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Ruling

Subject: Employment termination payment and genuine redundancy

Question 1

Does the termination of your client's employment with the employer constitute a constructive dismissal?

Answer

No.

Question 2

Does the termination of your client's employment with the employer constitute a genuine redundancy?

Answer

Yes.

Question 3

Is any part of the ex gratia payment received on the termination of your client's employment exempt from tax as a tax-free part of a genuine redundancy payment in accordance with section 83-170 of the Income Tax Assessment Act 1997?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 2011.

The scheme commences on:

1 July 2010.

Relevant facts and circumstances

Your client was employed for over 10 years by their previous employer, as an engineer.

The previous employer was taken over by the employer a few years ago.

Consequently, your client commenced employment with the employer.

Your client's employment was continued following the takeover, and your client was appointed to a managerial position in one state of Australia. In this position your client was responsible to a location manager and an executive manager.

Following a restructure, your client's position remained unchanged. Later in the year the name of your client's position was changed. During this time your client reported to the relevant location manager.

Your client was advised that a new regional manager would be based in your client's home state and will have carriage of the employer's business operations in the area. The new manager would perform the same role that the senior manager had performed from the other state.

Your client was further advised that the employer would be looking to devolve responsibilities from your client's role down to the area operations managers. Your client was also requested to consider and identify new areas of focus or roles that they wanted to consider.

You state that the position your client vacated was not replaced. Rather, the responsibilities of your client's position were reallocated to the new regional manager's position and the subordinate area operations managers positions.

Despite discussions with several senior personnel of the employer, no opportunities were apparent to your client, and no alternative position was formally offered to your client.

In a termination letter sent to your client, your client was advised that as the employer had not been able to identify a suitable alternative position for your client, the employer was providing three months notice that the employment will end during the 2010-11 income year (the termination date). Your client was then advised in the termination letter that should an alternative position acceptable to both your client and the employer be identified during the notice period, then the employment termination would be withdrawn.

Your client was further advised in the termination letter that an ex gratia termination payment would be paid upon the termination on the termination date, in recognition of your client's tenure and your client's work on integrating the previous and current employers. Your client was also advised that the payment was contingent on continued positive participation in the current position until the termination date, and that the payment would be treated as an eligible termination payment.

All employment was severed on the termination date.

Your client was over age 55 but under age 65 on the termination date. There was no date prior to your client's 65^th birthday on which your client was required to terminate the employment.

As at the termination date, no arrangement existed between your client and the employer, or between the employer and another person, to employ your client after the termination of the employment.

You state that the parties were dealing at arm's length. In addition, you state that the ex gratia payment satisfies the requirement that it must be in addition to any ETP your client could have reasonably expected to receive if your client had voluntarily resigned on the termination date.

A PAYG payment summary-employment termination payment was issued by the employer at the end of the 2010-11 income year for the ex gratia payment. The PAYG payment summary shows the date of the payment as the termination date. The PAYG payment summary further shows the entire ex gratia payment as a taxable component with no tax-free component, and the amount of tax withheld from the payment. The PAYG payment summary also shows that the payment is not a transitional termination payment, a death benefit, or part of a payment made in an earlier income year for the same termination.

The ex gratia payment was not made by the employer in lieu of superannuation benefits.

Relevant legislative provisions:

Income Tax Assessment Act 1936 Section 27F,

Income Tax Assessment Act 1936 Subsection 27F(1),

Income Tax Assessment Act 1997 Subsection 82-130(1),

Income Tax Assessment Act 1997 Subparagraph 82-130(1)(a)(i),

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 Section 82-135,

Income Tax Assessment Act 1997 Paragraph 82-135(e),

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) and

Income Tax Assessment Act 1997 Subsection 995-1(1).

Summary

The termination of your client's employment was initiated by the employer. As such, your client was dismissed from the employment by the employer. Therefore, it is considered that the employment termination was not a constructive dismissal.

Your client's dismissal was caused by the genuine redundancy of your client's former position.

Your client's position was made redundant by the employer reallocating the duties and functions of that position to other positions within its organisational structure.

The entire amount of the ex gratia payment your client received on the termination of the employment represents the tax-free part of a genuine redundancy payment. The tax-free amount is calculated on the basis that your client completed a particular number of full years of continuous service with both the previous employer and the employer. This tax-free amount is not assessable income and is not exempt income in your client's hands.

Detailed reasoning

Employment termination payments

Employment termination payments are payments that are made in consequence of the termination of any employment of a taxpayer.

Subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997) states:

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 be an employment termination payment, the ex gratia payment your client received on the termination date must satisfy all three conditions listed above.

