Edited version of your private ruling

Authorisation Number: 1012438843515

Ruling

Subject: Genuine Redundancy Payment

Question

Is any part of the employment termination payment the tax-free amount of a genuine redundancy payment?

Answer

No.

This ruling applies for the following periods:

For the year ended 30 June 2012

The scheme commences on:

1 July 2011

Relevant facts and circumstances

Your client commenced employment with the Company in the mid-1990s and completed more than 15 years of service.

Your client held two positions with the Company - Role A and Role B.

Your client was under 50 years of age at the time their employment was terminated with the Company.

Your client received a payment upon the termination of their employment, comprised of the following components:

· Unused annual leave

· Unused long service leave

· Outstanding salary

· Employment Termination Payment

The Company did not treat the employment termination payment as a genuine redundancy payment.

Your client was advised of a departmental restructure early in the particular calendar year via an email whilst away on leave. The email invited your client to call the Company’s Chief Executive Officer (CEO) to discuss the matter.

You state that from the discussions with the CEO it was clear that the ‘restructure’ was effectively a demotion in relation to your client’s role. You further state that the CEO stated that they could see how your client viewed this restructure as a demotion when asked this question.

Your client subsequently sent an email prior to returning from leave seeking to enforce your client’s contractual rights for redundancy under the employment contract as a result of the perceived demotion, reduction in status, authority and responsibility.

The CEO disputed that your client had that right and directed your client to return from annual leave and to report to another department upon returning from leave and commence work in Role B.

In a letter dated just prior to your client returning to work, the CEO restated their view that the transfer of your client’s position from one area of the Company to another did not give your client grounds to seek the redundancy benefit referred to in your client’s contract.

In the same letter the CEO also stated:

(a) that your client’s role in the new area would involve the same duties as your client currently held and the same remuneration;

(b) that if your client did not continue in this position the Company would seek to fill it with another person; and

(c) that if your client chose to resign, the terms of your client’s contract required your client to give a specific period of notice.

The CEO then indicated that, under the circumstances, the Company was prepared to accept a shorter period of notice of resignation.

Your client did not take up that offer and the Company directed your client to work in Role B. Your client duly complied with this request.

Your client sent a letter to the Company, outlining the areas as to why the change had diminished your client’s role. The Company responded and denied all of your client’s claims without explanation.

Your client subsequently engaged a legal firm to represent them on the matter.

Your client elected to pursue mediation to have the matter resolved and also implicitly stated that they would observe the Company’s direction to work in Role B.

The Company denied your client’s opportunity of mediation and offered your client an internal grievance process. Your client agreed to participate in the grievance process the following day.

A week later the Company stated that your client’s employment would cease the next day as they treated your client’s earlier email as a set number of week’s notice effective from the date of that email. Your client’s lawyer contested that the notice did not constitute a resignation. It is noted that prior to this, the Company declined to treat your client’s email as a notice of termination.

Several days later the Company advised that your client can continue working but deemed your client’s employment termination date to cease at the beginning of the following month to facilitate the grievance process. It was also advised that if your client continued their employment beyond that date this would deem your client to agreeing to work out the remaining period of your client’s full contractual period of notice.

Following the grievance process, the Company maintained the stance that your client had given the shorter period of notice of termination of employment and that your client’s employment would be terminated. Any periods worked beyond the negotiated date would be deemed as your client’s acceptance of Role B.

Your client’s lawyer maintained their position that your client did not give notice of resignation on the date of the email.

Your client subsequently proposed that the Company remedy a number of issues in relation to Role B.

The Company issued a letter to your client and advised that your client’s employment would be terminated if your client did not accept Role B.

Your client agreed to perform Role B on the basis that the Company consider your client’s proposal.

The Company’s representing lawyer issued a letter to your client’s lawyer outlining an offer of full settlement entitlements.

A copy of the settlement agreement between your client and the Company has been provided.

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

Based on the information provided, your client’s termination does not meet the requirements of a genuine redundancy payment as specified in the income tax legislation. As such, the payment to be received upon the termination of employment should be included in your client’s income tax return in the relevant income year as an employment termination payment.

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.

The question of whether or not the payment is in consequence of the termination of your client’s employment is not in dispute. It is evident that your client and the employer both consider that the payment was made in consequence of the termination of your client’s employment with the employer. Accordingly, the requirement under paragraph 82-130(1)(a) of the ITAA 1997 has been satisfied.

It is also clearly evident that the payment was made within 12 months of the termination of your client’s employment. Therefore, the requirement under paragraph 82-130(1)(b) of the ITAA 1997 has also been satisfied.

The issue at hand is whether or not any part of the payment is excluded from being an employment termination payment under paragraph 82-130(1)(c) of the ITAA 1997 by virtue of being a payment mentioned in section 82-135.

Payments excluded from being employment termination payments

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.

Clearly the payment is not for unused annual leave or unused long service leave. We will now consider if any of it is a 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.

The first criteria to be satisfied (subsection 83-175(1) of the ITAA 1997) is:

(a) that the payment is received by an employee who is dismissed from employment because the employee’s position is genuinely redundant; and

(b) that 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.

Dismissal because of genuine redundancy

The first condition requires the taxpayer to be dismissed from employment because the taxpayer’s position is genuinely redundant.

