still listed as vacant several months later. Your employer has now refilled your position.

Accordingly, the settlement payment does not include a tax-free genuine redundancy payment as it is considered that the prevailing, or most influential, cause of the termination of your employment was not redundancy.

Detailed reasoning

For an employment termination payment to be considered a genuine redundancy payment, the requirements under section 83-175 of the Income Tax Assessment Act 1997 (ITAA 1997) need to be satisfied.

Employment termination payment

Payments made in consequence of the termination of a taxpayer's employment are known as employment termination payments, in accordance with section 82-130 of the ITAA 1997.

For a payment to be an employment termination payment, it must be received by you either:

· in consequence of the termination of your employment; or

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

· it must both:

o be received by you no later than 12 months after the termination of your employment; and

o not be a payment mentioned in section 82-135 of the ITAA 1997.

In your particular case, the Deed of separation and release (the Deed), entered into between yourself and the employer, agreed that you would resign from your employment and your employment records with the employer would reflect that resignation.

On terminating your employment in accordance with the Deed, you became entitled to be paid a settlement amount. A PAYG payment summary - employment termination payment shows that the taxable component was made in consequence of the termination of your employment.

The payment would not have been made if the termination of employment had not occurred. The termination of employment, the Deed and the settlement payment are all intertwined and connected. If not for the termination of employment, the issue of making this payment would not have arisen. Consequently it is considered that this payment was made in consequence of the termination of your employment.

The facts also show that the employment termination payment was received within 12 months of the termination of your employment.

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. Certain clauses of the Deed indicated that your accrued leave entitlement did not form part of the settlement payment. In this respect, your PAYG summary - individual non-business shows that your unused leave entitlements were paid out separately.

With the exception of whether any part of the payment represents the tax-free part of a genuine redundancy payment, none of the other payments mentioned in section 82-135 applies to your payment.

Genuine redundancy payment

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. The payment must exceed 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 (subsection 83-175(1) 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 the payment was referred to as a bona fide redundancy payment.

To qualify as a genuine redundancy payment all of the conditions under section 83-175(2) of the ITAA  1997 must be met. The conditions include:

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

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 applicable).

(b) if the dismissal was not at arm's length the payment must not exceed the amount that could reasonably be expected to be made if the dismissal was 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.

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 of the payment or at a later time.

Dismissal and redundancy

The first condition is that the taxpayer is dismissed from employment because the taxpayer's position is genuinely redundant.

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:

There are four necessary components within the basis of genuine redundancy requirement:

(1) The payment being tested must be received in consequence of a termination.

(2) That termination must involve an employee being dismissed from employment.

(3) That dismissal must be caused by the redundancy of the employee's position.

(4) 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

The issue of whether the payment was made in consequence of your termination of employment was discussed above. It was determined that the payment was made in consequence the termination of your employment. Therefore the requirement that the payment must be received in consequence of a termination has been met.

Dismissal from employment

Dismissal carries with it the concept that the termination of a person's employment is normally involuntary and instigated by the employer. Consequently, resignation by the employee would not, ordinarily, be considered a dismissal.

Dismissal however, can include the notion of constructive dismissal where an employee is placed in a situation where he or she has little option but to tender his or her resignation. It should be noted that constructive dismissal, as with other forms of dismissal, does not in its own right indicate that a genuine redundancy has taken place.

In this case, you were not dismissed from employment by the employer in any ordinary sense but by mutual agreement, as documented in the Deed.

However, you contend that the termination was a constructive dismissal as the manner in which the termination came about left you with little other option.

In respect of the employer's citing of 'performance concerns', the Commissioner of Taxation administers the tax laws and in doing so applies the facts and evidence as presented to him. Whether any employee performs to the satisfaction of their employer is not an issue that the Commissioner can determine but one that only the employer can decide.

In this case, no document originating from the employer has been provided evidencing the exact nature and extent of these concerns. While a Recital  in the Deed evidences that the employer had concerns about your performance, the only details come from your record of the meeting in a letter to your union (the Letter). Nevertheless, in the Letter you admit to not meeting your employer's expectations over the period of your current contract.

