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Ruling

Subject: Employment termination payment

Question

1. Is any part of the payment to an employee an employment termination payment under section 82-130 of the Income Tax Assessment Act 1997 (ITAA 1997)?

2. Is any part of a payment to an employee a genuine redundancy payment under section 83-175 of the ITAA 1997?

Answer

1. No.

2. No

This ruling applies for the following periods:

2011-12 income year

2012-13 income year

The scheme commences on:

1 July 2011

Relevant facts and circumstances

An employee was employed by the employer in 2 positions, Role A and Role B.

In a letter from the employer to the employee on a specific date during the 2011-12 income year stated:

…The employer would like you to undertake the duties of Role C in lieu of Role A, as per the attached position description. The remaining days a week will remain as per the status quo and be allocated to your current Role B.

…your classification level will not change, nor will any of your current conditions of employment, the employer will supply you with the appropriate training, clothing and furnish equipment to carry out Role C.

Should you not accept the redeployment to Role C within 6 months we will do all we can to find another suitable role agreeable to both parties. Failing that, a Clause under the Enterprise Agreement allows for a voluntary separation package. Should further deployment be unsatisfactory achieved and you elected to take a voluntary separation package, it would be based on pro-rata on your role that has changed.

…

The funding for Role A ceased and the employee's position became redundant effective during the 2011-12 income year.

The employee was redeployed to another position during the 2011-12 income year as per a Clause in the Enterprise Agreement.

During the 2011-12 income year the employee took the option for a Voluntary Separation Package (VSP) under a Clause of the Enterprise Agreement for Role A. In a letter from the employer to the employee during the 2011-12 income year stated:

As per the letter to you on a specific date during the 2011-12 income year, a Clause of the Enterprise Agreement allows a voluntary separation package. You have advised me in writing on a specific date during the 2011-12 income year that you elect to take a voluntary separation package for Role A. ...

A Clause in the Enterprise Agreement describes the conditions of a VSP.

Under a Clause in the Enterprise Agreement, the employee worked the specific number of weeks notice of termination and terminated employment during the 2011-12 income year. The employee was paid each fortnight in the regular pay run over the specific number of weeks. A Clause in the Enterprise Agreement allowed a lump sum payment at the end of the notice period. A particular Clause of the Enterprise Agreement was not applied.

The employee continued in Role B, after taking the VSP for Role A component of the employee's employment during the 2011-12 income year.

The redeployed position of Role C became vacant.

Role C was then upgraded to Role D and advertised internally. The employee applied for Role D and was the successful candidate, commencing on a specific date during the 2011-12 income year. As a result, Role B became vacant and has since been advertised internally. The employee continues as an employee of the employer in Role D.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 82-10

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 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 Paragraph 82-130(4)(a)

Income Tax Assessment Act 1997 Subsection 82-130(7)

Income Tax Assessment Act 1997 Section 82-135

Income Tax Assessment Act 1997 Section 82-140

Income Tax Assessment Act 1997 Section 82-150

Income Tax Assessment Act 1997 Section 82-155

Income Tax Assessment Act 1997 Subsection 301-20(2)

Income Tax Assessment Act 1997 Section 995-1

Income Tax Assessment Act 1997 Section 118-20

Income Tax Assessment Act 1997 Section 118-22

Reasons for decision

Summary of decision

The payment to the employee is not an employment termination payment under section 82-130 of the Income Tax Assessment Act 1997 (ITAA 1997) as the payment is not considered to be made in consequence of the termination of employment.

The payment to the employee is not a genuine redundancy payment under section 83-175 of the ITAA 1997 as there was an arrangement between the employer and employee to employ the employee after finishing in the position.

Detailed reasoning

Employment termination payment

An employment termination payment, where the payment is made during the life of a taxpayer, is known as a life benefit termination payment (subsection 82-130(2) of the ITAA 1997.

Section 995-1 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:

· it is received by you:

· in consequence of the termination of your employment; or

· after another person's death, in consequence of the termination of the other person's employment; and

· it is received no later than 12 months after the termination (but see subsection (4)); and

· it is not a payment mentioned in section 82-135.

Therefore, it can be seen that a number of conditions need to be satisfied in order for the payment to be treated as an employment termination payment.

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

Payment is made in consequence of the termination of employment

The first condition 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 which discusses the meaning of the phrase.

In paragraph 5 of TR 2003/13 the Commissioner states:

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.

As further stated by the Commissioner in paragraph 6 of TR 2003/13, there must be:

a causal connection between the termination and the payment, although the termination need not be the dominant cause of the payment. The question of whether a payment is made in consequence of the termination of employment will be determined by the relevant facts and circumstances of each case.

