Edited version of your private ruling

Authorisation number : 1012412416529

Ruling

Subject: Employment termination payment - genuine redundancy

Question

Does any part of the payment made on termination of your employment represent the tax-free part of a genuine redundancy payment?

Answer

No.

This ruling applies for the following periods:

For the year ended 30 June 2013

The scheme commences on:

1 July 2012

Relevant facts and circumstances

You were employed at Company A (the Company).

You commenced employment at the Company some years ago.

The Company announced the closure of Site A in mid 2012 and that relocation plans will take place some 6 months later. Your position will become redundant when the relocation is completed.

Your employment with the Company was terminated during certain month 2012 by way of a voluntary resignation.

You were over 45 years of age at the time when your employment was terminated with the Company.

Upon the termination of your employment, you were paid various components which included overtime, unused long service leave and unused annual leave payments.

The Company issued an information pack to all staff members which outline details of the relocation and redeployment options.

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 of decision

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

However, all the requirements under section 83-175 of the ITAA 1997 have not been satisfied so the payment cannot be considered a genuine redundancy payment.

Detailed reasoning

Employment termination payment

Payments made in consequence of the termination of a taxpayer's employment are known as employment termination payments.

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:

(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.

Therefore, 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.

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 in 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 making his decision Justice Goldberg stated:

I am satisfied that there is a sufficient connection between the termination of the applicant's employment and the payment to warrant the finding that the payment was made in consequence of the termination of the applicant's 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. 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.

The Commissioner has also issued Taxation Ruling TR 2003/13 (TR 2003/13) which discusses the meaning of the phrase in light of these court decisions.

In paragraph 6 of TR 2003/13, the Commissioner states that 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.

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.

From the facts provided, your employment was terminated during certain month 2012 and you were paid a lump sum payment.

The payment is considered to have been made in consequence of the termination of your employment. The payment would not have been made had there been no termination of employment. The termination of employment and the payment is intertwined and connected.

Consequently, the requirement in paragraph 82-130(1)(a) of the ITAA 1997 is satisfied.

The payment is received no later than 12 months after termination of employment

Paragraph 82-130(1)(b) of the ITAA 1997 requires that the payment must be received no later than 12 months after the termination of employment.

In the facts, you stated that your employment was terminated during certain month 2012 and a termination payment was made to you during following month 2012. As the payment was made to you within 12 months, the requirements in subsection 82-130(5) have been met.

Not a payment mentioned in section 82-135 of the ITAA 1997

Section 82-135 of the ITAA 1997 lists payments that are not employment 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.

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

Genuine redundancy payment

A payment made to an employee is a genuine redundancy payment if it satisfies all 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 employee's position is genuinely redundant as it 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). 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 employee's employment would have terminated when 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))

The Commissioner has issued Taxation Ruling TR 2009/2, titled Income Tax: genuine redundancy payments (TR 2009/2). The Ruling provides guidance on the factors to be considered in the interpretation of section 83-175 of the ITAA 1997.

Paragraph 11 of TR 2009/2 states:

11. There are four necessary components within the basis genuine redundancy requirement:

· The payment being tested must be received in consequence of a 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.

Each of the requirements will be discussed individually.

The payment is in consequence of the termination of employment

The issue of whether the payment you received was made in consequence of the termination your employment was discussed above. It was determined that the payment would be considered to be made in consequence of your clients termination of employment. Therefore the requirement that the payment must be received in consequence of a termination is met.

Dismissal from employment

Dismissal requires a termination of employment at the initiative of the employer without the consent of the employee.

At paragraphs 19 to 20 and 21 of TR 2009/2, the following is stated:

19. Consent in this context refers to the employee freely choosing to agree or approve the act or decision to terminate employment in circumstances where the employee has the capacity to make such a choice. Determining whether an employee has consented to their termination requires an assessment of the facts and circumstances of each case. Consent may be either expressly stated by the employee or implied by their behaviour or conduct.

20. A dismissal can still occur even where an employee has indicated that they would be interested in having their employment terminated, provided that the final decision to terminate employment remains solely with the employer. Such a case may arise where expression of interest in receiving a redundancy package are sought from the employees as part of a structured process undertaken by the employer as a means of promoting industrial harmony.

21. Where an employee is given notice from their employer that they will be terminated at a specified time in the future due to genuine redundancy, that employee will be dismissed because of redundancy for the purposes of section 83-175. This will be the case even where an employee, following notification, negotiates with the employer or nominates to end their employment at an earlier time. Negotiation or nomination of an earlier date relates to the timing of the termination and not to the character of the termination as a dismissal. In determining whether any payment made in these circumstances would qualify as a genuine redundancy payment, the other conditions in section 83-175 would still need to be met.

