Edited version of private ruling

Authorisation Number: 1011751378096

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Ruling

Subject: Employment termination payment - redundancy

Issue 1

Questions

1. Is any portion of the payment made to you on termination of employment, a tax free amount of a genuine redundancy payment (GRP) in accordance with section 83-170 of the Income Tax Assessment Act 1997 (ITAA 1997)?

2. Is any part of the termination payment, in excess of the tax free amount of a genuine redundancy payment, a transitional termination payment as defined in section 82-10 of the Income Tax (Transitional Provisions) Act 1997 (IT(TP)A)?

3. Can any part of an amount to be awarded by a court or tribunal in respect of a breach of the Fair Work Act 2009 be a transitional termination payment?

Advice/Answers

1. Yes.

2. No.

3. No.

Issue 2

Question

Is superannuation guarantee payable on the payment made to you in lieu of notice?

Advice/Answer

A private ruling cannot be given on superannuation guarantee payments, however general advice is given.

This ruling applies for the following period

For the year ended 30 June 2011

The scheme commenced on

1 July 2010

Relevant facts

An employer (the employer) has confirmed that you commenced employment with them a number of years ago.

For more than 10 years, your role with the employer has been in a management position.

You have advised that your position continued without break on a series of renewals and extensions of contracts until your employment was terminated.

You have provided copies of the three most recent employment agreements made between yourself and the employer, the term of each is stated to run for a specified period.

In a letter dated late 2009, an offer of employment in a management position with the employer was made to you. Upon acceptance of the offer you were required to sign an agreement (the 2010 Agreement) which details the terms and conditions of your employment with the employer. The 2010 Agreement would commence after the previous agreement ended and runs for a specified period, unless otherwise terminated in accordance with the Agreement.

The 2010 Agreement allows either party to terminate the employment on the provision of a specified period of notice in writing and that the employer may substitute payment in lieu of part or all of the period of notice of termination.

Furthermore, the 2010 Agreement refers to a redundancy payment where your position is declared redundant and you are entitled to either a number of weeks' pay for each completed year of service with the employer or a payment in accordance with relevant industrial law, whichever is the greater amount.

The 2010 Agreement, states that it:

· contains the entire agreement between the parties

· all previous negotiations and understandings are superseded by this document and can no longer be relied on.

· no oral explanation or information will:

· affect the meaning of the agreement; or

· be an additional agreement or understanding of your employment conditions.

The employer advised that due to structural changes your position was made redundant, and that a redundancy package would be paid to you.

Subsequently, in the 2010-11 income year, you were paid a termination payment which included a tax free amount in respect of genuine redundancy.

In addition to the redundancy payment, other entitlements were paid to you on the termination of your employment such as payment in lieu of notice, accrued annual leave and long service leave.

The relevant Payment Advice shows you were paid an employment termination payment, unused leave and a tax free redundancy amount and had an amount of tax withheld.

In an undated letter replying to your email of early 2011, a representative of the employer addressed a number of issues you raised in respect of the termination of your employment. It is clear from this letter that the employer had not at that time entered into any arrangement with you, or another entity, to employ you after the termination date.

You are seriously contemplating taking action against the employer in respect of the termination of your employment.

You are under the age of 55 years.

Reasons for decision

Issue 1

The payment is considered to be a genuine redundancy payment, and includes a tax free amount.

The portion of the payment in excess of the tax free amount is the taxable component of an employment termination payment and is to be included in your assessable income for the 2010-11 income year.

The amount in excess of the tax free limit of the genuine redundancy payment made in relation to the agreement is not a transitional termination payment.

As the payment is not a transitional termination payment is cannot be directed to a superannuation fund.

As you are under your preservation age, and the employment termination payment is less than the ETP cap amount of $160,000 for the 2010-11 income year, a tax offset will apply to ensure that the taxable component is taxed at no more than 30% plus Medicare levy.

A directed termination payment must be paid directly by the employer to a complying superannuation fund.

