Edited version of private ruling

Authorisation Number: 1011769313312

This edited version of your ruling will be published in the public Register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns.

Ruling

Subject: Employment termination payment from a redundancy trust

Issue

Question

Does any part of the payments made to your client from a redundancy trust represent the tax-free amount of a genuine redundancy payment in accordance with section 83-170 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Advice/Answer

No.

This ruling applies for the following period

For the year ended 30 June 20XX

The scheme commenced on

1 July 20XX

Relevant facts

Between 10 and 20 years ago, your client commenced employment with an employer (the employer).

The employer terminated your client's employment in the 20XX-XX income year.

Your client was a member of a redundancy trust and satisfied a requirement to receive benefits.

The redundancy trust advised that your client would be entitled to the same amount regardless of whether they were made redundant, left the industry of their own volition, or were in financial hardship.

The employer completed an Employment Separation Certificate which shows your client's employment was terminated due to a shortage of work.

ETP Payment Summaries, for the 20XX-XX income year, show the taxable amounts and tax withheld on the payments made to your client by the redundancy trust.

The amount of each gross payment is shown on the summary as a 'Post June 1983 untaxed element'.

In a 'Pre-filling report 20XX', prepared for your client, you categorised the gross payment as a 'taxable component - taxed' of 'Australian superannuation lump sum payments'.

In addition to the payments from the redundancy trust, your client received unused annual leave entitlements from the employer.

There was no date prior to your client's 65^th birthday when your client was required to cease employment.

Your client is under the age of 55 years.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 82-10(2)
Income Tax Assessment Act 1997 Section 82-10(3)
Income Tax Assessment Act 1997 Section 82-130
Income Tax Assessment Act 1997 Subsection 82-130(1)
Income Tax Assessment Act 1997 Paragraph 82-130(1)(a)
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 82-130(5)
Income Tax Assessment Act 1997 Subsection 82-130(7)
Income Tax Assessment Act 1997 Section 82-135
Income Tax Assessment Act 1997 Paragraph 82-135(a)
Income Tax Assessment Act 1997 Paragraph 82-135(c)
Income Tax Assessment Act 1997 Paragraph 82-135(d)
Income Tax Assessment Act 1997 Paragraph 82-135(e
Income Tax Assessment Act 1997 Paragraph 82-135(i)
Income Tax Assessment Act 1997 Section 82-140
Income Tax Assessment Act 1997 Section 82-145
Income Tax Assessment Act 1997 Section 82-150
Income Tax Assessment Act 1997 Section 82-155
Income Tax Assessment Act 1997 Section 82-160
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 Section 83-295
Income Tax Assessment Act 1997 Subsection 307-5(1)
Income Tax Assessment Act 1997 Section 995-1

Reasons for decision

Summary

The payments made to your client from the redundancy trust are not excluded from being employment termination payments as the tax-free part of genuine redundancy payments, as all the conditions have not been satisfied.

The payments are taxable components of employment termination payments to be included in your client's assessable income for the 2009-10 income year.

The payments are to be included at Item 4 in your client's income tax return.

Detailed reasoning

Employment termination payment

From 1 July 2007, payments made in consequence of the termination of a taxpayer's employment are known as employment termination payments. Where the payment is received during the life of the taxpayer it is known as a 'life benefit termination payment'. Where the payment is received after the death of the taxpayer, it is known as a 'death benefit termination payment'.

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.

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 determine if the payments made to your client from the redundancy trust constitute life benefit termination payments, all the conditions in section 82-130 of the ITAA 1997 will need to be satisfied.

Failure to satisfy any of the conditions will result in the payment not being considered an employment termination payment.

In consequence of the termination of employment

The first criterion to be met is that the payment is received by the person in consequence of the termination of their employment. The phrase 'in consequence of' is not defined in the ITAA 1997. However, the words have been interpreted by the courts in several cases. The Commissioner has also issued Taxation Ruling TR 2003/13 entitled: 'Income tax: eligible termination payments (ETP): payments made in consequence of the termination of any employment: meaning of the phase 'in consequence of' (TR 2003/13) which discusses the meaning of the phrase.

The Full High Court of Australia considered the expression 'in consequence of the termination of any employment' in Reseck v. Federal Commissioner of Taxation (1975) 49 ALJR 370; (1975) 6 ALR 642; (1975) 5ATR 538; (1975) 75 ATC 4213; (1975) 133 CLR 45 (Reseck). The relevant issue in that case was whether amounts paid to a taxpayer by his employer at the end of two periods of employment, to which the taxpayer was entitled under an agreement between the employer and the taxpayer's union, were an allowance paid in a lump sum 'in consequence of retirement from, or the termination of, any office or employment'. Justice Gibbs concluded that the amounts were made in consequence of the termination of the taxpayer's employment. His Honour said that:

Within the ordinary meaning of the words, a sum is paid in consequence of the termination of employment when the payment follows as an effect or result of the termination. It is not in my opinion necessary that the termination of the services should be the dominant cause of the payment … In the present case the allowance was paid in consequence of a number of circumstances, including the fact that the taxpayer's service had been satisfactory and that the industrial agreements provided for the payment, but it was none the less paid in consequence of the termination of the taxpayer's employment.

