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Ruling

Subject: Genuine redundancy

Question 1

Is any part of the payment in lieu of notice you received, considered to be a genuine redundancy payment in accordance with section 83-175 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 2

Is any part of the bonus you received, considered to be a genuine redundancy payment in accordance with section 83-175 of the ITAA 1997?

Answer

No.

This ruling applies for the following period:

2012-13 income year

The scheme commences on:

1 July 2012

Relevant facts and circumstances

You are under 65 years of age.

You initially commenced employment with (the Employer) on a part-time basis.

The Employer subsequently offered you a permanent part-time role with their firm.

Your letter of employment states that you are entitled to receive a guaranteed annual bonus for the first 12 months of a fixed amount regardless of the hours worked. This bonus was:

· payable 12 months after commencement as an employee; and

· it was payable if, during the 12 months, the Employer decided to terminate the business or your employment (other than for misconduct or performance issues).

Within 4 weeks of the end of that 12 month period, the Employer advised that your position with their firm had been made redundant.

Subsequently, in the 2012-13 income year, you received payments from the Employer including a payment in lieu of notice and the annual bonus.

You also received payments for unused annual leave and superannuation guarantee entitlements.

In response to a request for additional information, the Employer confirmed that:

· the bonus may have been payable had you resigned, given you had a one month notice period

· the bonus would have been payable had they simply terminated your employment (for reasons other than misconduct or non-performance) rather than retrenching you.

You have confirmed that had you resigned voluntarily, you would have been required to give the Employer the mandatory four weeks notice and work the four week period until your date of resignation.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 82-130.

Income Tax Assessment Act 1997 section 82-135.

Income Tax Assessment Act 1997 section 83-170.

Income Tax Assessment Act 1997 section 83-175.

Reasons for decision

Summary

The payment in lieu of notice is a genuine redundancy payment. The tax-free part of the genuine redundancy payment has been calculated in accordance with the formula in subsection 83-170(3) of the ITAA 1997. The remaining amount in excess of the tax-free part is an employment termination payment and treated as assessable income.

The bonus is not an employment termination payment, as it was not paid in consequence of the termination of your employment. As such, the bonus is fully assessable at your marginal tax rates.

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 employer termination payments. These include (among others):

· superannuation benefits

· unused annual leave or long service leave payments

· foreign termination payments covered under Subdivision 83-D of the ITAA 1997 and

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

Based on the information provided, you were made redundant on 11 October 2012.

Payment in lieu of notice

A payment in lieu of notice was paid to you in the 2012-13 income year. The payment in lieu of notice was made to you in consequence of the termination of your employment. There is a clear causal connection between the termination of your employment and the payment in lieu of notice. The payment followed as an effect or result of the termination of your employment. In other words, but for the termination of employment that payment would not have been made to you. Had you voluntarily resigned, you would not have been entitled to the payment in lieu of notice. You would have been required to provide four weeks notice and work that four week period on voluntary resignation.

Therefore, the payment in lieu of notice was made in consequence of the termination of employment as defined in subparagraph 82-130(1)(a)(i) of the ITAA 1997.

Further, the payment in lieu of notice was paid to you:

· within 12 months of your termination (thereby satisfying paragraph 82-130(1)(b)) of the ITAA 1997, and

· apart from the possible exception of paragraph 82-135(e) of the ITAA 1997, which is discussed below, it is not a payment excluded from being an employment termination payment under section 82-135.

Bonus payment

You were also paid a bonus in the 2012-13 income year. Your letter of employment states that you are entitled to receive a guaranteed annual bonus for the first 12 months of a fixed amount regardless of the hours worked. This bonus was:

· payable 12 months after commencement as an employee, and

· it was payable if, during the 12 months, the Employer decided to terminate the business or your employment (other than for misconduct or performance issues).

As the bonus was a guaranteed payment, which you would have received had you continued working for the Employer, the bonus payment you received is not in consequence of the termination of your employment.

In other words, there is no requisite causal connection between the termination and the bonus payment. The bonus payment does not 'follow as an effect or result of the termination' as you were clearly entitled to a guaranteed bonus had your employment continued with the Employer.

The bonus payment was not in consequence of the termination of your employment as the bonus would have been paid to you had your employment not been terminated. Furthermore, the Employer has confirmed that the bonus may have been payable had you resigned from the firm, given you had a one month notice period.

While the payment was certainly paid at the time of the termination of your employment, it is considered that the connection was merely temporal. In accordance with the Commissioner's view in TR 2003/13, whilst the termination of employment need not be the dominant cause of the payment, there must be a causal nexus between the termination and the payment. In McIntosh v. Federal Commissioner of Taxation (1979) 79 ATC 4325; (1979) 25 ALR 557; (1979) 45 FLR 279, Justice Brennan said that:

…His honour denies the necessity to show that retirement is the dominant cause, but he does not allow a temporal sequence alone to suffice as the nexus. Though the language of causation often contains the seeds of confusion, I apprehend his Honour to hold the required nexus to be (at least) that the payment would not have been made but for the retirement.

