Edited version of your private ruling

Authorisation Number: 1012578993710

Ruling

Subject: Employment termination payment

Question 1

Is any part of the payment received on the termination of your 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 20ZZ

The scheme commences on:

1 July 20YY

Relevant facts and circumstances

In late 20XX you accepted an Offer of Employment with the Employer, in a particular role, for a project on a facility in a particular location.

The Employer is the primary contractor for the project.

You were required to work in accordance with a specific roster based on working 12 hours per day for 14 days, followed by 14 days off.

Item 1 of your Offer of Employment states:

At the end of your period of engagement, your employment will terminate on your direct return to … airport (or other demobilisation port agreed…)

You advised that when you commenced employment with the Employer, it was your understanding that your employment would be for a finite period of time, for the duration of the project, which was expected to continue for a period of 14 months. The project duration however, ultimately exceeded two years.

You advised that you were aware that you were not going to be deployed elsewhere on completion of the project.

In early 20ZZ, your employment with the Employer was terminated.

Shortly after your termination you received an employment termination payment.

You also received an accrued annual leave payment which was included in your payment summary for the year ended 30 June 20ZZ as ordinary income.

You declared the employment termination payment received in your income tax return for the year ended 30 June 20ZZ.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 82-130

Income Tax Assessment Act 1997 Section 82-135

Income Tax Assessment Act 1997 Section 83-10

Income Tax Assessment Act 1997 Section 83-15

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

The payment you received is not a genuine redundancy payment. It is an employment termination payment and has been treated correctly by the Employer.

Detailed reasoning

You received an employment termination payment in the 20ZZ financial 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'.

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 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.

152. ... 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.

In your case, you received an Offer of Employment from the Employer to work in a particular role for the project. Your employment commenced in late 20XX.

It was clear from your offer of employment that your employment was for a finite period of time, subject to the execution of phases relevant to your role for the project.

Item 1 of your Offer of Employment states:

At the end of your period of engagement, your employment will terminate on your direct return to … airport (or other demobilisation port agreed…)

Either party may terminate the contract by giving one day's notice.

You advised that it was your clear understanding that your employment would be for the duration of the project, which was expected to continue for a period of 14 months, despite it ultimately exceeding two years.

You also advised that you were aware that you were not going to be deployed elsewhere on completion of the project.

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

Despite the absence of a stipulated period of service in your Offer of Employment, the 'mutual intentions of the parties' was that your 'period of engagement' would be until the completion of your allotted role on the project, which was tied directly to the achievement of a particular outcome. Your circumstances are similar to the example outlined in paragraphs 148 and 149 of TR 2009/2, which indicates that a termination payment in circumstances such as yours is not a genuine redundancy payment.

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

The taxable component of the payment you received is an employment termination payment and is included in full, as assessable income in your income tax return for the 20ZZ financial year.