Detailed reasoning

Under section 82-130 of the Income Tax Assessment Act 1997 (ITAA 1997), a life benefit termination payment is an employment termination payment received by a person in consequence of the termination of the person's employment.

Certain payments, however, are excluded from being employment termination payments under section 82-135 of the ITAA 1997, including the tax free amount of a genuine redundancy payment.

Genuine redundancy payment

To determine if any part of the employment termination payment you received from the employer constitutes a GRP, all the conditions in section 83-175 of the ITAA 1997 will need to be satisfied.

Where a payment is made to an employee after 30 June 2007, a GRP is defined in subsection 83-175(1) of the ITAA 1997 as:

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 the dismissal.

Subsection 83-175(2) of the ITAA 1997 states that for a payment to qualify as a GRP all of the following conditions must be met:

· the employee is dismissed before the earlier of the following:

· the day he or she turned 65;

· 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 the case may be);

· 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;

· 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.

In addition, subsection 83-175(3) of the ITAA 1997 provides that a GRP 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. In addition, subsection 83-175(4) provides that a payment is not a GRP if it is a payment mentioned in section 82-135.

The Commissioner has issued Taxation Ruling TR 2009/2 (TR 2009/2) which outlines the Commissioner's view of the requirements to be satisfied for a payment to qualify as a genuine redundancy payment under section 83-175 of the ITAA 1997.

It is proposed to examine each of these conditions.

The requirement under subsection 83-175(1) of the ITAA 1997

The first requirement which is specified in subsection 83-175(1) of the ITAA 1997 has three conditions:

· the payment is received by an employee who is dismissed from employment;

· the employee is dismissed because the employee's position is genuinely redundant; and

· the payment 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 the dismissal.

Dismissal from employment

The first condition is that there has been a dismissal from employment, which usually means that the termination of employment is involuntary on the part of the employee concerned and is instigated by the employer.

According to the facts, your employment was terminated by the employer as your position was no longer required, due to decisions made by the employer to change management structure and removal of the specific management positions.

The termination of your employment is clearly a dismissal for the purposes of subsection 83-175(1) of the ITAA 1997, because your employment was terminated at the instigation of the employer. Therefore, it is considered that you have satisfied the first condition under subsection 83-175(1) in this instance.

Genuine redundancy

Having established that there was a dismissal from employment for the purposes of subsection 83-175(1) of the ITAA 1997, the next condition that needs to be considered is whether you were dismissed because your position is genuinely redundant.

Redundancy is a situation where the dismissal of an employee is not caused by any consideration peculiar to the employee. Redundancy does not extend to a situation where an employee is dismissed for personal or disciplinary reasons or because the employee was inefficient, but rather because an employer no longer requires employees to carry out work of a particular kind or to carry out work of a particular kind at the same location.

At paragraph 27 of TR 2009/2 it states:

… if an employer decides after downsizing or some other structural reorganisation to terminate an employee, the former position of the employee is redundant as long as the downsizing or reorganisation is the prevailing or most influential cause of the termination.

You were advised that due to the structural changes made by the employer specific positions were redundant.

Furthermore, the employer has confirmed that your position was made redundant and that you received a redundancy package in the 2010-11 income year.

The termination of your employment was not on account of any personal act or default on your part, and was not due to the ordinary and customary turnover of labour. Rather the employer no longer required anyone to perform the job you had been doing. Therefore the employer's decision to terminate your employment is due to a redundancy.

Accordingly, it is considered that you have also satisfied the second condition under subsection 83-175(1) of the ITAA 1997 in this instance.

The payment exceeds what you would have received in consequence of the voluntary termination of your employment at the time of your dismissal

The third condition that needs to be considered is whether the payment exceeds the amount that you could reasonably be expected to receive in consequence of the voluntary termination of your employment will be treated as a genuine redundancy payment.

The Commissioner considers that it is necessary to show how the amount an employee is entitled to be paid exceeds the amount that is payable to employees who voluntarily terminate their employment.