The terms ‘dismissal’ and ‘redundancy’ are not defined in the income tax legislation. Therefore, it is necessary to consider the ordinary meaning of the terms and the meaning the courts have ascribed to each word.

The Explanatory Memorandum to the Income Tax Assessment Amendment Act (No.3) 1984 which inserted former section 27F into the Income Tax Assessment Act 1936 (ITAA 1936) states at page 91:

The terms “dismissal” and “redundancy” are not defined in the legislation and, therefore, should be given their ordinary meanings. “Dismissal” carries with it the concept of the involuntary (on the taxpayer’s part) termination of employment. “Redundancy” carries the concept that the requirements of the employer for employees to carry out work of a particular kind, or for employees to carry out work of a particular kind in the place where they were so employed, have ceased or diminished or are expected to cease or diminish. Redundancy, however, would not extend to the dismissal of an employee for personal or disciplinary reasons or for reasons that the employee was inefficient.

The Commissioner's view as stated in Taxation Ruling TR 2009/2 – Income tax: genuine redundancy payments is that a position is redundant when the functions, duties and responsibilities formerly attached to the position are determined by the employer to be superfluous to the current needs and purposes of the organisation. The decision to make an employee's position redundant is fundamentally one made by the employer. Dismissal requires that a termination of employment is made at the initiative of the employer without the consent of the employee.

Further, a dismissal is not caused by redundancy where personal acts or default are the cause for termination for example unsatisfactory performance or behaviour.

Therefore the questions to be answered are whether the position your client occupied was abolished and whether your client was dismissed from employment.

It is clear that Role A in the Company ceased to exist as stated in an email issued by the CEO of the Company prior to the expiration of your client’s leave which indicated that the team under your client’s management was to transfer to another area within the Company.

The Company offered a position (Role B) to your client as a result of the restructuring process. An email issued by your client confirms that your client did not accept the position being offered. This would therefore indicate that the termination of your client’s employment was voluntary in nature.

However, it is noted that the Company disputed that your client was in a position to invoke that particular clause of your client’s employment contract and did not accept the resignation at that time. It is further noted that, when your client returned to work after recreation leave, your client commenced in Role B and continued to perform the duties of that role until the date your client’s employment ceased.

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 and therefore the employee must be dismissed.

This view is supported by the decision of the Full Federal Court in Dibb v Federal Commissioner of Taxation [2004] FCAFC 126; (2004) 136 FCR 388; (2004) 2004 ATC 4555;(2004) 207 ALR 151; (2004) 55 ATR 786; (Dibb). In that case, the Full Federal Court took the view that where an employee, whose job as defined by reference to its duties, has disappeared, may be able to perform some other available job to the satisfaction of the employer, then no question of redundancy arises. It is only where the employer considers that there is no available job for which the employee is suited, and that he or she must therefore be dismissed, that the question of redundancy arises.

As noted above, the Role B position was offered to your client which, while declining the offer, your client nonetheless continued to perform until your client’s employment ultimately ceased.

However, your client contends that the termination of their employment was a ‘constructive dismissal’. The basis of this claim being the email sent to the Company seeking to invoke your client’s contractual rights under a clause of the employment contract.

Constructive Dismissal

Paragraphs 22 and 30 of TR 2009/2 state the following regarding ‘constructive dismissal’:

22. Cases of 'constructive dismissal' are a dismissal for the purposes of subsection 83-175(1). Constructive dismissal is currently recognised to occur where the actions or behaviour of the employer in relation to the employment relationship effectively curtails the element of consent on the employee's behalf. The simplest example of constructive dismissal is where an employee resigns under threat (explicit or implicit) of dismissal. Another example is where the employee resigns after the employer offers work in an alternative position which is inappropriate given the employee's particular circumstances (for example, their skills or experience). While in form this appears to be a termination at the employee's initiative, it is recognised at law to be a dismissal.

…

30. In circumstances where an employee resigns after being offered alternative employment with an employer following an organisational restructure, it will be necessary to assess whether the termination of employment amounts to a constructive dismissal.

In the present case, the facts presented and the documentary evidence supplied indicates that the Company had made a decision that your client was able to perform the duties of Role B to their satisfaction.

In comparison with Role A, the facts have indicated a number of differences for Role B. It is these differences which appear to give rise to the dispute between your client and the employer. However, it is noted that your client continued performing their duties in Role B until the employment ultimately ceased.

In this regard your client’s situation differs from that envisaged under paragraph 22 of TR 2009/2. Accordingly, it is questionable that the termination of your client’s employment constitutes a ‘constructive dismissal’ given that your client was actually performing the duties of the new role for at least a month prior to your client’s employment ceasing.

As mentioned above, a redundancy occurs when a role is no longer required and not occupied by anyone. The evidence provided by your client did not show any indications of this role (Role B) being abolished following your client’s departure. Further, in one of the letters issued to your client, it is clearly stated that if your client did not take up the position (Role B) the Company would seek to fill it with another person.

This clearly indicates that the role was still required by the Company at that time. Consequently, no redundancy occurred.

Conclusion

All conditions must be satisfied before the payment is to be considered a genuine redundancy payment.

In this case two conditions have not been met:

(a) there has not been a dismissal (constructive or otherwise);

(b) the position your client was holding on cessation of employment was not abolished at that time.

Consequently, the payment is not considered to be a genuine redundancy payment under section 83-175 of the ITAA 1997.