Also in paragraph 5 of TR 2003/13 the Commissioner notes that the Courts have considered the meaning of the words in consequence of in several cases.

Of note are the decisions made by the Full Bench of the High Court in Reseck v. Federal Commissioner of Taxation (1975) 49 ALJR 370; (1975) 6 ALR 642; (1975) 5 ATR 538; (1975) 75 ATC 4213; (1975) 133 CLR 45 (Reseck) and the Full Federal Court in McIntosh v Federal Commissioner of Taxation (1979) 25 ALR 557; (1979) 10 ATR 13; (1979) 45 FLR 279; (1979) 79 ATC 4325 (McIntosh).

In Reseck, Justice Gibbs stated:

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 my opinion necessary that the termination of the services should be the dominant cause of the payment.

While Justice Jacobs, in the same case, stated:

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.

In looking at the phrase in consequence of the Full Federal Court in McIntosh considered the decision in Reseck. In doing so the Full Federal Court emphasised that a payment may be in consequence of the termination of employment even though the termination is not the dominant cause of the payment.

In particular, Justice Brennan considered the judgments of Justice Gibbs and Justice 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.

Thus, while it is not necessary to show that termination of employment is the sole or dominant cause, a temporal sequence alone would not be sufficient.

The phrase in consequence of and the decisions in Reseck and McIntosh were considered more recently by the Federal Court in Le Grand v Federal Commissioner of Taxation [2002] FCA 1258; (2002) 124 FCR 53; (2002) 195 ALR 194; (2002) 2002 ATC 4907; (2002) 51 ATR 39 (Le Grand).

In Le Grand, a settlement payment in relation to legal proceedings involving a wrongful dismissal claim, together with a claim for misleading and deceptive conduct, was held to be an eligible termination payment. Justice Goldberg, the presiding judge, considered that the settlement of the misleading and deceptive conduct component of the claim did not break the casual relationship that existed between the settlement payment and the termination of the taxpayer's employment.

In making his decision, Justice Goldberg stated:

I am satisfied that there is a sufficient connection between the termination of the applicants employment and the payment to warrant the finding that the payment was made in consequence of the termination of the applicants employment. I am satisfied that the payment was an effect or result of that termination in the sense that there was a sequence of events following the termination of the employment which had a relationship and connection which ultimately led to the payment.

Justice Goldberg concluded that the test for determining when a payment is made in consequence of the termination of employment is that which was articulated by Justice Gibbs in Reseck.

The approach taken in Le Grand was also adopted in Dibb v Commissioner of Taxation (2004) 207 ALR 151; (2004) 2004 ATC 4555; (2004) 55 ATR 786; (2004) 136 FCR 388; [2004] ALMD 5780; [2004] FCAFC 126, where the Full Federal Court held that a payment received under a deed of release following the settlement of legal proceedings against the taxpayer's former employer was an eligible termination payment. The Court considered that there was a clear chain of causation between the payment and the termination. That is, the subject matter of the litigation was clearly interwoven and intertwined with the termination.

Thus, for the payment to have been made in consequence of the termination of employment, the payment must follow as an effect or result of the termination of employment. As noted in both paragraphs 6 and 28 of TR 2003/13, there must be 'a causal connection between the termination and the payment even though the termination need not be the [sole or] dominant cause of the payment'.

Therefore if the payment follows as an effect or a result from the termination of employment, the payment will be made in consequence of the termination of employment for the purposes of subparagraph 82-130(1)(a)(i) of the ITAA 1997. Hence the payment will be an employment termination payment unless the payment is specifically excluded under section 82-135.

From the facts of the case the employee was employed in 2 positions with the employer. The employee was employed in Role A and Role B. The funding for Role A ceased and the employee's position was made redundant during the 2011-12 income year. During the 2011-12 income year the employee was redeployed by the employer under a Clause in the Enterprise Agreement to Role B. During the 2011-12 income year the employee took the option for a Voluntary Separation Package (VSP) under a Clause of the Enterprise Agreement for Role A. Under a Clause in the Enterprise Agreement the employee worked a specific number of weeks notice of termination and terminated employment during the 2011-12 income year. The employee continued to work in Role B after a specific date during the 2011-12 income year.

From the facts provided, it is evident that the payment is not made in consequence of the termination of employment. As noted above, the payment must follow as an effect or result of the termination of employment. The employee was continuously employed by the employer prior to and after the employee finished in Role B. Therefore there is not an effective termination of employment with the employer as the employee was at all times still employed by the employer.

