Edited version of your private ruling

Authorisation Number: 1012436426656

Ruling

Subject: Redundancy payment

Question

Does the mandatory placement of a genuinely redundant employee on an employer list constitute an 'arrangement' to employ the employee after the dismissal under paragraph 83-175(2)(c) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No in the unique circumstances of this case.

This ruling applies for the following period

30 June 2013

The scheme commenced on

1 July 2012

Relevant facts and circumstances

For those employees in receipt of redundancy and who joined the employer after a specified date, the employee must remain on the employer's list for a specified number of years or until compulsory retirement age is reached (whichever is sooner).

Employees on the employer's list have no standing offer of employment, rather their names and skills are maintained on the register in the event of specific circumstances and their particular skill sets are required. The employee may then be required for full-time employment.

An employee is required to repay any redundancy benefit if, within a specified time of ceasing employment, is called from the list and re-commences a further period of service.

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 83-175(3).

Income Tax Assessment Act 1997 Subsection 83-175(4).

Income Tax Assessment Act 1997 Subsection 995-1(1).

Reasons for decision

Summary

At the time of dismissal, employees being mandatory transferred to the employer's list have no standing offer of employment. Therefore the mandatory transfer of an employee to the list is not a genuine arrangement between the employer and the employee to employ the employee after the termination of employment.

Detailed reasoning

Genuine redundancy payment

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)).

In the facts of this case an employee is being dismissed from employment as the employer has made a decision that the work or job is no longer required to be performed by anyone because of the changes in their operational requirements.

Whether there is any arrangement between the employee and the employer to re-employ the employee after the termination of employment will now be considered.

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.

The Commissioner has issued Taxation Ruling 2009/2, 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.

The Commissioner considers that the phrase 'arrangement… to employ' in paragraph 83-175(2)(c) of the ITAA 1997 refers to common law employment only. This condition does not contemplate a situation where there is an arrangement to engage the former employee as an independent contractor.

Paragraphs 50 to 52 of TR 2009/2 state:

No stipulated arrangement to employ

50. Under paragraph 83-175(2)(c), an arrangement to employ an employee after his or her termination prevents a dismissal giving rise to a genuine redundancy payment if that arrangement is entered into between either:

Ÿ the employer and the dismissed employee; or

Ÿ the employer and another entity.

51. In the second of these two cases, the other entity would commonly be the new employer, although this need not necessarily be the case. For instance, there could be an arrangement between a subsidiary company, the employer, and a holding company, the other entity, to employ the terminating employee in another subsidiary company within the group.

52. The Commissioner considers that the phrase 'arrangement... to employ' in paragraph 83-175(2)(c) refers to common law employment only. This condition does not contemplate a situation where there is an arrangement to engage the former employee as an independent contractor.

Therefore, if an employee has independently entered into an arrangement with another entity for that entity to employ him or her after the time of the dismissal from the original employer, the condition in paragraph 83-175(2)(c) of the ITAA 1997 will be met.

On the other hand, given the breadth of the meaning of 'arrangement', an implied understanding between two related companies at the time of an employee's dismissal with one of those companies to the effect that the employee will be employed at a later time with the other is sufficient for this condition not to be met.

For those employees who joined the employer after a specific date, it is mandatory to transfer to an employer's list (the employer's list) for those employees in receipt of redundancy. The employee must remain on the list for a specified number of years or until compulsory retirement age is reached (whichever is sooner).

Employees on the employer's list are not remunerated while on the list and have no training obligations.

It is only in the event in certain circumstances that an employee's particular skill sets are required. The employee may then be required for full-time service. Furthermore, an employee is required to repay any redundancy benefit if, within a specified time of being made redundant, re-commences service with the employer from the list.

Although the term 'arrangement' generally has a wide meaning, in the scope of genuine redundancy the normal circumstances fall around a person leaving one job and moving to another paid position. If that new position was 'arranged' by the employer with basically anyone, the test for genuine redundancy would fail. However, given the unique circumstances around the employer's list and that placement on the list does not result in a paid position (and may never do so), mandatory placement on the list would not fall within the meaning of 'arrangement' for genuine redundancy purposes.

Therefore it is not considered there is 'arrangement' as envisaged by paragraph 83-175(2)(c) of the ITAA 1997 in place at the time of dismissal for those employees who were mandatory transferred to the employer's list.