Edited version of your private ruling

Authorisation Number: 1012379244994

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. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet.

Ruling

Subject: Employment termination payment - long retention bonus

Questions

1. Does the payment described as a 'long retention bonus' made by the Employer to its employees constitute an employment termination payment?

2. Is any part of the 'long retention bonus' made to the employees a genuine redundancy payment?

Answers

1. Yes.

2. Yes.

This ruling applies for the following periods

Year ended 30 June 2012

Year ending 30 June 2013

The scheme commenced on

1 July 2011

Relevant facts and circumstances

In the relevant income year the Employer entered into an agreement to sell an asset (the asset) to an interested entity (the Purchaser).

The Employer employed individuals (the Site X Employees) who performed services on the asset. A related entity also employed some individuals in relation to the asset who were located at a site where the asset was not located (Site Y Employees).

During the process of the negotiation it became apparent to the Employer (and the related entity) that the services of many employees would no longer be required.

You state as a result of the sale:

(a) many of the positions of the employees would no longer exist;

(b) the Purchaser had no intention of continuing the employment of the Site Y Employees; and

(c) the above would result in the redundancy of all the Employees as well as some, but not all, of the related entity's Site Y Employees.

To assist its Site X Employees on redundancy, and provide an incentive for them to continue their employment up until the sale and a period thereafter, the Employer offered all its Site X Employees the opportunity to participate in an incentive plan (the Plan).

In the relevant income year the Employer sent letters (the Offer letters) to the Site X Employees which detailed the Plan. A generic copy of the letters has been provided which states:

(a) The sale of the asset could result in redundancies;

(b) Under the Plan, if an agreement was signed for sale of the asset to the Purchaser and the title in the asset being transferred to the Purchaser before a specified date, each Site X Employee who accepted the Plan and continued their employment until a specified date, or earlier upon their role with the Employer becoming redundant, would receive a 'Long Retention Bonus' (the Bonus);

(c) In order to receive the Bonus, each Site X Employee who accepted the Plan was required to:

(i) remain employed by the Employer until a specified date or earlier, if the redundancy occurred earlier (Termination Date);

(ii) continue to perform their roles until the Termination Date; and

(iii) provide assistance and co-operation in respect to any requests made concerning the sale process of the asset.

In the offer to each Site X Employee, the Bonus was stated to be in addition to the Employer's other payment obligations to each Site X Employee. These other payments are:

(a) an amount in lieu of the contractual obligation (i.e. under the relevant enterprise bargaining agreement (EBA)) to provide notice prior to termination of employment (Notice Payment); and

(b) an amount in satisfaction of each Employee's leave entitlements.

The Bonus was expressed to be 'inclusive of all superannuation payments'.

Each Site X Employee who was made redundant would receive:

(a) wages or salary owing to them;

(b) the Notice Payment (if applicable);

(c) leave payments, that is, unused annual or long service leave; and

(d) the Bonus.

A specific clause of the EBA provided that a contract of employment may be terminated by either the employee or the employer by provision of four weeks' written notice or by the payment of salary by the employer in lieu of notice.

Early in the subsequent income year a letter (Confirmation of Redundancy letter) was sent to the Site X Employees confirming their positions would be made redundant. The letter stated:

(a) each Site X Employee's employment would be terminated on the Termination date as a result of the sale of the asset;

(b) the Purchaser had provided written confirmation that each Employee's position was no longer required and accordingly each role had ceased to exist; and

(c) the Employer had no suitable roles within its organisation and accordingly each Site X Employee's employment terminated on the Termination date.

The letter further provided that each Site X Employee was entitled to:

(a) a severance payment, calculated by reference to the Site X Employee's period of employment; and

(b) the Bonus,

which would be paid along with other outstanding entitlements (such as payments in lieu of unused annual leave and, where applicable, long service leave) on either:

(a) the Termination date; or

(b) such earlier date upon which the Site X Employee's position became redundant.

Payment of the severance payment, the Bonus and other entitlements would be made directly to each Site X Employee.

