Edited version of your private ruling

Authorisation Number: 1012580045492

Ruling

Subject: Genuine redundancy payment

Question

Is the payment made to terminating employees a genuine redundancy payment?

Answer

Yes.

This ruling applies for the following period:

For the year ending 30 June 2014

The scheme commences on:

1 July 2013

Relevant facts and circumstances

1. A division of the employer is a Business Division and the wholesale arm of the Employing Division which is an Agency of the Company. The Employing Division is a Body Corporate established under a State Act. The Employing Division is in the process of outsourcing the functions of a division of the employer to a private provider (the Provider), with effect from a specific date during the 2013-14 income year. Consequently, employees will be made redundant effective from close of business on a specific date during the 2013-14 income year.

2. Employees were advised verbally on a specific date during the 2013-14 income year of their positions becoming redundant at which time they were informed of a payment that would be paid to eligible employees as a lump sum on termination of employment as part of their termination payment.

3. The purpose of the payment is to encourage employees to work with a division of the employer from a specific date during the 2013-14 income year until a specific date during the 2013-14 income year to ensure continuity of business and facilitation of a smooth transition to the Provider. This means that the payment will only be made to employees for days they actually attend the work place.

4. Calculation of the payment is based on a number of days in the working week and will accrue for each day actually worked from a specific date during the 2013-14 income year until a specific date during the 2013-14 income year inclusive. The payment will be paid to eligible employees on cessation.

5. To ensure the extent of this payment is realised and is applied in a fair and transparent manner, no payment will be made for any day taken as paid or unpaid leave during the aforementioned period.

6. The payment is not available to any employee who resigned prior to a specific date during the 2013-14 income year even if they worked some days between a specific date during the 2013-14 income year and a specific date during the 2013-14 income year.

7. The payment is in additional to the redundancy provisions contained in the Enterprise Agreement which provides the Employing Division the authority to establish terms and conditions applicable to a division of the employer.

8. The Employing Division intend to issue statements of termination confirming the employees are excess to requirements and outlining the elements of the redundancy payment. It is proposed that the payment is included as an element of the employee's statement of termination.

9. At the Employing Division's request, the Provider agreed to make a number of reservation jobs based in a city available to employees of a division of the employer. Only employees of a division of the employer are eligible to apply for these positions. This is not binding on the Provider and there is no guarantee of success. If an employee of a division of the employer is successful in securing a position their employment will be terminated with a division of the employer. The employee will not be entitled to redundancy payments because their accrued entitlements will be transferred to the Provider. However, the employee will be eligible for the payment but that will not form part of a severance or redundancy payment in those circumstances.

10. The payment is in excess of the amount that employees could reasonably expect to receive if he or she had resigned or retired from employment in the position they held at the time of dismissal.

11. The payment will be paid to the employees within 12 months of their termination of employment with a division of the employer.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 82-135

Income Tax Assessment Act 1997 Section 82-170.

Income Tax Assessment Act 1997 Subsection 82-170(2).

Income Tax Assessment Act 1997 Subsection 82-170(3).

Income Tax Assessment Act 1997 Section 82-175.

Income Tax Assessment Act 1997 Subsection 82-175(1).

Income Tax Assessment Act 1997 Subsection 82-175(2).

Income Tax Assessment Act 1997 Subsection 82-175(3).

Reasons for decision

Summary

12. The payment made to employees of a division of the employer will be a genuine redundancy payment. However, for those employees who take up a position with a private provider (the Provider), the payment will be an employment termination payment and not a genuine redundancy payment.

13. The tax-free amount of a genuine redundancy payment will depend on the tax-free cap applying to each employee. The amount of the genuine redundancy payment up to the employee's cap will be non-assessable and non-exempt income. Any amounts in excess of the cap will be taxed as an employment termination payment.

Detailed Reasoning

14. Genuine redundancy payments (GRP) are tax-free up to a limit worked out under section 83-170 of the ITAA 1997. Section 83-175 of the ITAA 1997 outlines the requirements to be satisfied before any payment made to a person whose employment is terminated qualifies for treatment as a GRP. This section states in part:

(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 the 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 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);

(b) if the dismissal was not at arm's length the payment does not exceed the amount that could reasonably be expected to be made if the dismissal were at arm's 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 the 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)).

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

16. In Taxation Ruling TR 2009/2 'Income tax: genuine redundancy payments', the Commissioner has outlined the requirements to be satisfied before any payment made to a person whose employment is terminated qualifies for treatment as a genuine redundancy payment under section 83-175 of the ITAA 1997.

