Edited version of your private ruling

Authorisation Number: 1012589774538

Ruling

Subject: Genuine redundancy payment

Question

Is the payment received by a taxpayer on termination of their employment a genuine redundancy payment?

Answer

No.

This ruling applies for the following period

Income year ended 30 June 2013

The scheme commences on

Not applicable

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

A taxpayer (the Taxpayer) commenced employment in the third quarter of the 2011-12 income year with a company (the Company). The Taxpayer was employed to undertake a supervisory and co-ordination role for specified types of work in a specified project. Their employment was on project basis with no pre-determined completion date.

The specified project commenced in 2009 and the work completed was officially in operation in the first quarter of the 2013-14 income year.

The Company's offer of employment to the Taxpayer stated, among other things, that:

1. Engagement and Terms

Your employment will commence on your arrival at [a specified location]…prior to departure, and continue in accordance with the roster until advised by [the Company] at the end of your engagement, your employment will terminate on your direct return to [a specified location]…

Either party may terminate the contract by giving [a specified period of] notice. However, the Company may terminate the contract without notice for serious misconduct…

2. Hours of Work and Rostering and Locations

From the commencement of your employment you will be required to work either day shift or night shift in accordance with the roster, which is based on working for [a specified number of hours] per day for [a specified period] (paid time), followed by [a specified period] off (unpaid time).

…

3. Wages and Allowances

Your rates of pay will be as specified in the Schedule of Pay Rates attachment to this contract…

Your rates include compensation for all disabilities, job termination, shift allowance, weekend working and any specific hourly allowances associated with …

…

The Company will withhold and accrue the redundancy and termination payments for the duration of this employment contract and all monies withheld will be paid on the next normal pay day following termination of this employment contract.

…

Relevantly, a summary of the employment terms and conditions' attached to the offer of employment to the Taxpayer had the following provisions:

Termination

Employees shall be terminated by [a specified period of] notice on either side given at any time or by the payment or forfeiture of wages [for the specified period] calculated on the basis of [a specified period] at the employee's rate of wages.

…

[The Company] shall have the right to dismiss an employee for misconduct, neglect of duty or inefficiency, in which case the employee shall be paid all wages due to him/her up to the time of dismissal only.

Termination Bonus

An employee, upon being made redundant, shall be entitled to a termination bonus of [a specified period] at the employee's appropriate rate of wages.

Redundancy

An employee, upon being made redundant by [the Company] due to completion of the contracted scope of work shall be paid a redundancy payment of [a specified period] at the employee's appropriate rate of wages.

An employee shall not be entitled to this payment should his/her employment be terminated for any of the following reasons:

(a) Resignation prior to the completion of the contract scope of work.

(b) Dismissal in accordance with the company disciplinary procedures.

Commencement or Termination of Employment during a Work Period

Should a weekly employee commence his/her employment during [a specified] work period he/she will be rostered to go on his/her relief period according to the established staff change schedule irrespective of whether [the specified period] worked prior to going on relief entitles him/her to the full relief period. In such cases, he/she will be paid from his/her commencement date and only for the actual time worked.

This pay entitlement will also apply for each shift worked in the event of the services of an employee being terminated by himself/herself or [the Company] before the completion of a [specified] work period.

Job Termination Payment

On completion of employment with the Company, an employee will be entitled to a job termination payment. The job termination payment is calculated on the basis of a specified percentage of the employee's gross earnings for the time worked, including allowances and training and money paid to the employee whilst on approved worker's compensation or income protection, but not including Redundancy or Termination Payments.

Any unused sick leave due to an employee upon being made redundant shall be paid as an attendance incentive bonus. The above shall not be paid should the employee resign before the completion of their scope of work on the specified project.

In the third quarter of the 2012-13 income year the Company notified the Taxpayer in writing of the termination of their contract of employment. The PAYG payment summary - employment termination payment issued to the Taxpayer by the Company for the year ended 30 June 2013 shows a specified amount of taxable component and a specified amount of total tax withheld.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 82-10.