However, without further details it is not possible to make any judgment as to whether those expectations were reasonable. In this regard it is noted that you stated in the Letter that you believed that loss of staff in your area and little management support had made meeting required timeframes difficult.

It is also your belief that the dismissal was partly in retaliation to a complaint you had lodged against certain staff of the employer and in addition raised performance measures as a way of forcing termination. In the Letter you state that your complaint was raised in your meeting with the CEO, but that the CEO stated that this had no bearing on the performance matters.

While a person's decision to accept an employer's offer of termination of employment would certainly be influenced by the circumstances you described, this alone does not automatically mean that the person had no choice but to resign.

In this case the employer's offer was open for a few days, giving you time to consider the terms proposed. Further, you made the decision to negotiate a better offer before agreeing to terminate your employment as it was in your best interests to do so.

However, regardless of whether you were dismissed from your employment, this does not mean that you were also made redundant.

The Administrative Appeals Tribunal (AAT) in AAT Case 12,997 (1998) 39 ATR 1073; (1998) 98 ATC 183, considered a payment received by a taxpayer was to be treated as a bona fide redundancy payment not solely due to the taxpayer having been constructively dismissed but also due to their job having been abolished.

Dismissal caused by genuine redundancy

As stated by the Commissioner in paragraph 23 of TR 2009/2, section 83-175 of the ITAA 1997 requires that the dismissal be caused only by redundancy of the employee's position, and not for some other reason. It follows, therefore, that redundancy must be the reason for termination of employment by way of dismissal.

In paragraphs 24, 25, 28and 29 of TR 2009/2, the Commissioner states the following regarding dismissal and 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 of the employer's operations… [Emphasis added]

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.

29. In some cases, an employer may decide to reorganise or restructure their organisation at the same time as identifying underperformance of particular members of staff or areas within the existing organisational structure. In the event that employees are dismissed in these circumstances, careful consideration will need to be given to what was the prevailing or most influential cause of 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 employers 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 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.

It is evident from the above that if the prevailing or most influential cause of termination was not redundancy, notwithstanding that the position occupied by a dismissed employee may have been abolished, the dismissal would not constitute a redundancy.

In your case, you state that your employer had a planned restructure of its operation and management. However, you have not provided any evidence to corroborate this. Your employer may be in the process of restructuring their business however there is no indication that the restructure of the organisation lead to your position being made redundant.

You further state that you are aware that your former supervisor took over your duties after the termination of your employment.

However, the fact that your former position was not immediately advertised or refilled after your termination would not necessarily imply that the position was made redundant. In this context, it is not considered unreasonable for the employer to distribute your former duties and responsibilities to existing employees until another suitable employee is found to take on those responsibilities.

From the evidence available, the former position held by you, albeit vacant, still existed after the termination of your employment. Accordingly, it has not been conclusively established that the dismissal was the result of redundancy.

Despite the claim made by you that your position was abolished at the time of your termination of employment with the employer, the organisation structure charts of the employer show that:

· you occupied the position prior to your unofficial termination of employment,

· the position was vacant after the official termination of your employment, and

· the position was still vacant several months after the termination of your employment.

Consequently, it is considered that your former position has not been made redundant as:

· the position appeared on organisational charts dated over six months after your employment was terminated;

· you stated that the work previously undertaken by you in that position was still being done by another employee; and

· your former position has recently been filled.

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.

Neither your account of the meeting with the CEO nor the Deed indicates that your termination of employment was on account of a genuine redundancy.

Given the above, it is considered that the prevailing, or most influential, cause of the termination of your employment was not redundancy. The fact that the employer may have subsequently decided to abolish or refill the position you formerly occupied does not change this.

On this basis, it is not considered that you were dismissed as a result of your position being made redundant.

Consequently, it is not necessary to examine whether the remaining requirements under subsection 83-175(2) have been satisfied.

Conclusion

No part of the payment is a genuine redundancy payment under section 83-175 of the ITAA 1997. The payment is an employment termination payment under subsection 82-130(1) and should be included in your income tax assessment in the 2009-10 income year.

The payment is not a genuine redundancy payment. Therefore, no part of the payment will be exempt under section 83-175 of the ITAA 1997.