17. There are four necessary components within this requirement:

· The payment being tested must be received in consequence of an employee's termination.

· That termination must involve the employee being dismissed from employment.

· That dismissal must be caused by the redundancy of the employee's position.

· The redundancy payment must be made genuinely because of a redundancy.

18. The satisfaction of this requirement establishes the essential character of the payment. However, there are further conditions that must also be satisfied before a payment can be treated as a genuine redundancy payment.

Component 1: Paid as a consequence of the termination of your employment

19. The phrase 'in consequence of' is not defined in the ITAA 1997. However, the courts have interpreted the phrase in a number of cases. Whilst the courts have divergent views on the meaning of this phrase, the Commissioner's view on the meaning and application of the 'in consequence of' test are set out in Taxation Ruling TR 2003/13 Income tax: eligible termination payments (ETP): payments made in consequence of the termination of any employment: meaning of the phrase 'in consequence of'.

20. While TR 2003/13 considered the meaning of the phrase 'in consequence of' in the context of eligible termination payments, TR 2003/13 can still be relied upon as both the former provision under the Income Tax Assessment Act 1936 and the current provision under the ITAA 1997 both use the term 'in consequence of' in the same manner.

21. In paragraph 5 of TR 2003/13 the Commissioner states:

5. ...the Commissioner considers that a payment is made in respect of a taxpayer in consequence of the termination of the employment of the taxpayer if the payment 'follows as an effect or result of' the termination. In other words, but for the termination of employment, the payment would not have been made to the taxpayer.

22. In paragraph 6 of TR 2003/13, the Commissioner recognises that:

6. The phrase requires a causal connection between the termination and the payment, although the termination need not be the dominant cause of the payment.

23. The phrase 'in consequence of' the termination of employment has been interpreted by the courts in several cases.

24. Of note are the decisions made by the High Court in Reseck v. Federal Commissioner of Taxation (1975) 49 ALJR 370; (1975) 6 ALR 642; (1975) 5 ATR 538; (1975) 75 ATC 4213; (1975) 133 CLR 45 (Reseck) and the Full Federal Court in McIntosh v Federal Commissioner of Taxation (1979) 25 ALR 557; (1979) 10 ATR 13; (1979) 45 FLR 279; (1979) 79 ATC 4325 (McIntosh).

25. Both Courts views were that for a payment to be made in consequence of the termination of employment it had to follow on as a result or effect of the termination of employment. Additionally, while it is not necessary to show that termination of employment is the sole or dominant cause, a temporal sequence alone would not be sufficient.

26. There is also a broader view of the meaning of 'in consequence of' the termination of employment. Paragraph 29 of TR 2003/13 provides that a payment will be in consequence of the termination of employment if the termination is either a cause of the payment or an antecedent event.

27. Furthermore, in Case No M 101/1976 (1977) 77 ATC 475; (1977) 22 CTBR (NS) 41 (Case No M 101/1976) the No. 2 Board of Review considered whether a production completion bonus was made in consequence of termination of employment. The facts of the case were that on the day he was retrenched, the taxpayer received a production completion bonus of $2,750 from his employer. In a letter to the Deputy Commissioner, the taxpayer's former employer explained that the bonus payment was designed as an incentive to keep the employee on a particular project until he was no longer needed. Payment of the bonus was conditional on the employee remaining on the job until retrenched. The taxpayer gave evidence that had he resigned at any time before the retrenchment date he would have received no part of the bonus.

28. The No. 2 Board of Review held that the payment constituted an allowance or compensation paid in a lump sum in consequence of the termination of the taxpayer's employment within the meaning of former paragraph 26(d) of the ITAA 1936 (the precursor to the ETP provisions). In making the decision the judgement of the majority of the Full High Court in Reseck was followed.

29. The question of whether a payment is made in consequence of the termination of employment will be determined by the relevant facts and circumstances of each case.

30. From the facts the Employing Division has advised that it is outsourcing the functions of a division of the employer to a private provider with effect from a specific date during the 2013-14 income year. Consequently, employees will be made redundant effective from close of business on a specific date during the 2013-14 income year.

31. Employees were advised verbally on a specific date during the 2013-14 income year of their positions becoming redundant at which time they were informed of a payment that would be paid to eligible employees as a lump sum on termination of employment as part of their termination payment. The purpose of the payment is to encourage employees to work with a division of the employer until a specific date during the 2013-14 income year to ensure continuity of business and facilitation of a smooth transition to the Provider.

32. Employees would not be eligible for the payment if they resigned prior to a specific date during the 2013-14 income year.