Details have been provided which show:

(a) the employment of all of the Site X Employees was terminated;

(b) some Site X Employees received the Bonus earlier than the Termination date on their positions being made redundant at that time;

(c) some Site X Employees, in addition to the Bonus, also received a Notice Payment; and

(d) the remainder of the Site X Employees received the Bonus in the subsequent income year

You state:

(a) each Site X Employee was dismissed before he or she turned 65 years of age or before the date at which their employment would have ordinarily terminated;

(b) the dismissals were at arm's length; and

(c) there is no arrangement between the Employer and the Site X Employees, or the Employer and any other person, to employee the Site X Employees after their dismissals.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 82-130

Income Tax Assessment Act 1997 Section 82-130(1)(a)

Income Tax Assessment Act 1997 Section 82-130(1)(b)

Income Tax Assessment Act 1997 Section 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 Subsection 83-170

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)

Reasons for decision

Summary

The severance, long retention bonus and payment in lieu of notice payments made by the Employer to its Site X Employees are considered to be genuine redundancy payments.

The part of the combined payments (the severance, long retention bonus and payment in lieu of notice) in excess of the tax-free amount of a genuine redundancy payment is the taxable component of an employment termination payment. Accordingly, the employment termination payment is to be included as assessable income for the income year in which the payments were received by the Employee.

Detailed reasoning

Employment termination payment

A payment made to an employee is an employment termination payment if the payment satisfies all the requirements in section 82-130 of the Income Tax Assessment Act 1997 (ITAA 1997) and is not specifically excluded under section 82-135.

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.

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

a) payment for unused annual leave or unused long service leave;

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

c) reasonable capital payments for personal injury.

In consequence of the termination of your employment

The phrase 'in consequence of' is not defined in the ITAA 1997. However, the courts have interpreted the phrase in a number of cases. Whilst the courts have divergent views on the meaning of this phrase, the Commissioner of Taxation's (the Commissioner) view on the meaning and application of the in consequence of test are set out in Taxation Ruling TR 2003/13 Income tax: eligible termination payments (ETP): payments made in consequence of the termination of any employment: meaning of the phrase in consequence of.

While TR 2003/13 considered the meaning of the phrase 'in consequence of' in the context of the eligible termination payments, TR 2003/13 can still be relied upon as both the former provision under the Income Tax Assessment Act 1936 and the current provision under the ITAA 1997 both use the term 'in consequence of' in the same manner. It should be noted that eligible termination payments ceased to exist from 1 July 2007 and were replaced by employment termination payments.

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. (emphasis added)

In paragraph 6 of TR 2003/13, the Commissioner recognises that:

The phrase requires 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. (emphasis added)

The phrase in consequence of termination of employment has been interpreted by the courts in several cases.

Of note are the decisions made by the High Court in Reseck v. Federal Commissioner of Taxation¹ (Reseck) and the Full Federal Court in McIntosh v Federal Commissioner of Taxation² (McIntosh).

Both Courts views were that for a payment to be made in consequence of the termination of employment it had to follow on as a result or effect of the termination of employment. Additionally, 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.

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.

There is also a broader view of the meaning of in consequence of the termination of employment. Paragraph 29 of TR 2003/13 provides that a payment will be in consequence of the termination of employment if the termination is either a cause of the payment or an antecedent event.

Furthermore, in Case No M 101/1976 the No. 2 Board of Review considered whether a production completion bonus was made in consequence of termination of employment. The facts of the case were that on the day he was retrenched, the taxpayer received a production completion bonus of $2,750 from his employer. In a letter to the Deputy Commissioner, the taxpayer's former employer explained that the bonus payment was designed as an incentive to keep the employee on a particular project until he was no longer needed. Payment of the bonus was conditional on the employee remaining on the job until retrenched. The taxpayer gave evidence that had he resigned at any time before the retrenchment date he would have received no part of the bonus.

