Edited version of your private ruling

Authorisation Number: 1012534147207

Ruling

Subject: Genuine redundancy

Question

Is any part of a payment made under a deed of settlement the tax-free part of a genuine redundancy payment?

Answer

Yes.

This ruling applies for the following period:

For the year ended 30 June 2013

The scheme commenced on:

1 July 2012

Relevant facts and circumstances

You were previously employed in Role A of a company (the Company).

You commenced employment at the Company during 19XX.

You are below 65 years of age.

Your salary package was X per annum with entitlements to superannuation contributions of 9% of base salary.

The position you held in Role A ceased when the Company stopped operations.

You were offered redeployment to a different position (Role B) within a different area of the business. However, you did not accept the offer.

Your employment was terminated with the Company during the relevant income year.

You lodged a General Protections Dispute application in accordance with section 365 of the Fair Work Act 2009 (FWA 2009) against the Company.

During the subsequent income year, FWA conducted a conference to deal with the matter and issued a Certificate under Section 369. The Certificate enabled you to lodge Federal Magistrates Court of Australia application for the matter to be heard.

After Federal Court mediations, the matter has been settled towards the end of the subsequent income year.

You received a lump sum payment of Y. The Company did not treat this payment as a redundancy payment.

You provided a copy of the PAYG payment summary - employment termination payment for the subsequent year end.

You provided a copy of the relevant Enterprise Agreement (the Agreement). The amount you received under the Deed was more than you would have received if you voluntarily resigned.

You provided a copy of the Deed of Release issued during the subsequent income year.

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

Based on the information provided, the termination of your employment meets the requirements of a genuine redundancy payment as specified in the income tax legislation. As such, the payment received upon the termination of employment does not need to be included in your income tax return in the subsequent income year. You will need to refer to this ruling when lodging your return.

Detailed reasoning

Payments excluded from being employment termination payments

You received an employment termination payment of Y under the terms of a deed of settlement.

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;

· the tax-free part of a genuine redundancy payment or an early retirement scheme payment.

Clearly, the payment of Y 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:

· that the payment is received by an employee who is dismissed from employment because the employee's position is genuinely redundant; and

· 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 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 you occupied was abolished and whether you were dismissed from employment.

It is clear that your position in Role A in the Company ceased to exist as stated in the media release in the subsequent year:

This is also confirmed in a letter issued to you during the subsequent income year by the Company.

From these facts, it is clear the position of Role A no longer existed.

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 facts provided, you stated that the Company offered a less senior position to you as a result of the closure of the areas of business you worked in. In an email, you stated that you this position was effectively a demotion and that you wished to decline the redeployment offer:

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 he or she must therefore be dismissed, that the question of redundancy arises.

As noted above, the position of Role B was offered to you. Given this, it is necessary to consider whether constructive dismissal applies in your situation, that is, whether your employer has embarked on a course of action to make you leave, or the conditions in the work place that are impossible that no reasonable person could stay.

In the present case, the facts presented and the documentary evidence supplied indicates that you performed Role A. As already mentioned above, a letter was issued to you by the Company stating that the termination of your role was due to the closure of the areas of business you worked in. The Company then offered you a position in Role B.

Given you had been in a somewhat managerial position and were being asked to take on Role B which required you to report to a manager, it is considered this offer was not an appropriate alternate position in regard to your previous position, skills and experience. For this reason the termination of your employment constitutes a 'constructive dismissal'.

Tax-free amount

Subsection 83-170(2) of the ITAA 1997 provides that so much of the genuine redundancy payment that does not exceed the amount worked out using the formula prescribed in subsection 83-170(3) is not assessable income and is not exempt income. Any amount in excess of the tax-free amount is taxed as an employment termination payment. The formula for working out the tax-free amount is:

Base amount + (Service amount × Years of service)

For the 2012-13 income year:

Base amount means $8,806;

Service amount means $4,404; and

Years of service means the number of whole years in the period, or sum of periods, of employment to which the payment relates.

For you, the 'years of service' to which the genuine redundancy payment relates is D whole years of service.

Accordingly, the tax-free part of a genuine redundancy payment you can receive in the 2012-13 income year under subsection 83-175(3) of the ITAA 1997 is:

$8,806 + ($4,404 × D) = E

As your redundancy payment is less than the amount calculated above, the entire amount is considered non-assessable and non-exempt income.

Taxation treatment of unused annual leave and unused long service payments

Please note, any payments for unused annual leave and unused long service leave that are made in connection with a genuine redundancy payment are taxed at a maximum rate of 30% pursuant to sections 83-15 and 83-80 of the ITAA 1997.

Conclusion

As there has been a dismissal (constructive) and the position you previously held no longer exists, the payment under the deed is considered to be a genuine redundancy payment under section 83-175 of the ITAA 1997.