Edited version of your private ruling

Authorisation Number: 1012473612885

Ruling

Subject: Genuine redundancy payment

Questions

1. Is any part of the payment received by your client an employment termination payment in accordance with subsection 82-130(1) of the Income Tax Assessment Act 1997 (ITAA 1997)?

2. Is any part of the payment received by your client a genuine redundancy payment in accordance with section 83-175 of the ITAA 1997?

3. Will a tax-offset under section 83-15 of the ITAA 1997 apply to the payment for unused annual leave on termination of employment?

4. Will a tax-offset under section 83-85 of the ITAA 1997 apply to the payment for unused long service leave on termination of employment?

Advice/Answers

1. Yes.

2. No.

3. No.

4. No.

This ruling applies for the following period

Year ending 30 June 2013

The scheme commenced on

1 July 2012

Relevant facts and circumstances

In the 2000-01 income year your client commenced employment with their employer (the Employer).

In the 2011-12 income year your client commenced leave.

Whilst on leave the Employer announced a number of redundancies for staff.

Your client's employment with the Employer was terminated in the 2012-13 income year.

The Employer asserts that your client's employment has not been made redundant.

Your client received the following payments from the Employer in the 2012-13 income year comprising payment in lieu of notice, unused annual leave and long service leave accrued.

The payment was made to your client within 12 months after the termination of their employment

No other payments were made to your client.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 27F.

Income Tax Assessment Act 1997 Section 82-130.

Income Tax Assessment Act 1997 Section 82-135.

Income Tax Assessment Act 1997 Section 83-10.

Income Tax Assessment Act 1997 Section 83-15.

Income Tax Assessment Act 1997 Section 83-80.

Income Tax Assessment Act 1997 Section 82-85.

Income Tax Assessment Act 1997 Section 995-1.

Further issues for you to consider

Does Part IVA apply to this ruling?

No.

Reasons for decision

Summary:

The payment in lieu of notice is an employment termination payment.

It is considered that the dismissal has not been caused by the redundancy of your client's position and no part of the payment is a genuine redundancy payment

The payments for unused annual leave and long service leave accrued are excluded from being an employment termination payment. Therefore, the whole payment for unused annual leave of and unused long service leave are to be included in your client's assessable income. As your client's employment was not terminated due to genuine redundancy, your client is not entitled to a tax offset on these amounts.

Detailed reasoning:

Employment termination payment

Section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997) states that:

employment termination payment has the meaning given by section 82-130 of the ITAA 1997.

Subsection 82-130(1) of the ITAA 1997 states that:

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 that termination (but see subsection (4)); and

(c) it is not a payment mentioned in section 82-135.

An employment termination payment, where the payment is made during the life of a taxpayer, is known as a life benefit termination payment (subsection 82-130(2) of the ITAA 1997).

To determine if the payment made to your client constitutes an employment termination payment, all the conditions in section 82-130 of the ITAA 1997 will need to be satisfied.

Failure to satisfy any of the conditions will result in the payment not being considered an employment termination payment.

Paid as a consequence of the termination of employment

It should be noted that the phrase 'in consequence of the termination of your employment' is not defined in the legislation. However, both the Courts and the Commissioner have considered the meaning of this phrase.

In light of these decisions, the Commissioner discusses the meaning of the phrase in Taxation Ruling TR 2003/13 titled Income tax: eligible termination payments (ETP): payments made in consequence of the termination of any employment: meaning of the phrase 'in consequence of' (TR 2003/13).

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.

As further stated by the Commissioner in paragraph 6 of TR 2003/13, 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.

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 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 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. 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.

Suffice it to say that 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.

Furthermore, 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), the issue before the court was whether an amount received by the applicant as a result of accepting an offer of compromise in respect of claims brought by him against his former employer, in relation to the termination of his employment was in whole, or in part, an ETP. It was held that a settlement payment for litigation in relation to a taxpayer's dismissal was an ETP.

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. True it is that the payment was made not only to settle the applicant's claim for common law damages for breach of the employment agreement but also for statutory damages...

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. As earlier stated in paragraph 6 of TR 2003/13, there must be 'a causal connection between the termination and the payment even though the termination need not be the sole or dominant cause of the payment'.

The Full Federal Court in Dibb v Federal Commissioner of Taxation [2004] FCAFC 126; (2004) 207 ALR 151; (2004) 2004 ATC 4555; (2004) 55 ATR 786, has applied the above decisions in finding that the payment received by the taxpayer under a Deed of Release to settle various causes of action against the employer following the termination of employment was an ETP.