The first condition requires that there is a payment received by the employee in consequence of the termination of his 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 (TR 2003/13) which discusses the meaning of the phrase.

Paragraph 5 of TR 2003/13 states in part:

...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.

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 payment is made 'in consequence of' the termination of employment'

In a termination letter sent to your client, they were given several months notice that the employment will end during the 2010-11 income year (the termination date), and that an ex gratia termination payment would be paid upon the termination of the employment.

Your client's employment with the employer ceased on the termination date, and the employer made the ex gratia payment to your client on the same day.

The facts show that the ex gratia payment was made in consequence of the termination of your client's employment on the termination date. The payment would not have been made had there been no termination of employment.

The termination of employment and the payment are all intertwined and connected. If not for the termination of employment, the issue of making the payment would not have arisen. It follows that the payment was an effect or result of the cessation of the employment.

It is clearly evident that the ex gratia payment was made to your client in consequence of the termination of the employment. Therefore, the requirement of subparagraph 82-130(1)(a)(i) of the ITAA 1997 has been satisfied.

The '12 month rule'

To qualify as an employment termination payment, the lump sum payment must be received 'no later than 12 months after' the termination of the taxpayer's employment. Your client's employment was terminated on the termination date, and as noted above, the ex gratia payment was made to your client on the same day. Therefore the requirement in paragraph 82-130(1)(b) of the ITAA 1997 also has been satisfied.

Payments excluded from being employment termination payments

The payment will be an employment termination payment unless the payment is specifically excluded under section 82-135 of the ITAA 1997. The requirement specified in paragraph 82-130(1)(c) of the ITAA 1997 is that the employment termination payment is 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 payments include superannuation benefits, payments for accrued annual leave or unused long service leave, and the tax-free part of a genuine redundancy payment (GRP) or an early retirement scheme payment.

Relevant to this case is whether any part of the ex gratia payment represents the tax-free part of a GRP. The facts show that the payment does not include any of the other payments listed in this section.

Genuine redundancy payment (GRP)

Consideration must now be given as to whether any portion of the ex gratia payment represents the tax-free part of a GRP. If it does, then that portion of the payment:

o will not be an employment termination payment under paragraph 82-135(e) of the ITAA 1997; and

o is not assessable income and is not exempt income.

Subsection 995-1(1) of the ITAA 1997 states:

genuine redundancy payment has the meaning given by section 83-175.

A payment made to an employee, after 30 June 2007, is a GRP if it satisfies all the conditions set out in section 83-175 of the ITAA 1997.

Prior to 1 July 2007, such a payment was known as a bona fide redundancy payment, in accordance with former subsection 27F(1) of the Income Tax Assessment Act 1936 (ITAA 1936).

Section 83-175 of the ITAA 1997 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 employees 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)).

In addition to the basic genuine redundancy requirement that is specified in subsection 83-175(1) of the ITAA 1997, all of the other requirements of section 83-175 of the ITAA 1997 must be satisfied for a payment to qualify as a GRP.

The Commissioner has issued Taxation Ruling TR 2009/2 (TR 2009/2) entitled Income tax: genuine redundancy payments, which outlines the requirements to be satisfied before any payment made to a person whose employment is terminated qualifies for treatment as a GRP under section 83-175 of the ITAA 1997.

Under subsection 83-175(1) of the ITAA 1997, a GRP is a payment resulting from:

i a dismissal;

ii the employee's position is genuinely redundant; and

iii 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.

Reallocation of duties and genuine redundancy

In Dibb v Federal Commissioner of Taxation [2004] FCAFC 126; 2004 ATC 4555; (2004) 207 ALR 151; (2004) 55 ATR 786 (Dibb) the Full Federal Court, referring to former section 27F(1) of the ITAA 1936, stated at paragraph 43 that:

Re-allocation of duties within an organisation will often lead the employer to consider whether an employee, previously employed to perform specific functions assigned to a particular "job", will be able to perform any available "job" existing after such re-allocation. Even if the employee's job, defined by reference to its duties, has disappeared, he or she may be able to perform some other available job to the satisfaction of the employer. In that case, no question of redundancy arises. It is only if the employer considers that there is no available job for which the employee is suited, and that he or she must therefore be dismissed, that the question of redundancy arises. If, in good faith, the employer:

· has re-allocated duties;

· considers that the employee is not suitable to perform any available job, defined by reference to those re-allocated duties, existing after the re-allocation; and

· for that reason, dismisses the employee;

then, for the purposes of s 27F, the employee is dismissed by reason of his or her bona fide redundancy. In the above discussion we have used the word "available" as meaning "vacant", and the word "suitable" as meaning "within the employee's capacity".