In your case, the Company notified all staff members of the relocation plans and possible redeployment options during mid 2012. Documentation was issued outlining details of considerations available to affected staff members.

The facts provided indicate that you were dismissed from employment by the Company as a termination date was specified and you were informed that your role will be abolished when the relocation is completed. Accordingly, the second requirement of a genuine redundancy has been met.

Dismissal caused by redundancy

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. Redundancy must be the reason for termination of employment by way of dismissal.

At paragraphs 25 to 27 of TR 2009/2, the Commissioner makes the following comments 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 employers 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. However, if the employee who had been working in that position is still employed by the employer following the reallocation of duties and functions, there will not be a dismissal.

27. On the other hand, if an employer decides after a structural reorganisation to terminate an employee, the former position of the employee is effectively redundant as long as the reorganisation is the prevailing or most influential cause of the termination.

The Commissioner expands on the issue of determining the cause of dismissal at paragraphs 268 to 271 of TR 2009/2:

268. There are various reasons why an employee may be dismissed from employment. Redundancy may be only one of these reasons.

269. In circumstances where more than one reason can be identified for the dismissal, the Commissioner considers that redundancy must be the primary cause of the dismissal. This suggests an analysis of what is the prevailing or most influential cause of the dismissal. This question is to be answered in light of the facts and circumstances of each case.

270. The classic context for redundancy is the closure, downsizing or reorganisation of part or all of the employers operations. Redundancy can readily be established as the prevailing or most influential cause of dismissal in the first two of these scenarios.

271. Where an employer dismisses an employee after a reorganisation of duties, functions and responsibilities, a more careful analysis is required. A restructure of an organisation does not necessarily import redundancy where employees are dismissed following the reallocation or restructure. In these circumstances, it is necessary to consider what impact the restructure had on the duties, functions and responsibilities formerly fulfilled by the dismissed employee.

It is evident from the above that if the prevailing or most influential cause of termination was not redundancy, notwithstanding that the position occupied by a dismissed employee may have been abolished, the dismissal would not constitute a redundancy.

From the facts provided, it is clear that your position will be abolished when the relocation is completed during certain month 2013. The information pack provided by the Company stated specifically so.

Although you have been informed about the relocation during mid 2012, you were given significant time to consider a number of options available in relation to redeployment opportunities at the new site and the opportunity to stay with your employer until the closure date in 2013. However, you chose to resign from your position in 2012.

More importantly, when you resigned, your position was still required by your employer. It is clear that your position will not be become redundant until after the closure date of the particular site. Consequently, it is considered that the prevailing, or most influential, cause of the termination of your employment was not redundancy.

Further, you made references in your ruling application to example 12 in paragraphs 152 to 160 and example 17 in paragraphs 176 to 179 of TR 2009/2. It is noted that whilst there are some similarities in the circumstances surrounding the termination of your employment and situations outlined in the examples, there is no evidence in the facts that indicated you have negotiated a termination date with your employer nor dismissed from employment with no ultimate control.

As it is considered that the dismissal was not caused by the redundancy of your position, the third requirement of a genuine redundancy has not been satisfied.

The redundancy payment must be made genuinely because of a redundancy

It should be noted that whether a redundancy is genuine is determined on an objective basis.

In this case, from the facts provided, it is not evident that there has been a redundancy as discussed above. Therefore the fourth requirement of a genuine redundancy payment has not 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 the other conditions in section 83-175 must be met. These conditions include:

· The payment must be made before the person turns 65 or an earlier mandatory age of retirement;

· The payment must be made before the end of a fixed period of employment;

· The payment must not exceed an arm's length amount in the event that the employer and employee are not dealing at arm's length;

· There must be no stipulated arrangement to employ the person after the termination; and

· The payment must not be in lieu of superannuation benefits.

The facts indicate that all the above conditions in section 83-175 of the ITAA 1997 have been met. In this respect, it is noted that you and your employer were dealing at arms length, was not for a fixed term, no existing arrangements after termination and no superannuation benefits included in the termination payment made to you.

Conclusion

All the requirements under section 83-175 of the ITAA 1997 have not been satisfied. Consequently, the payment cannot be considered a genuine redundancy payment.

The payment you received from your employer is an employment termination payment under subsection 82-130(1) and should be included in your income tax assessment in the 2012-13 income year.

.