The No. 2 Board of Review held that the payment constituted an allowance or compensation paid in a lump sum in consequence of the termination of the taxpayer's employment within the meaning of former paragraph 26(d) of the ITAA 1936 (the precursor to the ETP provisions). The decision of majority of the Full High Court in Reseck applied.

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.

The circumstances of the present case are almost identical to those circumstances in Case No M 101/1976 considered by the No 2 Board of Review.

In this case the Employer, as part of a sales process, implemented the Plan to retain its Site X Employees during the sale and for a period after the sale process was completed.

Further, in the Offer letters which the Employer sent to its Site X Employees, wherein the Plan was detailed, reference was also made to the possibility of there being redundancies if the sale was completed and certain conditions were satisfied.

The Plan was offered by the Employer to all of its Site X Employees who were also all employed on the asset.

The Employer stated that as part of the Plan the Bonus would be paid to Site X Employees who agreed to continue with their employment until the Termination Date or earlier upon their role with the Employer becoming redundant.

Further the Employer stated that if:

(a) an agreement was not signed for the sale; or

(b) conditions precedent to the sale were not satisfied; or

(c) title to the asset was not transferred prior to a specified date in the 2011-12 income year;

the Bonus would not be paid and the Site X Employees' contracts would continue on their existing terms in support of the Employer's continued ownership of the asset.

The facts show that the asset was sold and early in the subsequent income year the Employer informed the Site X Employees in the Confirmation of Redundancy letter that their positions would be made redundant and their employment terminated.

Further, as shown in the details provided:

(a) the employment of all the Site X Employees was terminated;

(b) the employment of some Site X Employees was terminated in the relevant income year with the employment of the remainder being terminated in the subsequent income year ;and

(c) some Site X Employees received, in addition to the Bonus, a payment in lieu of notice.

In view of the above it is considered that payment of the Bonus was made in accordance with the Plan communicated to the Site X Employees in the Offer letters, that is, a Plan which indicated the Bonus would be made to Employees whose employment was terminated as a result of the sale of the asset.

As mentioned earlier, the Plan was implemented due to the negotiation process involving the sale of the asset and the resultant possibility of redundancies. Given the Site X Employees were all employed on the asset, it is considered there was a strong likelihood that:

(a) their employment could be terminated; and

(b) the Employer would be unable to provide them with alternative employment.

Accordingly, in view of the above discussion, it is considered there is a sufficient causal link between the Site X Employees' termination of employment and the Bonus paid to them under the Plan for the Bonus to be viewed as being made in consequence of their termination of employment. Further were it not for the Site X Employees termination of employment it is considered the Bonus would not have been made to the Site X Employees.

In addition, though not part of the Plan, it should be noted that the amounts paid to the Employees in relation to their severance and payment in lieu of notice payments are also considered to be made in consequence of the Employees' termination of employment.

In view of the above, subparagraph 82-130(1)(a)(i) of the ITAA 1997 is considered to be satisfied not only in relation to the Bonus but also in relation to the severance and payment in lieu of notice payments.

Payment received no later than 12 months after termination

In addition to meeting the other conditions for a payment to be an employment termination payment, paragraph 82-130(1)(b) of the ITAA 1997 specifies that the payment must be received within 12 months of the employee's termination of employment, unless they are covered by a determination exempting them from the '12 month rule'.

As shown in the facts, the Employer has stated that the Payments (which include severance pay, the Bonus and, where applicable, payment in lieu of notice) are paid to Site X Employees on their termination date or an earlier date on which their employment is made redundant.

Accordingly, as the Payments are made within 12 months of Site X Employees' termination of employment, the requirement in paragraph 82-130(1)(b) of the ITAA 1997 has been satisfied.

A payment mentioned in section 82-135 of the ITAA 1997

As previously mentioned, section 82-135 of the ITAA 1997 excludes certain payments from being employment termination payments, These payments include:

· a payment for unused annual leave

· a payment for unused long service leave

· capital payments for personal injury

· the tax-free amount of a genuine redundancy payment.

