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Ruling

Subject: Genuine redundancy - subsequent re-employment

Question:

Will there be a genuine redundancy payment for the purposes of the Income Tax Assessment Act 1997 if you cease full-time employment with the employer and commence casual employment, either the following business day or a week later, with the same employer?

Answer:

No

This ruling applies for the following period

30 June 2012

The scheme commenced on

1 July 2011

Relevant facts and circumstances

You are currently employed in a full-time position with the employer.

You will be made redundant from the employer after more than 30 years of service in the 2011-12 income year under a particular legislative regulation.

You are under 55 years of age at the time of the termination of your employment with the employer.

On termination:

· you will receive all your unused annual leave and long service leave; and

· your main source of income will be your superannuation pension from the employer sponsored superannuation scheme (the Scheme).

· Your employment with the employer in the full-time position will cease on a Friday. You intend to start casual employment with the same employer on the following Monday or possibly a week later. You have yet to notify the personal section of the employer of your intention.

Relevant legislative provisions

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 995-1(1).

Reasons for decision

Summary

There is an effective termination of your employment with the employer. Accordingly, the payment made in consequence of the termination of your employment is considered an employment termination payment.

There was an arrangement in place prior to your termination of employment between you and your employer that you will be re-employed by the same employer after the date of termination. Accordingly, the payment cannot be treated as a genuine redundancy payment.

Detailed reasoning

Termination of employment

For a termination of employment to be effective, the termination must be real and not merely illusory.

In Reseck v. Federal Commissioner of Taxation (1975) 49 ALJR 370; (1975) 6 ALR 642; (1975) 75 5ATR 538; (1975) 75 ATC 4213; (1975) 133 CLR 45, Justice Gibbs made the following comments:

In most cases in which a workman ceased his employment on a Friday and commenced employment again with the same employer on the following Monday it would be impossible to say that his employment had ever been terminated. If there were a contract agreement or arrangement whereby the employment of the workman was terminated and re-commenced it would no doubt be possible to invoke the provisions of s 260 of the Act, but even without the aid of that section in many cases when all the facts had been regarded the proper conclusion to be drawn would be that there had been no termination of the workman's employment at all.

Therefore, if a person purports to resign from their employment and is subsequently re-employed with the same employer the following working day then it would be considered unlikely that there was an effective termination of employment.

In Taxation Board of Review Decision Case B19 70 ATC 88, a woolclasser was, for the whole of the income year, employed by a grazier's shearing company under a general contract of employment as resident overseer for the shearing programme in the locality. For this he received a retainer, there being mutual obligations on the parties to offer and accept work when available.

Under the award, a separate contract had to be signed for the work at each shed and on its completion the classer had to be paid pro-rata holiday pay, in addition to the award wage. The Board held there was no cessation of the obligations between employer and taxpayer and the mere fact that a separate contract had to be made for each shed did not mean that there was a termination of employment on each occasion.

In your particular case, you state that you will be made redundant under a specific legislative regulation after more than 30 years of service. As a consequence, you will no longer be a full-time employee of the employer.

As a direct result of the redundancy, you will be paid out your entitlement to accrued annual leave and accrued long service leave. Further, you will become entitled to a superannuation pension paid under the Scheme.

All of these point to a clear termination of employment with the employer. Accordingly, the payment made in consequence of the termination of your employment is considered an employment termination payment.

Re-employment with the same employer

It is noted that you will no longer accrue benefits such as annual leave and long service leave. As such, your terms and conditions of employment have changed to such an extent that it can be argued that your employment with the employer has been terminated.

As there is a clear termination of your employment with the employer, the subsequent re-employment with the same employer will not jeopardise the concessional treatment of the employment termination payment.

Genuine redundancy payment

It is noted that a particular legislative regulation mentions redundancy.

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

As previously determined the payment was made in consequence of your termination of employment. The next issue to be considered is whether there is any arrangement between you and the employer to re-employ you after the termination of employment.

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

As noted above, 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.

The term 'arrangement' is defined in subsection 995-1(1) of the ITAA 1997 as meaning:

any arrangement, agreement, understanding, promise or undertaking, whether express or implied and whether or not enforceable (or intended to be enforceable) by legal proceedings.

In your particular case, you state that you are being made redundant under a specific legislative regulation. The wording of the regulation clearly indicates that there is an arrangement between you and the employer to transfer you to casual employment after the termination of your full-time employment with the employer. Accordingly, the payment received by you on the termination of your employment is not a genuine redundancy payment as there is an arrangement with the same employer to re-employ you after the date of termination.

Therefore, the requirement under paragraph 83-175(2)(c) of the ITAA 1997 has not been satisfied. Consequently, not all of the conditions contained in section 83-175 have been met and the payment cannot be considered a genuine redundancy payment.