Paragraph 31 of TR 2003/13 the Commissioner states:

It is clear from the decision in Le Grand, that when a payment is made to settle a claim brought by a taxpayer for wrongful dismissal or claims of a similar nature that arise as a result of an employer terminating the employment of the taxpayer, the payment will have a sufficient causal connection with the termination of the taxpayer's employment. The payment will be taken to have been made in consequence of the termination of employment because it would not have been made but for the termination.

The essence of this analysis is that if the payment follows as an effect or a result of 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. The termination of the payment need not be the sole or dominate cause of the payment.

The question of whether a payment is made in consequence of the termination of employment is determined by the relevant facts and circumstances of each case.

In this case, your client's employment with the Employer was terminated in the 2012-13 income year.

Your client received the following payments from the Employer in the 2012-13 income year comprising payment in lieu of notice, unused annual leave and long service leave accrued.

It is clear that the payment was made in consequence of the termination of your client's employment. The termination of employment and the payment are all intertwined and connected.

Because the payment is considered to be received by your client in consequence of the termination of their employment, the requirement under subparagraph 82-130(1)(a) of the ITAA 1997 has been met.

The payment is received no later than 12 months after termination

The second condition is stated under paragraph 82-130(1)(b) of the ITAA 1997. The settlement sum must be received within 12 months of the employee's termination of employment, unless the payment is covered by a determination exempting them from the 12 month rule.

The payment was made to your client within 12 months after the termination of their employment. Therefore, the requirement of paragraph 82-130(1)(b) of the ITAA 1997 has been satisfied.

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.

In this case part of the payment is for unused annual leave and long service leave accrued. This part of the payment is excluded from being a employment termination payment, because the payments are mentioned in section 82-135 of the ITAA 1997 (subsection 82-135(c) and subsection 82-135(d) of the ITAA 1997).

The payment in lieu of notice is not a payment that is excluded from being an employment termination payment. Relevant to this particular case is whether any part of the payment in lieu of notice 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 the criteria set out in section 83-175 of the ITAA 1997.

Under subsection 83-175(1) of the ITAA 1997, four criteria must be satisfied:

· The payment 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.

Payment is made in consequence of the termination of employment

As explained earlier, it is evident that the payment made to your client was made in consequence of the termination of their employment. The termination of employment and the payment are all intertwined and connected. If not for the termination of employment, the payment would not have been made.

Dismissal and Redundancy

The Explanatory Memorandum to the Income Tax Assessment Amendment Act (No.3) 1984 which inserted former section 27F, which dealt with bona fide redundancy payments, 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.'

Consequently, it is necessary to consider the ordinary meaning of the terms 'dismissal' and 'redundancy' and the meaning the judicial authorities have ascribed to them.

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

Paragraph 18 of TR 2009/2 discusses what constitutes a dismissal:

18. Dismissal is a particular mode of employment termination. It requires a decision to terminate employment at the employer's initiative without the consent of the employee. This stands in contrast to employment that is terminated at the initiative of the employee, for example in the case of resignation.

A payment is classified as a genuine redundancy payment only upon meeting all of the requirements set under section 83-175 of the ITAA 1997 and dismissal only forms part of those requirements.

Paragraphs 24, 25 and 28 of TR 2009/2 provide the following in relation to the meaning of redundancy:

24. As is the case in determining if there is a dismissal, the reason for a dismissal is to be established in light of the facts and circumstances of each case. The redundancy of the relevant position must be the prevailing or most influential reason for the dismissal if there is more than one contributing cause.

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 surrounding the employer's operations.

…

28. A dismissal is not caused by redundancy where personal acts or default are the prevailing or most influential cause for the termination. For example, a person may be dismissed due to unsatisfactory performance or behaviour.

In this case it is clear that the termination involved your client being dismissed from employment.

.

As outlined 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. It is fundamentally the employer's decision that a position is redundant. It is considered that the dismissal has not been caused by the redundancy of your client's position as the Employer asserts that your client's employment has not been made redundant.

Further conditions for a genuine redundancy payment

Subsection 83-175(2) of the ITAA 1997 sets out further criteria that must be satisfied for a payment to be regarded as a genuine redundancy payment.

The first condition requires that the taxpayer is dismissed before the earlier of the day the taxpayer turns 65 or the day they reach a particular age or completed a particular period of service that would have terminated the taxpayer's employment.

The second condition requires that if the dismissal were not at arms length, that the payment does not exceed the amount that could be reasonably expected to be made if the dismissal were at arms length.

The third condition is that at the time of 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.

A further requirement, as set out in subsection 83-175(3) of the ITAA 1997, is that no part of the payment 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 date.

In addition, 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 (apart from paragraph 82-135(e)).

The above conditions have not been considered in this case as your client has not satisfied subsection 83-175(1) of the ITAA 1997.

