Edited version of your private ruling

Authorisation Number: 1012532593410

Ruling

Subject: Employment termination payment - genuine redundancy

Question 1

Was the taxpayer's employment terminated as a result of dismissal?

Answer

Yes.

Question 2

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

Answer

No.

This ruling applies for the following periods:

The year ending 30 June 2013.

The scheme commences on:

1 July 2012.

Relevant facts and circumstances

A number of years ago, you commenced employment with your Employer (Employer A) and were employed in an upper management position.

After your employment commenced, your contract with Employer A was reviewed and updated.

Employer A was acquired by Employer B.

Your received a letter from Employer B advising of an administrative reorganisation of the Employer A and Employer B group of companies. This would lead to you changing employer. Attached to this letter was a new contract for you to sign.

The new contract you were requested to sign was different to the contract you previously reviewed and updated in a number of areas.

One particular condition of employment had changed by being significantly reduced. This clause had been specifically negotiated in your original contract.

You also no longer had the certain departments reporting to you.

Your position title would change.

Your remuneration would increase.

Your previous contract stated you would have specified duties and responsibilities as well as any other duties and responsibilities that may be reasonably required having regard to your skills and capacity.

The new contract states that your duties will remain consistent with your position with Employer A, however your duties may change as directed. It also noted that your position and/or reporting lines may vary from time to time.

You wrote an email to your manager, who was a manager from Employer B, informing them of changes to certain clauses in the new contract which you required to be changed before signing.

You received an email from the Human Resources Manager of Employer B advising that any employees who are moving legal entities (Employer A to Employer B) and do not sign the new contract by the deadline date, will have their employment terminated on the grounds of redundancy but will not receive any redundancy pay i.e. only the normal entitlements an employee would receive if their employment was terminated.

Your manager responded to your email and you also had a telephone conversation where you reiterated the significant reduction in a particular entitlement. Your manager advised you that all contracts had to be standard and changing your contract was a departure from the standard contract.

You had received no further update and to try and resolve the issue you made the adjustments you wanted, signed the contract and returned it to your manager. You offered a compromise where you would be paid out the difference between the two contracts.

You were advised by your manager that the amended contract was not accepted, your compromise solution was not accepted and you were again told to sign the new contract originally provided or you would be terminated on a specified date.

You informed your manager that you were not prepared to sign the new contract and understood that your employment would be terminated.

Your employment was terminated with Employer A during the relevant financial year. During the relevant financial year you received an employment termination payment with a taxable component in addition to a payment for unused annual leave.

In accordance with the email from Employer B, your payment on termination did not include an extra payment as a result of being made redundant.

To date, your position has not been replaced in the new structure within Employer B.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 82-135.

Income Tax Assessment Act 1997 Paragraph 82-135(e).

Income Tax Assessment Act 1997 Section 83-170.

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 Subsection 83-175(3).

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

Reasons for decision

Summary of decision

No part of the payment made to you by Employer A is a genuine redundancy payment. This is because the amount you received upon the termination of your employment is no more than the amount you would have received upon voluntarily terminating your employment in accordance with your contract with Employer A.

Detailed reasoning

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 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 employees 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 arms length the payment does not exceed the amount that could reasonably be expected to be made if the dismissal were at arms 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)).

Section 82-135 of the ITAA 1997 lists payments that are not employment termination payments, including payment for unused annual and long service leave. Paragraph 82-135(e) provides that the part of a genuine redundancy payment worked out under section 83-170 is not an employment termination payment.

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 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 (TR 2009/2) 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 you occupied was abolished and whether you were dismissed from employment.

It is clear that your position with Employer A would cease to exist after the administrative reorganisation of the Employer A and Employer B Group of companies.

You were offered a position with Employer B as a result of the reorganising process and were required to sign a new contract with Employer B.

You received an email from the Human Resources Manager of Employer B advising that any employees who are moving legal entities (Employer A to Employer B) and do not sign the new contract by the deadline date, will have their employment terminated on the grounds of redundancy but will not receive any redundancy pay.

You informed your manager that you were not prepared to sign the new contract and understood that your employment with Employer A would be terminated during the relevant financial year.

You and your employer did not come to agreement over your new contract and so your employment was terminated as a result of redundancy, ie because your position with Employer A was abolished.

Because you were dismissed as a result of your position being made redundant, it is not necessary to consider whether you were constructively dismissed.

However, for a payment on redundancy to be a genuine redundancy payment, other conditions, outlined above must also be met.

The payment exceeds what you would have received in consequence of the voluntary termination of your employment

Whilst It is considered that you were dismissed due to redundancy, all the other requirements under subsection 83-175(1) of the ITAA 1997 must also be met.

Subsection 83-175(1) of the ITAA 1997 requires the payment exceeds the amount that you could reasonably be expected to receive in consequence voluntarily terminating your employment.

Paragraphs 61 to 63 of TR 2009/2 state:

61. It would generally be expected that a greater amount would be paid on redundancy than voluntary termination. This recognises the purpose of redundancy payments, being primarily to compensate for loss of non-transferable entitlements (for example accrued sick leave and accrued long service leave prior to 10 years service) and the peculiar hardship associated with being made redundant.

62. Contractual or other entitlements payable by an employee on voluntary termination are generally a sound guide as to what might reasonably be expected…

63. There may be industry norms that could be used as a guide as to what payments would be made on voluntary termination…

As stated in an email from the Human Resources Manager of Employer B, any employees who are moving legal entities and do not sign the new contract by the deadline date will have their employment terminated on the grounds of redundancy but will not receive any redundancy pay.

You received payment in lieu of notice which was calculated in accordance with your contract with Employer A.

This notice period applied to both the taxpayer and the employer. Nothing in the contract would prevent the employer paying out all or part of the notice period given by the taxpayer on voluntary termination, as would also be the case on redundancy.

Consequently, the payment is not considered to be made in circumstances of a genuine redundancy, and is not in excess of the amount that could reasonably be expected to be received in consequence of a termination.