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Ruling

Subject: Employment termination payment - Genuine redundancy

Questions

Is any part of the payment received by you considered to be a genuine redundancy payment in accordance with section 83-175 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Advice/Answers

Yes.

This ruling applies for the following period

Year ending 30 June 2010

The scheme commenced on

1 July 2009

Relevant facts

You were employed by the Employer.

You received a letter from the Employer stating that it had lost a contract relevant to your employment and that it intended to relocate you to an alternative position if possible.

Subsequently, you received another letter from the Employer stating that it had not found you an alternative position and that your employment was to be terminated in the 2009-10 income year.

You had completed 10 years of service at the time of the termination of your employment.

You were dismissed from your role before you were 65 years of age.

You lodged an application for unlawful termination with the relevant authority which was subsequently settled by a deed of release (the Deed).

The Deed states that the payment is made to you to settle the unlawful termination matter and in consideration of you not pursuing allegations in respect of the termination of your employment.

In accordance with the Deed, you received a payment (the Payment) in the 2009-10 income year.

No part of the Payment was received by you in lieu of superannuation benefits.

There was no arrangement (written, verbal or implied) between you and the Employer or between the Employer and another person, to employ you after the dismissal and the agreement to reemploy you arises after the termination of your employment.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 27F

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 83-175(2)

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

Income Tax Assessment Act 1997 Subsection 83-175(4)

Reasons for decision

Summary

In this case as all conditions have been satisfied the Payment made to you is a genuine redundancy payment. As the Payment is below your tax-free amount, in respect of the genuine redundancy of this employment, the Payment is not assessable income and is not exempt income.

Detailed reasoning

Genuine redundancy payment

A payment made to an employee is a genuine redundancy payment if it satisfies all the criteria set out in section 83-175 of the Income Tax Assessment Act 1997 (ITAA 1997).

Under subsection 83-175(1) of the ITAA 1997, four criteria must be satisfied:

· The payment must be received in consequence of a 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.

Payment is made in consequence of the termination of employment

In Taxation Ruling TR 2003/13 (TR 2003/13) the Commissioner considered the meaning of the phrase 'in consequence of' as interpreted by the Courts.

In paragraph 5 of TR 2003/13 the Commissioner states:

A payment is made in respect of a taxpayer in consequence of the termination of the employment of the taxpayer if the payment follows as an effect or result of the termination. In other words, but for the termination of employment, the payment would not have been made to the taxpayer.

As further stated by the Commissioner in paragraph 6 of TR 2003/13, there must be:

A causal connection between the termination and the payment, although the termination need not be the dominant cause of the payment. The question of whether a payment is made in consequence of the termination of employment will be determined by the relevant facts and circumstances of each case.

The Employer advised you that it had lost a contract and indicated that it intended to relocate you to an alternative position if possible.

Subsequently, the Employer stated that it had not found you an alternative position and that your employment was to be terminated effective in the 2009-10 income year.

You then lodged an application for unlawful termination, which was settled with a Deed of Release/Agreement.

The Deed states that the payment is made to you to settle the unlawful termination matter and in consideration of you not pursuing allegations in respect of the termination of your employment.

In accordance with the deed, you received a payment (the Payment) in the 2009-10 income year.

Therefore, it is considered that the Payment made to you was made in consequence of the termination of your employment. The Deed of Release/Agreement, termination of employment and the Payment are all intertwined and connected. If not for the termination of employment, the Payment would not have been made.

Dismissal and Redundancy

The Explanatory Memorandum to the Income Tax Assessment Amendment Act (No.3) 1984 which inserted former section 27F, which dealt with bona fide redundancy payments, into the Income Tax Assessment Act 1936 ( 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.'

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.

The Commissioner has issued Taxation Ruling TR 2009/2 Income Tax: genuine redundancy payments (TR 2009/2) which provides guidance on the factors to be considered in the interpretation of section 83-175 of the ITAA 1997.

Paragraph 18 of TR 2009/2 discusses 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.

A payment is classified as a genuine redundancy payment only 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 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, your role with the Employer was made redundant as the Employer had lost a contract. The Employer made the decision to terminate your employment without your consent. It is considered that you have been dismissed from your employment because your role with your employer has been made genuinely redundant. Therefore, subsection 83-175(1) of the ITAA 1997 has been satisfied.

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.

This condition is satisfied as you were dismissed from your role before you were 65 years of age.

The second condition requires that if the dismissal were not at arm's 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.

This condition does not apply as the dismissal was made 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.

This condition is satisfied as, at the time of dismissal there was no arrangement (written, verbal or implied) between you and the Employer or between the Employer and another person, to employ you after the dismissal and the agreement to reemploy you arises after the termination of your employment.

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.

In this case, this condition is satisfied as no part of the Payment was received by you in lieu of superannuation benefits.

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)). Section 82-135 of the ITAA 1997 includes (among others):

Ÿ superannuation benefits;

Ÿ the payment of a pension or annuity; and

Ÿ unused annual leave or long service leave payments.

This condition is satisfied as the Payment is not a payment mentioned in section 82-135 of the ITAA 1997 (apart from paragraph 82-135(e)).

Tax-free amount

So much of the genuine redundancy payment that does not exceed the amount worked out using the prescribed formula is not assessable income and is not exempt income. The formula for working out the tax-free amount is:

Base amount + (Service amount x Years of service)

For the 2009-10 income year:

Base amount means $7,732;

Service amount means $3,867; and

Years of service means the number of whole years in the period, or sum of periods, of employment to which the payment relates.

Conclusion

In this case all the conditions in section 83-175 of the ITAA 1997 have been satisfied and the Payment made to you is a genuine redundancy payment. As the Payment is below the tax-free amount of a genuine redundancy payment, the entire payment is not assessable income and is not exempt income.