Dismissal from employment

Dismissal is a particular mode of termination which requires the termination of employment at the initiative of the employer without the consent of the employee.

In paragraph 22 of TR 2009/2 the Commissioner states that cases of 'constructive dismissal' are a dismissal for the purposes of subsection 83-175(1) of the ITAA 1997.

Constructive dismissal is currently recognised to occur where the actions or behaviour of the employer in relation to the employment relationship effectively curtails the element of consent on the employee's behalf. As noted in your application, an example of constructive dismissal is where the employee resigns after the employer offers work in an alternative position which is inappropriate given the employee's particular circumstances (for example, their skills or experience).

Applying the principles in paragraph 43 of the judgment in Dibb to this case, the employment of your client was terminated at the initiative of the employer.

Your client was advised that the that the new regional manager will be based in your client's home state and will perform the same role that the senior manager had performed from the other state.

Your client was further advised that with the transition to the new regional manager's position and with the development of area operations managers also in your client's home state, the employer would be looking to devolve responsibilities from your client's role down to the area operations managers. Your client was also requested to consider and identify new areas of focus or roles that they want to consider.

Despite discussions with several senior personnel of the employer, no opportunities were apparent to your client, and no alternative position was formally offered to your client.

In the termination letter, your client was notified that as the employer had not been able to identify a suitable alternative position for your client, the employment will end on the termination date.

Your client was also advised in the termination letter that should an alternative position acceptable to both your client and the employer be identified during the notice period, then the employment termination would be withdrawn.

As noted above, in Dibb, the Full Federal Court takes the view that where an employee, whose job as defined by reference to its duties, has disappeared, may be able to perform some other available job to the satisfaction of the employer, then no question of redundancy arises. It is only where the employer considers that there is no available job for which the employee is suited after the reallocation of duties, and that he or she must therefore be dismissed, that the question of redundancy arises.

In this situation, the position your client vacated was not replaced. As described in the facts, the responsibilities of your client's position were reallocated to the new regional manager's position and the subordinate area operations manager's positions. It is evident that your client's position, as defined by reference to its duties, had disappeared.

Further, the employer considered that there was no available position for which your client was suited to its satisfaction, after the reallocation of the duties of your client's former position. As a consequence of no alternative position being found for your client, the employer determined that your client's employment would be terminated for this reason.

This is evidenced by the fact that your client was notified in the termination letter that because the employer could not identify a suitable alternative position for your client, the employment would cease on the termination date. In addition, you have confirmed that all employment with the employer was severed on the termination date.

In this instance, the termination of your client's employment is a dismissal, because the cessation of the employment was initiated by the employer.

Although, having found that the employer dismissed your client, it is not necessary to determine whether the termination constitutes a constructive dismissal, the facts show that the decision to terminate your client's employment was made by the employer. Thus it is considered that the termination was not a constructive dismissal.

In this case, the employment termination was initiated by the employer. Therefore the employment termination involved your client being dismissed from the employment.

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 by redundancy of the employee's position, and not for some other reason. In paragraphs 25, 26 and 28 of TR 2009/2, the Commissioner also states the following regarding dismissal and redundancy:

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.

26. In some circumstances, an employer may reallocate the duties and functions attached to a particular position to another position within the employer's organisational structure. In such cases, the former position is redundant. …

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.

The facts show that your client was dismissed because the duties and functions that were attached to the former position were reallocated to other positions within the employer's organisational structure.

As a result of the reallocation of your client's duties to these other positions, the former position, as defined by reference to your client's previous duties, had disappeared. It therefore follows that this position was made redundant by the employer. It is evident that the employer's decision to make the position redundant resulted in your client's dismissal.

The termination of your client's employment was not on account of any personal act or default on your client's part. Rather the employer no longer required anyone to perform the manager's role your client had been doing because of the reallocation of your client's duties to other managerial positions. In light of these circumstances, the employer's decision to terminate your client's employment is due to a redundancy arising from the employer reallocating the duties of the position your client had occupied.

Applying the decision in Dibb to this case, it is evident that your client's dismissal was caused by the genuine redundancy of the position your client' occupied, and not by some other reason.

Therefore your client's dismissal was for reasons of genuine redundancy.

Payment by reason of genuine redundancy

As noted above, the ex gratia payment resulted from a dismissal and a genuine redundancy.

Hence the payment was made by reason of a genuine redundancy.

You state that the ex gratia payment satisfies the requirement that it must be in addition to any ETP your client could have reasonably expected to receive if your client had voluntarily resigned on the termination date.

