Edited version of your private ruling

Authorisation Number: 1012475466983

Ruling

Subject: Genuine redundancy payment - deed of separation.

Question

Is any part of the payment of $YYY made under the Deed of Separation the tax-free part of a genuine redundancy payment?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 2012.

The scheme commences on:

1 July 2011.

Relevant facts and circumstances

Your client is under the age of 65.

Your client was employed by the employer in the position of AAA on a fixed term contract.

The employer proposed a restructure of the organisation.

Under the new organisational structure:

· Your client's position of AAA was abolished;

· Your client was offered the alternative position of BBB.

Your client entered into a dispute with the employer regarding their role within the new organisational structure.

Your client entered into a Deed of Separation and release (the Deed) on XX/XX/20X1.

Recitals of the Deed state that the employer elected to terminate your client effective XX/XX/20X1.

On the termination of employment, your client received a gross employment termination payment in lieu of notice of $YYY.

This payment was made within 12 months of termination.

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 83-175.

Income Tax Assessment Act 1997 Section 82-10(3)(b).

Income Tax Assessment Act 1997 Section 82-140

Income Tax Assessment Act 1997 Section 82-145

Income Tax Assessment Act 1997 Section 82-150

Income Tax Assessment Act 1997 Section 82-155

Income Tax Assessment Act 1997 Section 83-170.

Reasons for decision

Summary

No part of the payment of $YYY is a genuine redundancy payment as it is considered that the prevailing, or most influential, cause of the termination of your client's employment was not redundancy.

The payment is an employment termination payment and is to be included in your client's income tax assessment for the relevant income year.

Detailed reasoning

Employment termination payment

A payment made to an employee is an employment termination payment if the payment satisfies all the requirements under 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 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.

Subsection 82-130(2) of the ITAA 1997 states:

A life benefit termination payment is an employment termination payment to which subparagraph (1)(a)(i) applies.

Failure to satisfy any of the three conditions in section 82-130(1) of the ITAA 1997 will result in the payment not being considered an employment termination payment.

As noted in the facts, your client received a gross employment termination payment of $YYY on the termination of their employment.

Paragraph 82-130(1)(a) of the ITAA 1997 requires that a termination payment be made in consequence of the termination of employment of the taxpayer. While the phrase 'in consequence of' is not defined in the ITAA 1997, the Commissioner considers that a payment will be made 'in consequence of' the termination of employment for the purposes of subparagraph 82-130(1)(a)(i), if the payment follows as an effect or as a result of the termination of employment. In this case, the payment of $YYY was made following on as a result of the termination of your client's employment. This payment would not have been made had there been no termination of employment. The termination of employment and these payments are thus intertwined and connected. Therefore, the payment has been made 'in consequence' of the termination of your client, satisfying paragraph 82-130(1)(a) of the ITAA 1997.

Paragraph 82-130(1)(b) of the ITAA 1997 requires that a termination payment be received no later than 12 months after the termination of employment. As your client terminated their employment on XX/XX/XX, and received the payment of $YYY within 12 months of the termination of their employment, paragraph 82-130(1)(b) of the ITAA 1997 has been satisfied.

Paragraph 82-130(1)(c) of the ITAA 1997 specifically excludes payments mentioned in section 82-135 from being employment termination payments. Section 82-135 specifically excludes certain payments from being employment termination payments. Applicable to this case is paragraph 82-135(e) which excludes the tax free part of a genuine redundancy payment or an early retirement scheme payment worked out under section 83-170 of the ITAA 1997. Accordingly, it is necessary to determine the extent (if any) to which the payment of $YYY:

(a) qualifies as a genuine redundancy payment; and

(b) is excluded as the tax-free part of a genuine redundancy payment.

Any part of the payment which does not qualify as a tax-free part of a genuine redundancy payment will constitute an employee termination payment and be taxed accordingly.

Genuine redundancy payments

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. 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 employee's 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)).

The terms 'dismissal' and 'redundancy' are not defined in the ITAA 1997. 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 (now section 83-175 of the ITAA 1997) into the 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.

Further to the above, the Commissioner has issued Taxation Ruling TR 2009/2, 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.

In discussing what constitutes a genuine redundancy payment in accordance with subsection 83-175(1) of the ITAA 1997, paragraph 11 of TR 2009/2 states:

There are four necessary components within this requirement:

· The payment being tested must be received in consequence of an employee's termination;

· That termination must involve an employee being dismissed from employment;

· That dismissal must be caused by the redundancy of the employee's position; and

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

Each of these requirements will be discussed individually.

Payment 'in consequence' of the termination of employment

As noted above, your termination payments were made 'in consequence' of the termination of your client's employment. Accordingly the payment was received in consequence of the termination of employment and subsection 83-175(1) of the ITAA 1997 has been satisfied.

Dismissal from employment

Dismissal carries with it the concept that the termination of a person's employment is involuntary and instigated by the employer. Dismissal however, can include the notion of constructive dismissal where an employee may be placed in a situation where he or she has little option but to tender his or her resignation. It should be noted that constructive dismissal, as with other forms of dismissal, does not in its own right indicate that a genuine redundancy has taken place.

In this case, your client entered into a Deed of Separation (the Deed) with the employer on XX/XX/X1. Recitals of the Deed show that the employer elected to terminate your client's employment, effective XX/XX/X1. The employer's 'election' to terminate your client's employment indicates that it was fundamentally the employer's decision to terminate the employment rather than a situation of voluntary termination. As the final decision to terminate employment was made by the employer, your client has been dismissed from employment and the second requirement of a genuine redundancy has been met.