Paragraphs 61 to 63 of TR 2009/2 state:

61. It would generally be expected that a greater amount would be paid on redundancy than voluntary termination. This recognises the purpose of redundancy payments, being primarily to compensate for loss of non-transferable entitlements (for example accrued sick leave and accrued long service leave prior to 10 years service) and the peculiar hardship associated with being made redundant.

62. Contractual or other entitlements payable by an employee on voluntary termination are generally a sound guide as to what might reasonably be expected …

63. There may be industry norms that could be used as a guide as to what payments would be made on voluntary termination …

Had you resigned or retired from employment, you were only entitled to be paid your accrued annual leave and long service leave.

According to the facts, you received a redundancy payment as well as your unused leave. It is accepted that this redundancy payment exceeds the amount you could reasonably expect to receive if you had resigned or retired from employment in the position you held at the time of the dismissal.

The payment was made on termination of your employment due to your role being abolished. The payment is paid in circumstances of genuine redundancy, and is in excess of the amount that could reasonably be expected to be received by a worker in consequence of voluntary termination.

Therefore, it is considered that you have satisfied the third condition under subsection 83-175(1) of the ITAA 1997.

You were dismissed as a result of a genuine redundancy

All the conditions stipulated in subsection 83-175(1) of the ITAA 1997 have been satisfied.

Consequently it is considered that the amount was paid to you because you were dismissed from employment as your position was made genuinely redundant. However, a GRP must also satisfy the conditions in subsections 83-175(2) to 83-175(4) of the ITAA 1997.

The requirements under paragraphs 83-175(2)(a) and (b) of the ITAA 1997

As previously noted, paragraph 83-175(2)(a) of the ITAA 1997 prescribes that the employee must be dismissed before the earlier of:

· the day he or she turned 65; or

· 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).

Under the terms of the 2010 Agreement the duration of your employment was to continue for a specified period, unless terminated earlier in accordance with the agreement. Further, you were under 65 years of age at the time of your dismissal. Accordingly, as the termination of your employment occurred before the stated termination date of 2010 Agreement, you have satisfied the conditions of paragraph 83-175(2)(a) of the ITAA 1997.

Additionally, from the facts of this case it is accepted that all dealings between you and the employer were at arm's length. Therefore it follows that you have also satisfied the condition under paragraph 83-175(2)(b) of the ITAA 1997.

The requirement under paragraph 83-175(2)(c) of the ITAA 1997

Paragraph 83-175(2)(c) of the ITAA 1997 requires that 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.

A letter from a representative of the employer addressed a number of issues you raised in respect of the termination of your employment. It is clear from this letter that the employer had not at that time entered into any arrangement with you, or another entity, to employ you after your termination date. Therefore, it is accepted that you have satisfied the condition under paragraph 83-175(2)(c) of the ITAA 1997 in this case.

The requirements under subsections 83-175(3) and 83-175(4) of the ITAA 1997

Subsection 83-175(3) of the ITAA 1997 provides that a GRP does not include any part of a payment that is received in lieu of superannuation benefits. The facts show that no part of your payment was made to you in lieu of superannuation benefits. Therefore it is accepted that the condition under subsection 83-175(3) is satisfied.

Subsection 83-175(4) of the ITAA 1997 provides that a payment is not a GRP if it is a payment mentioned in section 82-135 (other than a GRP or early retirement scheme payment).

Section 82-135 of the ITAA 1997 includes payments such as pensions, unused annual leave and unused long service leave.

An examination of the redundancy payment made to you shows that the condition in subsection 83-175(4) of the ITAA 1997 has been satisfied.

A GRP under sections 83-170 and 83-175 of the ITAA 1997:

Because you have satisfied all the conditions set out in section 83-175 of the ITAA 1997, it is considered that the amount constitutes a GRP for the purposes of section 83-170.