The bonus payment was made to you in satisfaction of your entitlement to the bonus payment. The bonus payment would have been paid to you had you continued working with the Employer or resigned after working for 12 months. Your entitlement to the payment was not inconsequence of your position being made redundant.

As the requirement in subparagraph 82-130(1)(a)(i) of the ITAA 1997 has not been satisfied, the bonus payment you received is not an employment termination payment and therefore not subject to concessional tax treatment. The bonus is fully assessable, at your marginal tax rate applicable in the 2012-13 income year.

Genuine redundancy payment

Under subsection 83-175(1) of the ITAA 1997 a genuine redundancy payment is one 'received by an employee who is dismissed from employment because the employee's position is genuinely redundant'.

In Taxation Ruling 2009/2 Income tax: genuine redundancy payments, the Commissioner has outlined the requirements to be satisfied before any payment made to a person whose employment is terminated qualifies for treatment as a genuine redundancy payment under section 83-175 of the ITAA 1997.

There are four necessary components within this termination requirement:

1. The payment being tested must be received in consequence of an employee's termination.

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

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

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

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

It has been established previously that the payment in lieu of notice has been received in consequence of the termination of your employment. Therefore the requirement of the first component of subsection 83-175(1) of the ITAA 1997 has been satisfied.

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

On the basis of the facts as presented in your case, it is evident you were dismissed from your employment at the initiative of the Employer. This was confirmed in a letter from the Employer.

Therefore, this second component of subsection 83-175(1) of the ITAA 1997 has been satisfied.

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

Based on the information provided it is evident that the Employer made the ultimate decision that your position was redundant and that was the prevailing reason you were dismissed from your employment.

The Employer has confirmed this in their letter to you, stating that your dismissal was caused by the redundancy of your position with their firm. The third requirement of a genuine redundancy has therefore been satisfied.

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

The need for an employee's position to be genuinely redundant establishes that contrived cases of redundancy will not meet the conditions in section 83-175 of the ITAA 1997.

In your case, there is nothing to indicate that the redundancy is not genuine. Therefore, the fourth component of a genuine redundancy has been satisfied.

Further conditions for a genuine redundancy payment

Before a payment that meets the basic redundancy requirement in subsection 83-175(1) of the ITAA 1997 qualifies as a genuine redundancy payment, all other conditions in subsections 83-175(2) and (3) must be met. These conditions include:

The payment must be made before a person turns 65 or an earlier mandatory age;

The termination was not at the end of a fixed period of employment;

· the actual amount that was paid is not greater than the amount that could reasonably be expected to be paid had the parties been dealing at arm's length;

· the amount that was paid was in excess of what a person would have been entitled to receive if they had voluntarily resigned;

· there was no arrangement for re-employment with the employer or a related party after the termination date; and

· the payment was not in lieu of superannuation benefits.

On the basis of the information provided, it is considered that all the conditions of subsections 83-175(2) and 83-175(3) of the ITAA 1997 are also satisfied, with the exception of the amount paid being in excess of what you would have been entitled to receive if you had voluntarily resigned, as it applies to the bonus payment.

The Employer has stated that if you had resigned on the day you were made redundant, you would have still received the bonus, as your notice period would have taken you past the 12 month qualifying period for that payment.

Consequently, it can be concluded that only the payment in lieu of notice is a genuine redundancy payment as defined in section 83-175 of the ITAA 1997.

As your payment in lieu of notice would clearly not be payable on voluntary termination, the entire payment in lieu of notice you received is a genuine redundancy payment.

Section 83-170 then applies to treat so much of the relevant payment (that does not exceed the amount worked out under a specified formula) as tax-free. That is, the tax-free part is not assessable income and is not exempt income.

Taxation 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)

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 2012-13 income year:

Base amount means $8,806; and

Service amount means $4,404.

In your case, the tax-free part of a genuine redundancy payment you can receive in the 2012-13 year has been calculated in accordance with subsection 83-170(3) of the ITAA 1997. This tax-free amount is not assessable income and is not exempt income in accordance with subsection 83-170(2) of the ITAA 1997.

Accordingly, as the payment in lieu of notice you received is in excess of the tax-free amount, the remaining amount is an employment termination payment, to be included in your income tax return for the 2012-13 income year.

Conclusion:

The payment in lieu of notice is a genuine redundancy payment. The tax-free part of the genuine redundancy payment has been calculated in accordance with the formula in subsection 83-170(3) of the ITAA 1997. The remaining amount in excess of the tax-free part is an employment termination payment and treated as assessable income.

The bonus which you received is not an employment termination payment as it was not paid in consequence of the termination of your employment. Accordingly, it is assessable income to be declared in your income tax return for the 2012-13 income year and taxable at your marginal tax rate.