In this case the facts provided show that the issue of whether any part of the Payments (which as stated previously, includes the Bonus, severance payment and payments in lieu of notice), is a genuine redundancy payment requires consideration.

Genuine redundancy payment

To determine if any part of the Payments constitute a genuine redundancy payment all the conditions in section 83-175 of the ITAA 1997 need to be satisfied.

Where a payment is made to an employee after 30 June 2007, a a genuine redundancy payment is defined in subsection 83-175(1) of the ITAA 1997 as:

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 the dismissal.

Subsection 83-175(2) of the ITAA 1997 states that for a payment to qualify as a a genuine redundancy payment all of the following conditions must be met:

(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 the dismissal.

In addition, subsection 83-175(3) of the ITAA 1997 provides that a 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. In addition, subsection 83-175(4) provides that a payment is not a a genuine redundancy payment if it is a payment mentioned in section 82-135.

The Commissioner of Taxation has issued Taxation Ruling TR 2009/2 which outlines the Commissioner's view of the requirements to be satisfied for a payment to qualify as a genuine redundancy payment under section 83-175 of the ITAA 1997.

It is proposed to examine each of these provisions.

The requirement under subsection 83-175(1) of the ITAA 1997

The first requirement which is specified in subsection 83-175(1) of the ITAA 1997 has four criteria:

· the payment is in consequence of the employee's termination of employment;

· the payment is received by an employee who is dismissed from employment;

· the employee is dismissed because the employee's position is genuinely redundant; and

· 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.

Payment in consequence of termination

The issue of whether the Payments are in consequence of the termination of employment was discussed above. As it was determined that the Payments are made in consequence of the Site X Employees' termination of employment this criterion is satisfied.

Dismissal from employment

Dismissal from employment usually means that the termination of employment is involuntary on the part of the employee concerned and is instigated by the employer.

From the facts provided, it is evident that the Site X Employees did not voluntarily terminate their employment but that their employment was terminated at the instigation of the Employer. Further, the dismissals were not the result of any misbehaviour on the Site X Employees' part but arise from negotiations entered into by the Employer to divest itself of an asset.

Therefore, the Site X Employees' termination of employment are clearly dismissals for the purposes of subsection 83-175(1) of the ITAA 1997.

Genuine redundancy

Having established that the Payments are in consequence of termination of employment, and the Site X Employees were dismissed from employment for the purposes of subsection 83-175(1) of the ITAA 1997, the next criterion that needs to be considered is whether the Site X Employees were dismissed because their positions were 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 TR2009/2 the following comment is made:

… 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.

In this case the facts show, as previously discussed, the dismissals were not for any reasons such as inefficiency or misbehaviour but due to the Employer reorganising its operations which involved the sale of an asset. As a result of the sale the Employer no longer requires the Site X Employees attached to that asset.

In the Offer letters which the Employer sent to all its Site X Employees, wherein they were made an offer to participate in the Plan, the Employer stated that redundancies could occur as a result of the sale and that employment could be terminated on the Termination date or on an earlier date if the redundancy occurred earlier.

Further, as shown in the facts, the Employer sent Confirmation of Redundancy letters to the Site X Employees confirming their positions would be made redundant as a result of the sale of the asset.

In view of the above, and that all of the Site X Employees were terminated as a result of the sale of the asset, its is considered that the Site X Employees' employment was terminated due to genuine redundancy and the Payments are made as a result of genuine redundancy.

Accordingly, it is considered that this third criterion under subsection 83-175(1) of the ITAA 1997 is satisfied.

The payment exceeds what the employee would have received in consequence of the voluntary termination of their employment at the time of their dismissal

The last criterion that needs to be considered is whether the payment exceeds the amount that the employee could reasonably be expected to receive in consequence of the voluntary termination of their employment will be treated as a genuine redundancy payment.