Income Tax Assessment Act 1997 Subsection 82-10(2)

Income Tax Assessment Act 1997 Subsection 82-10(3)

Income Tax Assessment Act 1997 Subsection 82-10(4)

Income Tax Assessment Act 1997 Section 82-130

Income Tax Assessment Act 1997 Subsection 82-130(1)

Income Tax Assessment Act 1997 Subsection 82-130(2)

Income Tax Assessment Act 1997 Section 82-135

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

Income Tax Assessment Act 1997 Section 83-170

Income Tax Assessment Act 1997 Subsection 83-170(2)

Income Tax Assessment Act 1997 Subsection 83-170(3)

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(4)

Summary

No part of the employment termination payment received by the Taxpayer is a genuine redundancy payment as their project-based employment was terminated on completion of the contracted scope of work.

Detailed reasoning

The Taxpayer received an employment termination payment on termination of their employment with the Company. The Taxpayer argued that their dismissal by the Company was caused by the redundancy of their position as the scope of the project was completed.

Section 82-135 of the Income Tax Assessment Act 1997 (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'. Based on the facts of a case, the Commissioner determines if there was a genuine redundancy.

For a payment to qualify as a genuine redundancy payment, all other conditions in section 83-175 of the ITAA 1997 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 paragraph 83-175(2)(a) of the ITAA 1997, which states that:

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.

Relevantly, paragraphs 36 and 38 of TR 2009/2 state that:

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 contracts TR 2009/2 provides an example at paragraphs 148 to 152, 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.

The Taxpayer accepted an offer of employment from the Company and commenced the employment on 13 March 2012.

The Commissioner has noted the following from the Company's offer of employment to the Taxpayer:

Ÿ At the end of your period of engagement, your employment will terminate on your direct return to [a specified location]…

Ÿ Your rate [of pay] includes compensation for all disabilities, job termination, shift allowance, weekend working…

Ÿ The Company will withhold and accrue the redundancy and termination payments for the duration of this employment contract and all monies withheld will be paid on the next normal pay day following termination of this employment contract.

Ÿ Thank you for your participation in this project…(last paragraph)

From the summary of employment Terms and conditions' attached to the Company's offer of employment, the following has also been noted:

Redundancy

An employee, upon being made redundant by [the Company] due to completion of the contracted scope of work shall be paid a redundancy payment…

Job Termination Payment

On completion of employment with [the Company], an employee will be entitled to a job termination payment…

…The above shall not be paid should the employee resign before the completion of their scope of work …

However, neither the Company's offer of employment, nor the 'summary of employment terms and conditions' attached to it, defines what 'redundancy' is.

Based on the facts of the case, particularly the terms and conditions of employment quoted above, the Commissioner is of the view that:

Ÿ the Taxpayer's employment was on project basis, and its duration depended on that part of the project for which the Taxpayer was engaged by the Company;

Ÿ the Taxpayer's employment terminated at the end of their period of engagement in the project;

Ÿ the Taxpayer's job termination payment', 'redundancy' and 'termination bonus' were all based on a pre-determined number of hours or percentage specified in their contract of employment, withheld and accrued by the Company and paid to the Taxpayer when their employment was terminated since their project-based employment would be terminated once the contracted scope of work was complete; and

Ÿ the term 'redundancy' as appears in the Taxpayer's contract of employment refers to their employment being terminated on completion of the contracted scope of work, rather than to the Taxpayer being made redundant before the contracted scope of work was complete.

As mentioned in paragraph 36 of TR 2009/2, a payment made at the end of a fixed period of employment cannot normally be a genuine redundancy payment. Although the Taxpayer's contract of employment with the Company did not specify a completion or termination date, the Commissioner does not consider this fact helpful for your case in light of paragraph 38 of TR 2009/2, which states that:

…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

and in light of the example provided in paragraphs 148 to 152 of TR 2009/2 to illustrate the point made in paragraph 38.

As the termination of the Taxpayer's employment was due to the completion of the contracted scope of work, the payment from the Company was made to the Taxpayer 'by reference to the achievement of a particular outcome'. The Commissioner therefore considers that subparagraph 83-175(2)(a)(ii) of the ITAA 1997 has not been satisfied. Consequently the payment the Taxpayer received cannot be treated as a genuine redundancy payment.

The entire taxable component of the payment the Taxpayer received is, therefore, an employment termination payment, which must be included in full as their assessable income in their income tax return for the 2013 financial year in accordance with subsection 82-10(2) of the ITAA 1997. Depending on the amount of the Taxpayer's taxable income and their existing ETP cap amount, a tax offset may apply to part of the Taxpayer's employment termination payment under subsections 82-10(3) and (4) of the ITAA 1997.