Justice Jacobs also concluded that the amounts constituted an allowance that was paid in consequence of the termination of the taxpayer's employment. His Honour said:

It was submitted that the words 'in consequence of' import a concept that the termination of the employment was the dominant cause of the payment. This cannot be so. A consequence in this context is not the same as a result. It does not import causation but rather a 'following on'.

The different interpretations of 'in consequence of' adopted by Justices Gibbs and Jacobs were considered by the Full Federal Court in McIntosh v. Commissioner of Taxation (1979) 25 ALR 557; (1979) 10 ATR 13; (1979) 45 FLR 279; (1979) 79 ATC 4325 (McIntosh). The matter before the court concerned a taxpayer who one week after retirement commuted part of the pension, to which he became entitled upon his retirement, into a lump sum. The commuted payment was made out of a provident fund established by a bank for the payment of benefits to bank officers on their retirement. The issue being considered by the court was whether the commuted lump sum payment came within former paragraph 26(d) of the Income Tax Assessment Act 1936 (ITAA 1936).

Justice Brennan considered the judgments of Justices Gibbs and Jacobs in Reseck and concluded that their Honours were both saying that a causal nexus between the termination and payment was required, though it was not necessary for the termination to be the dominant cause of the payment. Justice Brennan said that:

Though Jacobs J. speaks in different terms, his meaning may not be significantly different from the meaning of Gibbs J …His Honour denies the necessity to show that retirement is the dominant cause, but he does not allow a temporal sequence alone to suffice as the nexus. Though the language of causation often contains the seeds of confusion, I apprehend his Honour to hold the required nexus to be (at least) that the payment would not have been made but for the retirement.

In the same case, Justice Lockhart stated:

In my opinion, although the phrase is sufficiently wide to include a payment caused by the retirement of the taxpayer, it is not confined to such a payment. The phrase requires that there be a connection between the payment and the retirement of the taxpayer, the act of retirement being either a cause or an antecedent of the payment. The phrase used in section 26(d) is not 'caused by' but 'in consequence of'. It has a wider connotation than causation and assumes a connection between the circumstance of retirement and the act of payment such that the payment can be said to be a 'following on' of the retirement.

The Commissioner in TR 2003/13 considered the phrase 'in consequence of' as interpreted by the Courts. Paragraph 5 of TR 2003/13 states:

… the Commissioner considers that 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.

The question of whether a payment is made in consequence of the termination of employment is determined by the relevant facts and circumstances of each case.

In this case it is evident that the claim for payment from the redundancy trust arose as a result of the termination of your client's employment. The payments would not have been made had there been no termination of employment. The termination of employment and the payments are all intertwined and connected. If not for the termination of employment, your client would not have made a claim for payment from the redundancy trust.

It is considered that there is sufficient nexus between the making of the payment and the termination of your client's employment to say that the payments would be made in consequence of your client's termination of employment.

Received no later than 12 months after the termination

Paragraph 82-130(1)(b) of the ITAA 1997 requires that a payment must be received no later than 12 months after the termination of employment (or such greater period as the Commissioner determines) to qualify as an employment termination payment.

A payment received more than 12 months after the termination of employment (or such greater period as the Commissioner determines), which would otherwise be employment termination payment, are assessable income under section 83-295 of the ITAA 1997. Such payments will be subject to tax at marginal rates.

The facts of this case show that your client's employment was terminated in the 2009-10 income year and the payments were made by the redundancy trust to your client in the 2009-10 income year, which is within 12 months after the termination of employment. Therefore the requirement under paragraph 82-130(1)(b) of the ITAA 1997 will be met.

The final requirement under paragraph 82-130(1)(c) of the ITAA 1997 is that the payment is not a payment mentioned in section 82-135 of the ITAA 1997.

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

Section 82-135 of the ITAA 1997 provides that certain payments are not employment termination payments. These include:

· superannuation benefits [paragraph 82-135(a)];

· payments for unused annual leave or unused long service leave [paragraphs 82-135(c) and (d)];

· the tax-free part of a genuine redundancy payment or an early retirement scheme payment [paragraph 82-135(e)]; and

· reasonable capital payments for personal injury [paragraph 82-135(i)].

As noted above, the payments were made in consequence of your client's termination of employment.

Furthermore, the payments are not superannuation benefits, as described in the table contained in subsection 307-5(1) of the ITAA 1997. Therefore, they are not excluded from being employment termination payments under paragraph 82-135(a).

The payments made to your client from the redundancy trust are not payments for unused annual leave or long service leave, or capital payments for personal injury.

However, we will now consider whether the payments are considered to be genuine redundancy payments.

For the payments to be excluded from being employment termination payments as the tax-free part of genuine redundancy payments all the conditions under section 83-175 of the ITAA 1997 must be satisfied. Failure to satisfy any of the conditions will result in the payment not being considered a genuine redundancy payment.