In this case it is considered that the Payments are in excess of what the Site X Employees would have received had they voluntarily terminated employment as:

(a) the EBA under which they were employed does not make any reference to amounts or calculation of amounts they would have been entitled to upon voluntary termination of employment;

(b) the Employer's Offer letter sent to all of the Site X Employees specifically states that the Bonus is a payment the Site X Employees would receive in addition to their other entitlements; and

(c) severance payments are payments which one does not receive upon normal termination of employment as are payments made in lieu of notice as in this case.

In view of the above, it is considered that the Payments are in excess of what the Site X Employees would have received had they voluntarily terminated employment.

Conclusion in relation to subsection 83-175(1) of the ITAA 1997

It is considered that all the criteria stipulated in subsection 83-175(1) of the ITAA 1997 has been satisfied.

Consequently it is considered that the Payments (representing the Bonus, severance and payment in lieu of notice payments) constitute a genuine redundancy payment within the meaning of subsection 83-175(1) of the ITAA 1997. However, a genuine redundancy payment must also satisfy the conditions in subsections 83-175(2) to 83-175(4).

The requirements under paragraphs 83-175(2)(a) and (b) of the ITAA 1997

As already noted previously, 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 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).

It is accepted that there was no date prior to each Site X Employee's 65^th birthday on which they were required to terminate employment, and that the Site X Employees were not required to terminate employment before they were dismissed. Also given that the Site X Employees are stated in the facts as being under 65 years of age at the time of their dismissal it is considered that the requirements of paragraph 83-175(2)(a) of the ITAA 1997 are satisfied.

Additionally, it is accepted that all dealings between the Employer and the Site X Employees were at arm's length. Therefore it follows the requirement under paragraph 83-175(2)(b) of the ITAA 1997 is satisfied.

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

Also as noted previously, 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.

In the present case, the Site X Employees were all terminated and there is no arrangement between the Employer and the Site X Employees, or the Employer and any other person, to employee the Site X Employees after their dismissals. Accordingly, the requirement under paragraph 83-175(2)(c) of the ITAA 1997 is satisfied.

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 genuine redundancy payment does not include any part of a payment that is received in lieu of superannuation benefits. No part of the payment to be made to you is in lieu of superannuation benefits. Therefore it is accepted that the requirement under subsection 83-175(3) is satisfied.

Also as noted previously, 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 (other than a genuine redundancy payment or early retirement scheme payment).

Section 82-135 of the ITAA 1997 includes payments such as pensions, foreign termination payments, unused annual leave and unused long service leave.

An examination of the Payments shows that the requirement in subsection 83-175(4) of the ITAA 1997 has been satisfied.

A genuine redundancy payment under sections 83-170 and 83-175 of the ITAA 1997

As all the criteria set out in section 83-175 of the ITAA 1997 are satisfied, it follows that the Payments constitute a genuine redundancy payment for the purposes of section 83-170.

Tax-free treatment of a genuine redundancy payment

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

Base amount + (Service amount × Years of service)

It should be noted as some Site X Employees were dismissed in the 2011-12 income year and others were dismissed in the 2012-13 income year that:

(a) the Base amount for genuine redundancy payments received in the 2011-12 and 2012-13 income years is $8,435 and $8,806 respectively;

(b) the Service amount for 2011-12 and 2012-13 income years is $4,218 and $4,404 respectively; and

(b) Years of service is the number of 'whole' years of service a Site X Employee was employed with the Employer.

The tax-free amount calculated above is accordingly applied against the total genuine redundancy payment received by a Site X Employee. The amount of the total genuine redundancy payment which exceeds the tax-free amount is taxed as an employment termination payment.

Conclusion

The tax-free amount of the total genuine redundancy payment calculated in accordance with subsection 83-175(3) of the ITAA 1997 is not assessable income and is not exempt income under subsection 83-170(2). Accordingly, the amount is not to be included in a Site X Employee's tax return.

In relation to the balance of the genuine redundancy payment, that is, the amount of the genuine redundancy payment in excess of the tax-free amount, it represents an employment termination payment which is to be included as assessable income in a Site X Employees tax return for the income year in which the Payments were received.