Tax free treatment of a GRP

Subsection 83-170(2) of the ITAA 1997 provides that so much of the GRP that does not exceed the amount worked out using the formula prescribed in subsection 83-170(3) is not assessable income and is not exempt income. Any amount in excess of the tax free amount is taxed as a life benefit employment termination payment. The formula for working out the tax free amount is:

Base amount + (Service amount x Years of service)

Your dismissal occurred during the 2010-11 income year, therefore the base amount will be $8,126 and the service amount will be $4,064. Therefore, the tax free amount calculated in accordance with subsection 83-175(3) of the ITAA 1997, is the tax free part of a GRP you can receive in the 2010-11 income year.

The tax free amount of the redundancy payment is not assessable income and is not exempt income under subsection 83-170(2) of the ITAA 1997.

After deducting the tax free amount of the redundancy payment the remaining amount is a taxable component of a life benefit employment termination payment.

Tax Treatment of the employment termination payment

An employment termination payment made on or after 1 July 2007 will be comprised of the following components:

Tax free component this includes the pre-July 83 segment (if any) and/or the invalidity segment (if any); and

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

In your case, there is no tax free component.

Therefore after deducting the tax free amount the remaining amount is the taxable component of the employment termination payment and is to be included in your assessable income for the 2010-11 income year (subsection 82-10(2) of the ITAA 1997).

The taxable components of all life benefit employment termination payments received in an income year, or in respect of the same termination of employment, are counted towards your ETP cap amount.

Any tax free amounts are not counted towards the cap.

In this case, the taxable component of your employment termination payment is under the ETP cap amount of $160,000 for the 2010-11 income year.

Consequently, as you are under your preservation age the amount will be taxed at 30% plus Medicare levy.

Please note, however, that receipt of a further employment termination payment, either before 30 June 2011 or in a future year in respect of the termination of your employment by the employer (such as a court ordered settlement) will be measured against your remaining ETP cap amount.

Payments in excess of the ETP cap amount are taxed at 46.5%.

Transitional termination payment

A life benefit termination payment made between 1 July 2007 and 30 June 2012 may be a transitional termination payment under section 82-10 of the Income Tax (Transitional Provisions) Act 1997 (IT(TP)A).

Under subsection 82-10(1) of the IT(TP)A, a life benefit termination payment received on or after 1 July 2007 is a transitional termination payment in the following circumstances:

(a) the payment is received by you because you are entitled to it under a written contract, a law of the Commonwealth, a State, a Territory or another country, an instrument under such a law, a collective agreement within the meaning of the Fair Work (Transitional Provisions and Consequential Amendments) Act 2009 or an AWA within the meaning of that Act; and

(b) the entitlement is provided for under that contract, law, instrument or agreement as in force just before 10 May 2006.

In this case, you commenced employment a number of years ago with the employer, under workplace employment agreements. For more than 10 years, your role with the employer has been in a management position.

An offer of employment in a management position was made to you by the employer. Upon acceptance of the offer you were required to sign an Agreement (the 2010 Agreement) which details the terms and conditions of your employment with the employer and would commence on in the 2010-11 for a specified period unless otherwise terminated in accordance with the Agreement.

You signed the 2010 Agreement formally acknowledging acceptance of the offer.

The 2010 Agreement contains your conditions on termination of employment and severance entitlements on redundancy, as outlined in specific clauses to the Agreement, which applies from it's commencement in the 2010-11 income year.

The 2010 Agreement, states that it:

· contains the entire agreement between the parties

· all previous negotiations and understandings are superseded by this document and can no longer be relied on.

· no oral explanation or information will:

· affect the meaning of the agreement; or

· be an additional agreement or understanding of your employment conditions.

This clearly indicates that it is the intention of the parties to the 2010 Agreement that this Agreement was a new contract of employment which superseded and replaced the previous employment agreement which had ended.

Notwithstanding the fact that your entitlements under the 2010 Agreement are similar to those in the agreement which commenced before 10 May 2006, the life benefit termination payment was paid under the relevant provisions of the new agreement that was first entered into on or after 10 May 2006.