33. It is clear from the facts provided that the payment is made 'in consequence of' the termination of employment with a division of the employer. As such, there is a direct causal connection between the termination of employment and the making of the payment.

34. If not for the termination of the employment with a division of the employer on a specific date during the 2013-14 income year, the payment would not have been made. In particular, the payment is conditional on employees remaining in employment with the Employing Division until the cessation date on a specific date during the 2013-14 income year.

35. It is therefore considered there is a sufficient causal nexus between the making of the payment and the termination of employment to say that the payment was made in consequence of the termination of employment and the first component of subsection 83-175(1) of the ITAA 1997 has been satisfied.

Component 2: 'Dismissal' from employment

36. TR 2009/2 at paragraph 18 states:

Dismissal is a particular mode of employment termination. It requires a decision to terminate employment at the employer's initiative without the consent of the employee. This stands in contrast to employment that is terminated at the initiative of the employee, for example in the case of resignation.

37. On the basis of the facts, the Employing Division has made a decision to outsource the functions of a division of the employer to the Provider with effect from on a specific date during the 2013-14 income year. Therefore all employees of a division of the employer will be dismissed on a specific date during the 2013-14 income year.

38. As it is considered that the employees will be dismissed from employment, the second component of subsection 83-175(1) of the ITAA 1997 has been satisfied.

Component 3: 'Dismissal' caused by 'redundancy'

39. The functions of a division of the employer will be outsourced to a private provider (the Provider) from a specific date during the 2013-14 income year. No positions will exist in a division of the employer and it is clear the employer has made a decision that the jobs and duties are no longer required or are to be performed by anyone. This decision has led to the dismissal of the employees.

40. Therefore it is considered that the dismissal was caused by the redundancy of the employees' positions with a division of the employer, and the third component has been satisfied.

Component 4: 'Genuine' redundancy

41. There is nothing to suggest the redundancy is contrived or is not genuinely made so this component is satisfied.

Further conditions for a GRP

42. 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), 83-175(3) and 83-175(4) of the ITAA 1997 must be met. These conditions include:

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

· the termination was 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;

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

· the payment was not in lieu of superannuation benefits; and

· it is not a payment mentioned in section 82-135 (other than paragraph 82-135(e) which refers to a GRP or an early retirement payment). Section 82-135 includes payments such as pensions, foreign termination payments, unused annual leave and unused long service leave.

43. Therefore, on the basis of the information provided, it is considered that the payments paid to those employees who are not taking up positions with the Provider satisfy the requirements of subsection 83-175(1) of the ITAA 1997 of the definition of a GRP. The payment is considered to be a GRP if the conditions of subsections 83-175(2), 83-175(3) and 83-175(4) of the ITAA 1997 are also satisfied.

44. Section 83-170 of the ITAA 1997 then applies to treat so much of the relevant payment (that does not exceed the amount worked out under a specified formula) as tax-free. That is, the tax-free part 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.

45. For those employees taking positions with the Provider, because there has been an arrangement in place to re-employ these workers, their payments will not be GRPs but normal employment termination payments.

Tax-free treatment of a GRP

46. Some or all of a genuine redundancy payment may be non-assessable and non-exempt income, and accordingly tax-free, under section 83-170 of the ITAA 1997.

47. Subsection 83-170(2) of the ITAA 1997 provides that so much of the GRP that does not exceed the amount worked out using the formula prescribed in subsection 83-170(3) of the ITAA 1997 is not assessable income and is not exempt income.

48. The extent to which the payment is tax-free will depend on the amount of the payment and the total number of whole years of employment to which the payment relates. The formula for working out the tax-free amount is:

Base amount + (Service amount × Years of service)

49. As the termination of employment will occur during the 2013-14 income year, the base amount is $9,246 and the service amount is $4,624.

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

51. The 'years of service' to which the genuine redundancy payment relates refers to each whole year of completed employment service to which the redundancy payment relates. It should be noted that, 6 months, 8 months or even 11 months do not count as a whole year for the purposes of this calculation.

52. The tax-free amount is not assessable income and is not exempt income in accordance with subsection 83-170(2) of the ITAA 1997.

Conclusion

53. The payment meets the definition of a GRP. The payment made to employees of a division of the employer is considered to be a GRP if the conditions of subsections 83-175(2), 83-175(3) and 83-175(4) of the ITAA 1997 are also satisfied.

54. For those employees of a division of the employer who take up a position with the Provider, the payment will be an employment termination payment and not a genuine redundancy payment.