As there was no effective termination of employment, the payment is not considered to be made in consequence of the termination of employment. The condition under subparagraph 82-130(a)(i) of the ITAA 1997 has not been satisfied.

As noted above, all conditions under subsection 82-130(1) of the ITAA 1997 must be satisfied before the payment is considered to be an employment termination payment. As one of the conditions have not been satisfied, the payment to the employee is not considered to be an employment termination payment.

Genuine redundancy payment

Section 82-135 of the ITAA 1997 provides that certain payments are not employment termination payments, including:

· an unused annual leave payment;

· an unused long service leave payment; or

· the tax-free part of a genuine redundancy payment or an early retirement scheme payment.

Relevant to this particular case is whether any part of the payment represents the tax free part of a genuine redundancy payment.

A payment made to an employee 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 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 employees 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.

(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 arms length the payment does not exceed the amount that could reasonably be expected to be made if the dismissal were at arms 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)).

The Commissioner has issued Taxation Ruling TR 2009/2 Income tax: genuine redundancy payments (TR 2009/2), 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.

In discussing what constitutes a GRP in accordance with subsection 83-175(1) of the ITAA 1997, paragraph 11 of TR 2009/2 states:

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 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.

· The payment relates to the finishing of Role A. We will now discuss each component to determine whether the payment is a GRP.

Component 1: Payment being tested must be received in consequence of an employee's termination.

It has been established previously that the payment to the employee is not considered to be received by the employee in consequence of termination, as there was no effective termination of employment with the employer. The employee continued to be employed by the employer after the employee's position in Role A ceased and was made redundant during the 2011-12 income year. Therefore the requirement of the first component of subsection 83-175(1) of the ITAA 1997 has not been satisfied.

Component 2: That termination must involve the employee being dismissed from employment.

From the facts of the case, it is considered that the employee was not dismissed from employment.

Paragraphs 16-17 of TR 2009/2 states:

Subject to the exception recognised in paragraph 17 of this Ruling, the loss of a particular position with an employer is not a dismissal for the purposes of subsection 83-175(1) unless all employment with the employer is severed. The Commissioner's view is that a genuine redundancy payment can only arise where there is no suitable job available for the employee with the employer, meaning that he or she must therefore be dismissed.

The exception to this general principle is the case of a person holding an office with the employer at the same time as having a common law employment relationship with the same employer. In this case dismissal from either the office or common law employment involves a dismissal from employment for the purposes of subsection 83-175(1). An example is a person who is both a director of the employer company and a common law employee of the company who is terminated from one of these two capacities.

In this case the employee was employed in 2 positions with the employer but was not holding an office with the employer at the same time as having a common law employment relationship with the same employer.

The employee finished in Role A during a specific date during the 2011-12 income year but was immediately redeployed by the employer on the following day to Role B. The employee continued to be employed by the employer. Therefore, the second component of subsection 83-175(1) of the ITAA 1997 has not been satisfied.

Component 3: That dismissal must be caused by the redundancy of the employee's position.

Based on the information provided although the employer made the decision that the employee's position was not required during a specific date during the 2011-12 income year, the employee was not dismissed from employment. The employee was redeployed by the employer the following day to Role B. The employee continued to be employed by the employer. Therefore, the third component of subsection 83-175(1) of the ITAA 1997 has not been satisfied.

Component 4: The redundancy payment must be made genuinely because of a redundancy.

It is considered the condition for this fourth component has not been satisfied as , there was an arrangement between the employee and the employer to employ the employee after the employee's Role A ceased.

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.

From the facts of the case there is clearly an arrangement between the employee and the employer to redeploy the employee to another role after the employee's Role A ceased on a specific date during the 2011-12 income year. On the following day, the employee was redeployed under a Clause of the Enterprise Agreement to Role B. It is also noted that the arrangement was made prior to the role ceasing on a specific date during the 2011-12 income year in a letter from the employer to the employee on a specific date during the 2011-12 income year offering the employee redeployment to another role. Therefore the fourth component of subsection 83-175(1) of the ITAA 1997 has not been satisfied.

As all four necessary components of a genuine redundancy payment have not been met, the payment cannot be considered to be a genuine redundancy payment.

The payment is considered to be ordinary salary and wages and should be included as salary and wages in the PAYG Payment Summary.

Conclusion

The payment to the employee is not an employment termination payment under section 82-130 of the Income Tax Assessment Act 1997 (ITAA 1997).

The payment to the employee is not a genuine redundancy payment under section 83-175 of the ITAA 1997.

The payment to the employee is considered to be ordinary salary and wages income.