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Authorisation Number: 1011799921282

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Ruling

Subject: Transfer of ownership of a motor vehicle on termination of employment

Questions:

Is the transfer of ownership of a motor vehicle to you on termination of your employment an employment termination payment?

Is any portion of the employment termination 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)?

Answers:

Yes

Yes

This ruling applies for the following period

30 June 2011

The scheme commenced on

1 July 2010

Relevant facts and circumstances

You are over 55 years of age.

You commenced employment with the employer in a specified role.

The employer told you in confidence that due to a restructure of the company your position was to be made redundant. On termination, you were advised that you could have the company car which you have been using for the last couple years as a gift for all the extra duties and effort you have performed whilst working with the company.

The company car was valued at a specific amount.

Your employer stated that the restructure was to take place prior to the end of the 2010-11 income year but nothing was certain. No official notice was given to you by the employer.

You and the employer signed the transfer papers for the company car to be transferred into your name, however, they were not lodged at that time with the Department of Transport (DOT) because you wanted to contact the Tax Office to find out if you could accept the gift and the taxation implications of doing so.

On the same day, your employer suggested you look for another job stating that should you be successful they would not hold you to your position in the company.

You advised the employer that you were aware that some of the employees would be leaving the company on a specific date and that you would like to leave at the same time. The employer agreed.

In a recent telephone conversation with the case officer of the Tax Office you stated that you believed that a number of employees were also made redundant when they left the company.

You lodged the transfer papers with DOT.

No agreement existed between you and the employer, or the employer and another person to employ you after the termination time.

You are currently working with an unrelated employer.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 27F.

Income Tax Assessment Act 1997 Section 995-1.

Income Tax Assessment Act 1997 Section 82-130

Income Tax Assessment Act 1997 Subsection 83-130(1)

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 Section 82-135.

Income Tax Assessment Act 1997 Subsection 82-135(e).

Income Tax Assessment Act 1997 Section 83-165.

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

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 in specie 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

Employment termination payment

Payments made in consequence of the termination of a taxpayer's employment are known as employment termination payments.

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) 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 be an employment termination payment, the amount received by you must satisfy all the conditions listed above, including not being specifically excluded under section 82-135 of the ITAA 1997.

In your particular case, you were employed by the employer for less than x years. The employer advised you that due to the restructuring of the company your position has been made redundant. Your redundancy payment will be made by transferring the ownership to you of a motor vehicle, the company car. Subsequently, your employment was terminated.

The payment would not have been made if the termination of employment had not occurred. The termination of employment, the transfer of ownership of the company are all intertwined and connected. If not for the termination of employment, the issue of making this payment would not have arisen.

However, in your case, there was no cash payment but rather an in specie payment (i.e. the company car). This then gives rise to the question: Whether this in specie payment constitutes an employment termination payment?

Subsection 80-15(1) of the ITAA 1997 states:

1) Any of the following payments covered by this Part (but no others covered by this Part) can include a transfer of property:

(a) an employment termination payment;

(b) a genuine redundancy payment;

(c) …to (e).

2) If it does, the amount of the payment includes the market value of the property

3) The market value is reduced by the value of any consideration given for the transfer of the property.

Subsection 80-15(1) of the ITAA 1997 provides that where a transfer of property has been made to a person for the purposes of making an employment termination payment, the transfer is deemed to be a payment of an amount equal to the value of the property immediately before the transfer. The market value of the property immediately before the transfer is accepted as the value for the purposes of this provision. In your case, the Commissioner has accepted that the amount of your employment termination payment was reasonable.

In addition, 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.

Relevant to your application is whether any part of the payment represents the tax-free part of a genuine redundancy 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:

The employee is 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).

· if the dismissal was not at arm's length the payment must not exceed the amount that could reasonable be expected to be made if the dismissal was at arms length.

· at the time of the dismissal, there was no arrangement between 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.

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

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:

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

· The payment being tested 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.

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.

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

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.

Dismissal caused by 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 by the employer that due to the restructuring of the company your position has been made redundant.

Furthermore, in a letter, the employer has confirmed that your redundancy payment will be made by transferring the ownership of the company car into your name.

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.

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. In fact, you are currently working for an unrelated employer.

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.

From the information provided, it appears that a separate superannuation guarantee payment will be made by the employer to your nominated superannuation fund. Therefore, 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):

· superannuation benefits;

· the payment of a pension or annuity; and

· 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 2010-11 income year:

Base amount means $X;

Service amount means $Y; and

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

You had completed 2 years of service at the time of the termination of your employment. Therefore, the tax-free amount determined under subsection 83-170(3) of the ITAA 1997 is:

= $X + [$Y x completed years of service]

= $Z

The in specie payment received by you does not exceed this tax-free amount. Consequently, the total of the payment received are not assessable income and is not exempt income.