Edited version of your private ruling

Authorisation Number: 1012526213369

Ruling

Subject: Payment received on the termination of employment

Question

1. Is the 'separation pay' received by your client a genuine redundancy payment for the purposes of section 83-175 of the Income Tax Assessment Act 1997 (ITAA 1997)?

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

3. 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?

Answer

1.No.

2.No.

3.No.

This ruling applies for the following periods:

2012-13 income year

The scheme commences on:

1 July 2012

Relevant facts and circumstances

Your client commenced employment with the employer several years ago.

Your client occupied a number of positions with the employer. Your client's most recent position was that of Position A pursuant to a letter of offer during the 20XX income year.

During the 20ZZ income year, the employer commenced a review of its organisational structure.

As a result of the organisation restructure, your client was offered Position B. You contend that despite similarities in the position title, the Position B role is a lessor role than that of Position A and is inappropriate for your client based on your client's skills and experience.

Your client chose not to accept Position B.

A dispute then ensued as to whether your client's position of Position A was redundant under the employer's redundancy policy.

In a clause in a letter from your client's lawyers to a representative of the employer contended that there was a clear difference between Position A and the new Position B.

The letter advised that without being in any way exhaustive, the roles are different in the following ways:

· the new Position B role is of a lower level of seniority than the Position A role .

· the new Position B role has less directs than the Position A role.

· the new Position B role has a lesser level of responsibility.

· the new Position B role has a lower level of approval authority.

· the Position B role is not part of the Senior Leadership Team, whereas the Position A role was.

· the Position B role is responsible for the completion of more junior tasks than the Position A role.

An e-mail from a representative of the employer to your client's lawyers provided a response to your client's lawyer's letter concerning the difference between the Position A and the new Position B advised that in the employer's view your client's role has not been made redundant and that minimal changes are proposed to the role. The employer's view is that there is a cumulative insignificant impact on the day to day performance of your client's role, status and responsibilities and the terms and conditions of your client's employment. The employer addressed the points above concerning the difference between Position A and the new Position B:

· The Position B role retains the same level of seniority and active participation in the senior leadership team.

· The Position B role will report to a role of equivalent status to Position A.

· In the course of the restructure the number of direct reports that your client will have is increased.

· Your client's approval level was and remains the same per transaction. Your client does not have and has not historically has approval authority beyond that limit.

· We have not identified any "more junior tasks" that would be allocated to the Position B role.

The employer does not accept that your client's role is redundant or that your client is entitled to a payment of a redundancy under the employer's redundancy policy. As the employer does not view that the Position B role is either redundant or materially changed in any respect, your client will not be able to access either Retrenchment Termination payment under the employer Redundancy Policy or a formal redeployment process.

In a clause in the letter from your client's lawyers to the employer it was stated that the terms and conditions of Position B position are significantly less favourable than the Position A position. Therefore no Acceptable Alternative position has been found.

A Deed of Separation was then executed between your client and the employer. A condition of the Deed of Separation was that your client's employment would terminate by reason of your client's resignation.

Your client then ceased employment with the employer.

Under the Deed of Separation, the employer agreed to pay your client an amount which included the following:

· An amount which was referred to as "separation pay" by the employer. Tax was withheld from the payment;

· An amount for unused annual leave. Tax was withheld;

· An amount for unused long service leave. Tax was withheld.

A payment advice stated that the above payments were made in June 20ZZ.

The payment was referred to by your clients employer as a Life Benefit ETP in the payment advice.

Your client is under 55 years of age.

The cessation of employment was at arm's length and the amount is an arm's length amount. If your client had voluntarily resigned, your client would not have been entitled to any amount of separation pay. Your client would only have been entitled to the payments in respect of annual leave, long service leave, legal fees and superannuation.

There was no arrangement between your client and the employer (or the employer and anyone else) to employ your client after the cessation of employment.

The amount does not include any amounts in lieu of superannuation benefits.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 82-135.

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).

Reasons for decision

Summary

The amount referred to as separation pay by the employer paid on the termination of employment is an employment termination payment.

The payment is not a genuine redundancy payment as it is considered that your client was not dismissed from employment because your client's position is genuinely redundant.

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 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

Your client has received an employment termination payment.

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 (GRP) if it satisfies all 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 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)).

Dismissal

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

Paragraphs 18, 20 and 22 of TR 2009/2 discuss 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.

…

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 expressions of interest in receiving a redundancy package are sought from employees as part of a structured process undertaken by the employer as a means of promoting industrial harmony.

…

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.

As noted above, a dismissal requires a decision to terminate employment at the employer's initiative without the consent of the employee which includes resignation of employment. A dismissal can be a 'constructive dismissal' for the purposes of subsection 83-175(1) of the ITAA 1997. This included the situation where 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).

In this case your client entered into a Deed of Separation with the employer. A condition of the Deed was that your client resigned from employment. As your client resigned from employment, we will now determine whether there was a constructive dismissal for the purposes of subsection 83-175(1) of the ITAA 1997.

From the facts the employer commenced a review of its organisational structure. As a result of the organisation restructure, your client was offered Position B.