Genuine redundancy payments

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

(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)).

Under subsection 83-175(1) of the ITAA 1997, the worker must be dismissed from employment because the worker's position is genuinely redundant. The Commissioner has issued Taxation Ruling TR 2009/2 entitled: 'Income tax: genuine redundancy payments' (TR 2009/2) which discusses the requirements for a genuine redundancy payment. Paragraphs 10 and 11 of the Taxation Ruling state:

10. Under subsection 83-175(1), a genuine redundancy payment is one 'received by an employee who is dismissed from employment because the employee's position is genuinely redundant'.

11. There are four necessary components within this requirement:

· The payment being tested must be received in consequence of an employee's termination.

· That termination must involve the 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.

As stated in subsection 83-175(1) of the ITAA 1997, only that part of the payment that exceeds the amount that could reasonably be expected to be received by the employee had the employee voluntarily terminated his or her employment at the time of dismissal will be treated as a genuine redundancy payment.

Furthermore, examples of a payment comeing from a redundancy trust are given in paragraphs 148 to 154 of TR 2009/2 which state:

148. Buildcorp makes contributions to an industry trust on behalf of its workers to cover the company for future termination payments (other than unused annual leave payments) it might be required to make under industry awards. The workers are all employed on a daily hire basis.

149. Buildcorp has a major construction contract to build an office block. Buildcorp's employees, its subcontractors and their employees have all been advised that they can expect to be employed on the project for at least six months, depending on their trade or other qualifications.

150. Three months into the project, all workers are terminated with a day's notice as required under their contracts because Buildcorp becomes insolvent and cannot meet its ongoing commitments.

151. The mutual intentions of the parties is that Buildcorp's employees will be employed until the completion of their tasks on the project, even though in form the contracts are made on a daily hire basis. Accordingly, in these circumstances, there is a dismissal caused by redundancy prior to the expiration of a fixed period of employment.

152. In contrast, if the workers had all completed their allotted tasks in keeping with the mutual intentions of the parties, any payments accruing on their termination of employment would not be eligible to be genuine redundancy payments. In these circumstances, the employees are terminated at the expiry of a fixed period of employment.

153. If Buildcorp has a core group of employees whom they retain indefinitely and are terminated on the company becoming insolvent, then the termination payments may also be genuine redundancy payments if the other conditions in section 83-175 are satisfied.

154. However, as the trust is established to meet Buildcorp's obligations to make termination payments in a variety of circumstances, it will be necessary to establish that the amount paid exceeds what could reasonably be expected on voluntary retirement. If the entitlements of the workers are the same regardless of the nature of the termination, the amount of the payment will equal the voluntary termination element. Accordingly, no part of the payment will be a genuine redundancy payment.

Therefore, 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.

Payments may be made on termination of employment for other reasons than genuine redundancy. Even where a payment is paid in circumstances of genuine redundancy, if payment is not in excess of the amount that could reasonably be expected to be received by a worker in consequence of voluntary termination, then no part of the payment will be a tax free genuine redundancy payment.

In this case, the employer has stated in an Employment Separation Certificate that due to a shortage of work, your client's employment was terminated in the 2009-10 income year.

In the 2009-10 income year, the redundancy trust made two lump sum payments to your client.

Although your client's employment was terminated because of a shortage of work your client would have been entitled to these payments if your client had voluntarily resigned from your client's position with the employer.

Consequently, no amount 'exceeds the amount that could reasonably be expected to be received by [your client] in consequence of the voluntary termination of [their] ... employment'.

As one of the conditions under section 83-175 of the ITAA 1997 has not been met, the payments made by the redundancy trust to your client are not genuine redundancy payments for the purposes of section 83-175.

Furthermore, the payments do not qualify as any of the other payments listed in paragraphs 82-135(a) to (m) of the ITAA 1997. Therefore, the payments are not excluded from being employment termination payments.

These payments are employment termination payments under section 82-130 of the ITAA 1997 as they are made in consequence of the termination of employment and made within 12 month's of your client's termination of employment.

Tax treatment

The payments from the redundancy trust satisfy all the requirements in section 82-130 of the ITAA 1997 for them to be considered life benefit termination payments (employment termination payments).

An employment termination payment may comprise a:

· Tax free component, which includes an invalidity segment and/or a pre-July 83 segment (if any); and

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

As your client's employment with the employer commenced less than 20 years ago and the payments do not contain invalidity segments, it is clear that the payments will consist entirely of the taxable component.

Subsection 82-10(2) of the ITAA 1997 provides that the taxable component of a life benefit termination payment is assessable income. Subsection 82-10(3) states that a taxable component is subject to tax and the rate applied depends on the recipient's age.

As your client is under 55 years of age and the payment will not exceed the $150,000 ETP cap amount that is specified for the 20XX-XX income year under section 82-160 of the ITAA 1997, the payments are taxed at a maximum rate of 30% plus Medicare levy.

The payments are to be included at Item 4 in your client's income tax return.