Edited version of your private ruling

Authorisation Number: 1012573738402

Ruling

Subject: Genuine redundancy

Question

Will any part of the employment termination payment received after age 65 contain a tax-free part of a genuine redundancy payment?

Answer

No

This ruling applies for the following period

Year ended 30 June 2014

The scheme commenced on

1 July 20132

Relevant facts and circumstances

You are over 65 years of age.

You were employed by the employer for a number of years.

You state that you have been contracted to perform various roles in various locations for your employer.

In the 2005-06 income year, due to your health, a meeting was held by the employer to consider an alternative employment for you. It was decided to create a new position specifically for you, whereby you could work from home in an administrative capacity with flexible working hours.

Your duties under this new position involved specific and unique projects that could undertaken by you from your home office, and would utilise your experience within the organisation as well as your life experience personally.

In the 2005-06 income year, you signed an agreement concerning the changed nature of your employment with the employer as outlined above. From the employer's perspective, there was an ongoing employment relationship with you under this agreement.

The mandatory retirement age for your occupation in your organisation is over XX. (over 70 years of age).

In a recent year, your employer held discussions with you about the likelihood of the completion of your role and position with the organisation.

It was agreed that your early retirement was to be on a specific date (the termination date) in the 2013-14 income year, due to your position becoming redundant and there would not be any replacement for your role or the duties you have been undertaking. You would take your accumulated long service leave from July through to the termination date.

In the beginning of the 2013-14 income year, you signed an 'Agreement of Understanding' concerning the completion of your role and the timeline for the taking of your accumulated long service leave.

The employer intends to pay you a gratuity payment in gratitude for your significant years of continuous service with the organisation.

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 Paragraph 83-175(2)(a).

Income Tax Assessment Act 1997 subparagraph 83-175(2)(a)(i)

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)

Age Discrimination Act 2004 Section 40

Reasons for decision

Summary

The employment termination payment to be received from the employer will not be a genuine redundancy payment as your employment was terminated after you turned 65 years of age.

Detailed reasoning

Genuine redundancy payment

A payment made to an employee is a genuine redundancy payment (GRP) if it satisfies all the conditions 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 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.

(1) 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

(2) 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 Commissioner has issued Taxation Ruling TR 2009/2 which outlines the Commissioner's view of the requirements to be satisfied for a payment to qualify as a genuine redundancy payment under section 83-175 of the ITAA 1997.

At paragraphs 34 and 35 of TR 2009/2 it refers to the age-based limits which state:

34 Under paragraph 83-175(2)(a), an employee must be less than 65 years old at the time of dismissal for a redundancy payment to qualify as a genuine redundancy payment (highlighted).

35. However, if the employment of a particular employee would have otherwise terminated at a younger age than 65, the employee must be dismissed before that time. This younger age becomes the employee's age-based limit in these circumstances.

Therefore, under subparagraph 83-175(2)(a)(i) of the ITAA 1997 your employment must be terminated before you turn 65 years of age. Your employment with the employer was officially terminated on a specific date. You had turned 65 years of age before the date your employment was terminated and as such you do not meet the condition under subsection 83-175(2) of the ITAA 1997.

As you have not met one of the conditions under section 83-175 of the ITAA 1997, it is not necessary to discuss whether you meet the other conditions under section 83-175 of the ITAA 1997. Therefore, the payment to be received from the employer will not be a genuine redundancy payment under section 83-175 of the ITAA 1997.

Consideration has been given in paragraph 37 of TR 2009/2. In paragraph 37 of TR 2009/2 the Commissioner states the following about whether a rolling fixed-term contract may establish an ongoing employment relationship:

37. However, some rolling fixed-term contracts may, as a matter of fact, establish an ongoing employment relationship. The reference to rolling contracts contemplates the situation where fixed-term contracts are renewed on one or more occasions following the expiry of the contracted term. However, where a contract is not renewed at the end of a contractually stipulated term, evidence is required to displace the express terms of the contract and establish an ongoing employment relationship. This is likely to be the exception rather than the rule.

Specific to your case, whether you have an ongoing employment relationship or rolling fixed-term contracts with your employer is irrelevant to the consideration of paragraph 83-175(2)(a) of the ITAA 1997. The most relevant is will you be able to meet all the conditions set out in section 83-175 of the ITAA 1997.

As previously determined, subparagraph 83-175(2)(a)(i) of the ITAA 1997 has not been satisfied as you were over 65 years at the date of termination. Accordingly, the termination payment to be received from the employer is not a genuine redundancy payment under section 83-175 of the ITAA 1997.

The legislation itself is quite specific. It requires all the conditions set out in section 83-175 of the ITAA 1997 must be met for a payment to be a genuine redundancy payment. It does not contain a discretion that can be exercised by the Commissioner to allow the payment to be exempt from tax as a genuine redundancy.

Please note that there are no age discrimination issues in this case. Section 40 of Division 4 (General Exemptions) of Part 4 (Unlawful Age Discrimination) of the Age Discrimination Act 2004 states:

This part does not make unlawful anything done by a person in direct compliance with a taxation law (within the meaning of the Income Tax Assessment Act 1997).

Further, the Explanatory Memorandum to the Age Discrimination Bill 2003 (which was enacted as the Age Discrimination Act 2004) states in relation to section 40:

Taxation: Distinctions based on age can legitimately feature in a number of ways in taxation legislation including rebates and other concessions. To ensure this flexibility is retained it is appropriate that taxation legislation laws be exempt.