Edited version of your private ruling

Authorisation Number: 1012578012152

Ruling

Subject: Genuine redundancy payment

Question

Is any part of the payment received on the termination of your client's employment considered to be a genuine redundancy payment in accordance with section 83-175 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer: No.

This ruling applies for the following period:

Year ended 30 June 2013

The scheme commences on:

1 July 2012

Relevant facts and circumstances

Your client was employed with an employer (the Employer).

A copy of the offer of employment (the Offer) which your client accepted in the 2010-11 income year has been provided which shows:

(a) your client was required to work for a project (the Project) in a particular location;

(b) the position that your client was to perform;

(c) your client was required to work in accordance with a specific roster;

(d) the terms and conditions of your client's employment and other related documentation which also included an industrial agreement (the Agreement); and

(e) the Project had many phases and the continuation of your client's employment depended at the completion of each phase on the need for your client's particular work skills and performance.

A copy of the Agreement has been provided which shows amongst other matters:

· the scope of the Agreement

· the termination payments available under the Agreement

· the period of notice to be provided in cases of termination of employment

· the hours of work to be performed

In the 2012-13 income year the Employer terminated your client's employment around the time that your client's last shift finished.

Your client stated:

(a) the date that your client's next shift on the Project would have commenced had there been no termination of employment;

(b) the shift of the person your client would have replaced was extended by several days to the date that the whole Project was completed.

A 'PAYG payment summary - employment termination payment' (the Summary) for the 2012-13 income year was provided to your client which shows:

(a) the payment was paid shortly after your client's termination of employment;

(b) all of the payment was a taxable component;

(c) tax withheld on payment and

(d) the payment was treated as an ETP code 'O'.

A copy of the last 'Payment Advice' received by your client shows, amongst other matters, the Summary comprised amounts paid in accordance with subclauses in the Agreement.

Correspondence from the Employer states the date your client was notified of the termination of employment and this was at the completion of the whole Project.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 82-10.

Income Tax Assessment Act 1997 Section 82-130.

Income Tax Assessment Act 1997 Section 82-135

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

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 Subsection 83-175(3)

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

Reasons for decision

Summary

The payment your client received is not a genuine redundancy payment. It is a employment termination payment and has been correctly treated as such by the Employer.

Detailed reasoning

Your client received an employment termination payment in the 2012-13 income year.

Section 82-135 of the ITAA 1997 provides that certain payments are not employer 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.

Under subsection 83-175(1) of the ITAA 1997, a genuine redundancy payment is one 'received by an employee who is dismissed from employment because the employee's position is genuinely redundant'.

Further, it should be noted that a payment made when an employee's position no longer exists or an employer no longer desires to have it performed by anyone does not in itself mean any part of that payment is a genuine redundancy payment for income tax purposes.

Before a payment that meets the basic redundancy requirement in subsection 83-175(1) of the ITAA 1997 qualifies as a genuine redundancy payment, all other conditions in subsections 83-175(2) and (3) must also be met. These conditions include:

· the payment must be made before a person turns 65 or an earlier mandatory age;

· the termination is not at the end of a fixed period of employment;

· the actual amount that was paid is not greater than the amount that could reasonably be expected to be paid had the parties been dealing at arm's length;

· the amount that was paid was in excess of what a person would have been entitled to receive if they had voluntarily resigned;

· there was no arrangement for re-employment with the employer or a related party after the termination date; and

· the payment was not in lieu of superannuation benefits.

For the purposes of your client's case, specific attention will turn to subsection 83-175(2) of the ITAA 1997 which states:

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);…

The Commissioner has issued Taxation Ruling TR 2009/2 (TR 2009/2), titled 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.

Paragraphs 36 and 38 of TR 2009/2 state:

36. Under subparagraph 83-175(2)(a)(ii), a payment made at the end of a fixed period of employment cannot normally be a genuine redundancy payment.

38. In some cases, particularly those involving multi-disciplinary project-based work, an employee's period of service may be determined by reference to the achievement of a particular outcome rather than a specified period of time. The employee's period of service in these circumstances concludes on the achievement of that outcome.

In relation to project based work TR 2009/2 provides an example at paragraphs 148 to 154, which state:

148. Buildcorp makes contributions to an industry trust on behalf of its workers to cover the company for future termination payments (other than unused annual leave payments) it might be required to make under industry awards. The workers are all employed on a daily hire basis.

149. Buildcorp has a major construction contract to build an office block. Buildcorp's employees, its subcontractors and their employees have all been advised that they can expect to be employed on the project for at least six months, depending on their trade or other qualifications.

150. Three months into the project, all workers are terminated with a day's notice as required under their contracts because Buildcorp becomes insolvent and cannot meet its ongoing commitments.

151. The mutual intentions of the parties is that Buildcorp's employees will be employed until the completion of their tasks on the project, even though in form the contracts are made on a daily hire basis. Accordingly, in these circumstances, there is a dismissal caused by redundancy prior to the expiration of a fixed period of employment.

152. In contrast, if the workers had all completed their allotted tasks in keeping with the mutual intentions of the parties, any payments accruing on their termination of employment would not be eligible to be genuine redundancy payments. In these circumstances, the employees are terminated at the expiry of a fixed period of employment. (emphasis added)

Further, paragraphs 288 and 289 of TR 2009/2 state:

288. In some industries workers are employed on a project basis. The fact that a project is completed, even where the project is completed before a designated time, is not situation where workers are redundant. For these purposes, the Commissioner considers that termination on completion of a particular task or outcome represents a particular period of service for the purposes of subparagraph 83-175(2)(a)(ii). If the completion of the task or outcome gives rise to a payment, such a payment would normally be an employment termination payment, not a genuine redundancy payment. (emphasis added)

289. It is also common in these types of project based industries for workers to be employed on a weekly or daily hire basis. Once again, the outcome here may be that there is not a genuine redundancy payment because a termination payment is made at the end of a limited period of time of employment. This is so even if the payments are referred to as redundancy payments….

In your client's case, the Employer made the Offer for your client to work in a particular capacity on the Project which your client accepted.

In the Offer, though no date or period was specified, it was evident that your client's employment was for a finite period of time as the Offer stated that the Project had many phases and the continuation of your client's employment depended at the completion of each phase on the need for your client's particular work skills and performance.

In view of the above and the paragraphs referred to in TR 2009/2 it is considered that the continuation of your client's employment was not necessarily tied in with the completion of the Project but also the phase of the Project for which your client's skills were required.

As stated in the facts, your client was notified by the Employer, around the time of your client's last shift, that your client's role was no longer required. It is considered that this did not represent a termination of your client's employment before the end of the contracted period of employment. Rather, as the Project was completed not long after the notification, the timing of the termination indicates:

(a) the Employer no longer required your client's particular skills at that phase of the Project; and

(b) the termination notice was made in accordance with the notice period provided in the Agreement.

Further, it should be noted that the extension of the shift of the person your client would have relieved, were it not for your client's termination notice, also does not mean your client's employment was terminated before the contracted period.

The Employer's extension of the person's shift is, which your client indicates was extended by no more than several days, is considered to have been made on an economic and operational basis by Employer when taking into account certain in the Agreement relating to working hours.

On the basis of the information provided, it is considered that subsection 83-175(2) ITAA 1997 has not been satisfied as the payment your client received on termination was made at the end of the achievement of a particular outcome/and or fixed period of employment.

Accordingly, the payment your client received on termination is not a genuine redundancy payment.

The taxable component of the payment is an employment termination payment and is included in full as assessable income in your client's income tax return for the 2012-13 income year.