Dismissal caused by genuine redundancy

As stated by the Commissioner in paragraph 23 of TR 2009/2, section 83-175 of the ITAA 1997 requires that the dismissal be caused only by the redundancy of the employee's position, and not for some other reason. Redundancy must be the prevailing cause of the termination of employment by way of dismissal.

At paragraph 24 and 25 of TR 2009/2, the Commissioner makes the following comments regarding dismissal and 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 of the employer's operations.

The Commissioner expands on the issue of determining the cause of dismissal at paragraphs 270 to 273 of TR 2009/2:

270. The classic context for redundancy is the closure, downsizing or reorganisation of part or all of the employer's 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. [Emphasis added]

272. In Re Marriott and Federal Commissioner of Taxation [[2004] AATA 806; (2004) 2004 ATC 2191; (2004) 56 ATR 1265] the employer did not see fit to dismiss the employee after a reallocation of duties, functions and responsibilities within the organisation. In this case, the employee was carrying out duties of a legal nature in the Tax Office. These duties changed upon the reorganisation, in that he was not continuing to directly negotiate settlements or train junior advocates. After carefully considering the evidence before him, Senior Member Lindsay found that there was not a dismissal (in particular there was not a constructive dismissal) and further commented that:

Whether an employee termination is by reason of redundancy will require an assessment of the changes to determine if they were beyond or beneath the employees qualifications, skills or experience.

273. In this case it was considered that the prevailing or most influential cause of termination was the employees own desire not to undertake the duties, functions and responsibilities he was offered following the reorganisation.

Further guidance on the meaning of 'redundancy' can be found in the Full Federal court decision in Dibb v Federal Commissioner of Taxation [2004] FCAC 126; 2004 ATC 4555; (2004) 207 ALR 151; (2004) 55 ATR 786, where Justices Spender, Dowsett and Allsop, stated:

Even if the employee's job, defined by reference to its duties, has disappeared, he or she may be able to perform some other available job to the satisfaction of the employer. In that case, no question of redundancy arises. It is only if 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. If, in good faith, the employer:

· has re-allocated duties;

· considers that the employee is not suitable to perform any available job, defined by reference to those re-allocated duties, existing after the re-allocation; and

· for that reason, dismisses the employee;

then, for the purposes of s27F, the employee is dismissed by reason of his or her bona fide redundancy. In the above discussion we have used the word "available" as meaning "vacant", and the word "suitable" as meaning "within the employee's capacity".

It is evident from the above that if the prevailing or most influential cause of termination is not redundancy, notwithstanding that the position occupied by a dismissed employee may have been abolished, the dismissal would not constitute a redundancy. Furthermore, 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 as the employee is superfluous to the employer's needs.

In the present case, the employer was engaged in the process of introducing changes to the overall structure of its organisation. Under this proposed restructure, your client's department was to be abolished. Your client was offered the alternative employment position of 'BBB'.

Your client was dissatisfied with the proposed alternative position, and raised a dispute with the employer regarding their new role within the proposed functional organisational structure. Your client contended that the proposed alternative position was a demotion from their current position and a reduction in their role and responsibilities.

Furthermore it was contended that the newly created role of 'CCC' was only a 'title change' from your client's previous role.

Based on the information provided, evidence has not been provided which indicates that the position was inappropriate in view of your client's skills and experience, nor that as a result of the proposed restructure, there was no job for which your client was qualified by their experience and expertise to perform. The duties and remuneration of the alternative position offered is comparable to those which had been previously occupied by your client. In comparison with the previous position, the alternative position offered your client:

· the same level of wage;

· the same financial benefits;

· substantially the same responsibilities as the previous position;

· substantially the same status and position among the senior management team.

Given the above, it is considered that the prevailing, or most influential, cause of the termination of your client's employment was not redundancy. Instead, the facts indicate that the termination was as a result of a dispute between your client and the employer. This dispute arose due to your client's dissatisfaction with the proposed alternative position.

As stated, a position will only be redundant if the employer considers that the employee is superfluous to the employer's needs and therefore must be dismissed. Consequently, the fact that the role of CCC may only be a 'title change' from your client's previous position does not alter the fact that the prevailing, or most influential, cause of the termination of your client's employment was not redundancy.

The facts and the documentary evidence supplied indicate that the employer made a decision that your client would be able to perform the alternative proposed position of BBB to the satisfaction of the employer. While arguably different, the duties in the alternative position was comparable to your client's previous position and furthermore not inappropriate in view of your client's skills and experience. Accordingly, although there was a dismissal, the facts show that the prevailing or most influential cause of termination was your client's own desire not to undertake the duties, functions and responsibilities that they were offered following the restructure. As your client's dismissal was not caused by genuine redundancy, the third requirement that the dismissal was caused by a genuine redundancy has not been satisfied.

As stated above, all conditions under section 83-175 of the ITAA 1997 must be satisfied for a payment to be a genuine redundancy payment. As you have not satisfied subsection 83-175(1) of the ITAA 1997, it is not necessary to examine whether the remaining requirements under section 83-175 of the ITAA 1997 have been satisfied.

Conclusion

No part of the payment of $YYY is a genuine redundancy payment as your client has not satisfied all criteria set out in section 83-175 of the ITAA 1997. Accordingly, no part of the payment is the tax-free part of a genuine redundancy payment.

The payment is an employment termination payment and is to be included in your client's income tax assessment for the relevant income year.