Therefore, no part of the payment is a genuine redundancy payment under section 83-175 of the ITAA 1997.

Hence, the payment of in lieu of notice of is an employment termination payment under subsection 82-130(1) of the ITAA 1997.

Tax Treatment of the payment as a Life Benefit Termination Payment (LBTP):

An employment termination payment will comprise of the following components:

Ÿ Tax free component - this includes the pre-July 83 segment (if any) and/or the invalidity segment (if any); and

Ÿ Taxable component - the amount remaining after deducting the tax free component from the total payment.

The tax free component is not assessable income and is not exempt income. The taxable component is included, in full, as assessable income.

Your client commenced employment with the Employer in the 2000-01 income year. As the period of employment to which the payment relates occurred after 1 July 1983, the whole LBTP will comprise of a taxable component.

For an individual who has not reached their preservation age, the taxable component of the LBTP is taxed at 30% plus Medicare levy for amounts below the employment termination payment cap of $175,000 for the 2012-2013 income year, and at the top marginal rate for the amount above this cap.

For an individual who has reached their preservation age, the taxable component of the LBTP is taxed at 15% plus Medicare levy for amounts below the employment termination payment cap of $175,000 for the 2012-2013 income year, and at the top marginal rate for the amount above this cap.

The taxable components of all LBTPs received in an income year are counted towards this cap. Any tax-free amounts are not counted towards the cap.

Employment termination payments cannot be rolled over into a complying superannuation fund, complying approved deposit fund (ADF) or to a retirement savings account (RSA) provider.

Unused annual leave

Section 83-10 of the ITAA 1997 sets out the assessable and tax-free parts of unused long service leave payments and states:

(1) This section applies to leave (annual leave) of the following types (whether it is made available as an entitlement or as a privilege):

(a) leave ordinarily known as annual leave, including recreational leave and annual holidays;

(b) any other leave made available in circumstances similar to those in which the leave mentioned in paragraph (a) is ordinarily made available.

Unused annual leave payments

(2) Your assessable income includes an unused annual leave payment that you receive.

(3) A payment that you receive in consequence of the termination of your employment is an unused annual leave payment if:

(a) it is for annual leave you have not used; or

(b) it is a bonus or other additional payment for annual leave you have not used; or

(c) it is for annual leave, or is a bonus or other additional payment for annual leave, to which you were not entitled just before the employment termination, but that would have been made available to you at a later time if it were not for the employment termination.

Further, section 83-85 of the ITAA 1997 states

You are entitled to a tax offset to ensure that the rate of tax on an unused annual leave payment does not exceed 30%, to the extent that:

(a) the payment was made in connection with a payment that includes, or consists of, any of the following:

(i) a genuine redundancy payment;

(ii) an early retirement scheme payment;

(iii) the invalidity segment of an *employment termination payment or superannuation benefit; or

(b) the payment was made in respect of employment before 18 August 1993.

In this case the whole payment for unused annual leave is to be included in your client's assessable income and your client is not entitled to a tax offset as no part of the payment is related to a genuine redundancy payment, an early retirement scheme payment or an invalidity segment of an employment termination payment or a superannuation benefit.

Unused long service leave

Section 83-80 of the ITAA 1997 which sets out the assessable and tax-free parts of unused long service leave payments states:

(1) If you receive an unused long service leave payment, your assessable income includes the part of the payment shown in this table:

Unused long service leave payments
Item	To the extent the payment is attributable to the ...	Your assessable income includes this part of it ...
1	pre-16/8/78 period	5%
2	pre-18/8/93 period	100%
3	post-17/8/93 period	100%

(2) The remainder of that part (if any) of an unused long service leave payment that is attributable to the pre-16/8/78 period is not assessable income and is not exempt income.

In relation to an entitlement to a tax offset on an unused long service leave payment section 83-85 of the ITAA 1997 states:

(1) You are entitled to a tax offset on an unused long service leave payment that ensures that the rate of income tax on the amount of the payment mentioned in subsection (2) does not exceed 30%.

(2) The amount is the part of the unused long service leave payment included in your assessable income under subsection 83-80(1):

(a) to the extent that it is attributable to the pre-18/8/93 period; and

(b) to the extent that it is attributable to the post-17/8/93 period, if the payment was made in connection with a payment that includes, or consists of, any of the following:

(i) a genuine redundancy payment; or

(ii) an early retirement scheme payment; or

(iii) an invalidity segment of an *employment termination payment or a superannuation benefit.

In this case the whole payment for unused long service leave is to be included in your client's assessable income and your client is not entitled to a tax offset as no part of the payment is related to a genuine redundancy payment, an early retirement scheme payment or an invalidity segment of an employment termination payment or a superannuation benefit.