A dispute then ensured concerning the new position and whether your Position A was redundant under the employer's redundancy policy. Your client's lawyers communicated in writing with the employer concerning the difference between Position A and Position B. You contend that despite similarities in the position title, Position B is a lessor role than that of Position A and is inappropriate for your client based on your client's skills and experience. Your client chose not to accept the Position B role.

In a clause in the letter from your client's lawyers to a representative of the employer it contended that there was a clear difference between Position A and the new Position B.

The letter advised that without being in any way exhaustive, the roles are different in the following ways:

· the new Position B role is of a lower level of seniority than the Position A role

· the new Position B role has less directs than the Position A role.

· the new Position B role has a lesser level of responsibility.

· the new Position B role has a lower level of approval authority.

· the Position B role is not part of the Senior Leadership Team, whereas the Position A role was.

· the Position B role is responsible for the completion of more junior tasks than the Position A role.

However the employer has maintained that the new position offered to your client of Position B is similar to Position A. An e-mail from a representative of the employer to your client's lawyers provided a response to your client's lawyer's letter of concerning the difference between Position A and the new Position B. The employer has advised that the Position A role was not redundant or materially changed in any respect as clearly stated in the e-mail. In the e-mail the employer advised that in the employer's view your client's role has not been made redundant and that minimal changes are proposed to the role. The employer's view is that there is a cumulative insignificant impact on the day to day performance of your client's role, status and responsibilities and the terms and conditions of your client's employment. The employer addressed the points above concerning the difference between Position A and the new Position B:

· The Position B role retains the same level of seniority and active participation in the senior leadership team.

· The Position B role will report to a role of equivalent status to Position A.

· In the course of the restructure the number of direct reports that your client will have is increased.

· Your client's approval level was and remains the same per transaction. Your client does not have and has not historically has approval authority beyond that limit.

· We have not identified any "more junior tasks" that would be allocated to the Position B role.

The employer does not accept that your client's role is redundant or that your client is entitled to a payment of a redundancy under the employer's redundancy policy. As the employer does not view that the Position B role is either redundant or materially changed in any respect, your client will not be able to access either Retrenchment Termination payment under the employer Redundancy Policy or a formal redeployment process.

From the facts provided, the termination of your client's employment did not amount to a constructive dismissal as the employer offered your client an opportunity to maintain their employment under what the employer considered a suitable alternative role with minimal changes are proposed to the role. It is considered that Position B did not have significantly different duties and functions to that of the Position A.

Notwithstanding the fact that the re-organisation of the employer's business structure affected your client's position, it was your client's decision to terminate her employment by not accepting what the employer believed to be a suitable comparable role.

Therefore your client's contention that there was a constructive dismissal has not been substantiated.

Is the employee's position 'genuinely redundant'

You contend that your client's position of Manager of Finance is redundant.

Paragraphs 24, 25 and 28 of TR 2009/2 provide the following comments 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.

Your client disputed whether Position A was redundant in the employer redundancy policy.

From the facts your client's position of Position A has not been abolished. Position A is similar to Position B. The employer has maintained that Position A is not redundant. In an e-mail from the employer to your client's lawyers it stated that your client's role has not been made redundant and that minimal changes are proposed to the role. The employer advised in the email that the employer does not accept that your client's role is redundant or that your client is entitled to a payment of a redundancy under the employer's redundancy policy. As the employer does not view that the Position B role is either redundant or materially changed in any respect, your client will not be able to access either Retrenchment Termination payment under the employer Redundancy Policy or a formal redeployment process.

As noted above, 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.

As Position A is not genuinely redundant, the termination of employment was not by reason of a genuine redundancy. Therefore, the first condition under section 83-175 of the ITAA 1997 has not been met.

All the conditions under section 83-175 of the ITAA 1997 must be met before the payment is considered a genuine redundancy payment.

As the first condition has not been met, it is not necessary to examine if the other conditions under section 83-175 will be met.

The separation pay is not a genuine redundancy payment. The payment is an employment termination payment under section 82-130 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:

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

· 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 several years ago. As the period of employment to which the payment relates occurred after 1 July 1983, the whole LBTP will comprise of a taxable component.

From 1 July 2012, employment termination payments are subject to the 'whole-of-income-cap'. This cap is $180,000 less your other taxable income for the year. As your client is under preservation age, the amount of the ETP up to the calculated amount is taxed at 30% plus Medicare levy. The amount of the ETP over the calculated amount is taxed at 45% plus the Medicare levy.

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.

Entitlement to tax offset - unused annual leave and unused long service leave

The payments made for unused long service leave and unused annual leave are to be included in your client's assessable income for the 20ZZ income year. As it has been determined that your client's position is not genuinely redundant, these payments are not considered to be made in connection with a genuine redundancy payment and your client is not entitled to receive a tax offset. The amounts will be assessed at your client's marginal rate of tax. In addition, the Medicare levy may apply.

Conclusion

The separation pay is not considered to be a genuine redundancy payment. The payment is considered to be an employment termination payment.

As your client's employment was not terminated due to genuine redundancy, your client is not entitled to a tax offset on payments for unused annual leave and long service.