In this light, it is accepted that the payment exceeds the amount that your client could reasonably expect to receive if your client had voluntarily resigned or retired from the employment in the position your client held at the time of the dismissal. Therefore in the context of paragraph 57 of TR 2009/2, the payment is specifically attributable to the fact that your client's employment was terminated because of redundancy. Accordingly it is considered that your client has satisfied the requirements under subsection 83-175(1) of the ITAA 1997.

The requirements under subsection 83-175(2) of the ITAA 1997

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 age 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).

Your client was over age 55 but under age 65 at the time of the dismissal. The termination date was before his your client's 65^th birthday. In addition, there was no date prior to your client's 65^th birthday on which your client was required to terminate the employment. Consequently, your client has satisfied the requirements of paragraph 83-175(2)(a) of the ITAA 1997.

You state that the parties were dealing at arm's length. Hence it is accepted that all dealings between your client and the employer were at arm's length. Therefore your client has satisfied the requirement under paragraph 83-175(2)(b) of the ITAA 1997.

As noted above, all employment with the employer was severed on the termination date. In addition, at the termination date no arrangement existed between your client and the employer, or between the employer and another person, to employ your client after the termination of the employment. As such, your client has also satisfied the requirement under paragraph 83-175(2)(c) of the ITAA 1997.

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. In this case, the ex gratia payment was not made by the employer in lieu of superannuation benefits. Therefore the requirement under subsection 83-175(3) of the ITAA 1997 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 of the ITAA 1997 (apart from paragraph 82-135(e)). As noted above, section 82-135 provides that certain payments are not employment termination payments. These payments include superannuation benefits and any accrued annual and long service leave payments.

From the facts, it is accepted that the ex gratia payment does not include any superannuation benefits, accrued annual and long service leave payments or any of the other payments listed in section 82-135. It follows, therefore, that your client has satisfied the requirement in subsection 83-175(4) of the ITAA 1997 in this instance.

The payment is a GRP under sections 83-170 and 83-175 of the ITAA 1997

An examination of the information provided shows that in relation to the ex gratia payment, your client has satisfied all of the relevant conditions set out in section 83-175 of the ITAA 1997.

Consequently it is considered that the ex gratia payment constitutes a GRP for the purposes of section 83-170 of the ITAA 1997.

Tax-free treatment of this GRP

The tax-free treatment of a GRP is determined under section 83-170 of the ITAA 1997. This provision places a limit on the amount of a GRP that is eligible for concessional tax treatment.

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

The formula for working out the tax-free amount is:

Base amount + (Service amount × Years of service),

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

For the purposes of subsection 83-170(3) of the ITAA 1997, the base amount for the 2010-11 income year is $8,126 and the service amount is $4,064. Any amount that the taxpayer receives which falls within this limit will attract no tax, that is, such an amount will be tax-free.

Paragraphs 69 and 70 of TR 2009/2 state the following in relation to the years of service:

69. The extent to which the payment is tax-free will ordinarily depend on the amount of the payment and the number of whole years to which the payment relates. There is no requirement for the years of service to be continuous when applying the threshold in section 83-170.

70. If earlier years of service with a previous employer are carried over and acknowledged on commencement with a new employer that later makes a redundancy payment to an employee, those years of service can be included in working out the tax-free amount of the genuine redundancy payment.

As noted above, your client's employment with the employer commenced a few years ago. Your client's employment was continued by the employer following the takeover of the previous employer by the employer. Also as noted above, your client's employment with the employer was terminated in the 2010-11 income year.

Your client had completed a number of whole years of continuous employment service with the previous employer and the employer at the time of the termination of the employment. Further, in making the payment, the employer cited the period of your client's tenure as a factor in deciding to make the payment.

Therefore in accordance with subsection 83-175(3) of the ITAA 1997, the tax-free part of a genuine redundancy payment your client can receive the 2010-11 income year can be calculated taking into account their employment with both employers. This tax-free amount is not assessable income and is not exempt income under subsection 83-170(2) of the ITAA 1997. In this case, as the payment is below the tax-free amount of a GRP, the entire amount of the payment is the tax-free part of a GRP. This tax-free amount is not assessable income and is not exempt income under subsection 83-170(2) of the ITAA 1997.

In addition, paragraph 82-135(e) of the ITAA 1997 operates to exclude the tax-free part of the GRP from being an employment termination payment. Because the tax-free amount is a payment mentioned in section 82-135 of the ITAA 1997, the requirement in paragraph 82-130(1)(c) of the ITAA 1997 is not satisfied. Therefore, no part of the tax-free amount is an employment termination payment.