Hence, as the payment was not made under an agreement in force just before 10 May 2006, it is not a transitional termination payment.

Consequently, all the conditions under section 82-10 of the IT(TP)A have not been satisfied. The amount in excess of the tax free amount of the genuine redundancy payment made to you under the 2010 Agreement is not a transitional termination payment as defined in section 82-10.

Directed termination payment

Section 82-10F of the IT(TP)A states:

(1) A transitional termination payment (or part of such a payment) is a directed termination payment if:

(b) the individual chooses, in accordance with this section, to direct the payment (or part of the payment) to be made; and

(b) the payment (or part of the payment) is made on the individual's behalf as directed.

In other words, to be a directed termination payment:

· the amount you receive must be a transitional termination payment; and

· you must choose to direct the payment; and

· the employer must make the payment as you direct.

As discussed above, the employment termination payment you received pursuant to the 2010 Agreement is not a transitional termination payment as defined in section 82-10 of the IT(TP)A.

Therefore, as the payment is not a transitional termination payment, you can not request the employer to direct the payment to a complying superannuation fund.

Please note, that as one of the conditions of a directed termination payment is that the employer makes the payment as directed, an employee may not 'direct' the payment from their own bank account. The payment must go directly from the employer to the employee's complying superannuation fund.

Conclusion

The portion of the payment in excess of the tax free amount, is the taxable component of the employment termination payment and is to be included in your assessable income for the 2010-11 income year.

It is neither a transitional termination payment nor a directed termination payment.

Issue 2

The Commissioner cannot provide a ruling on the operation of the superannuation guarantee, as it is not a relevant provision under section 357-55 of Schedule 1 to the Taxation Administration Act 1953. Relevant provisions include income tax, fringe benefits tax, withholding tax and the Medicare levy.

However, we offer the following general advice which, is not binding on the Commissioner.

Superannuation guarantee

The Commissioner has issued Superannuation Guarantee Ruling SGR 2009/2 entitled 'Superannuation guarantee: meaning of the terms 'ordinary time earnings' and 'salary and wages' (SGR 2009/2) which explains the meaning of ordinary time earnings (OTE) relevant to employers for the purpose of calculating the minimum level of superannuation support required for individual employees under the Superannuation Guarantee (Administration) Act 1992 (SGAA).

Because of amendments to the SGAA, which apply from 1 July 2008, the amount against which an employer is required to calculate the contributions necessary to satisfy their superannuation obligations in respect of their eligible employees is standardised to OTE.

SGR 2009/2 refers to payments in lieu of notice and states at paragraph 38:

An employee may be entitled to a period of notice before the employer's termination of his or her employment takes effect. Awards and agreements often provide that, instead of giving this notice, the employer may simply pay an amount equivalent to the ordinary time rate of salary or wages that the employee would have earned during the notice period. Such payments are OTE.

Therefore, superannuation guarantee (SG) is payable on payments made in lieu of notice. However, an employer's SG liability for any quarter in the 2010-11 income year is calculated on an amount that can not exceed the maximum contributions base of $42,220 for each employee (section 15 of the SGAA).

Relevant legislative provisions

Income tax (Transitional Provisions) Act 1997 Section 82-10.

Income tax (Transitional Provisions) Act 1997 Subsection 82-10(1).

Income tax (Transitional Provisions) Act 1997 Subsection 82-10(2).

Income tax (Transitional Provisions) Act 1997 Section 82-10F.

Income tax (Transitional Provisions) Act 1997 Section 82-10E.

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 Subsection 83-170(2).

Income Tax Assessment Act 1997 Subsection 83-170(3).

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 Paragraph 83-175(2)(a).

Income Tax Assessment Act 1997 Paragraph 83-175(2)(b).

Income Tax Assessment Act 1997 Paragraph 83-175(2)(c).

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

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

Income Tax Assessment Act 1997 Section 82-135.

Superannuation Guarantee (Administration) Act 1992 Section 15