Edited version of your private ruling

Authorisation Number: 1012593316899

Ruling

Subject: Employment termination payment - genuine redundancy

Question 1

Is any part of the payment received on termination of employment a tax-free part of a genuine redundancy payment?

Answer

No.

This ruling applies for the following periods:

The year ending 30 June 2013.

The scheme commences on:

1 July 2012.

Relevant facts and circumstances

Your client received an offer of employment from an employer to work in a specified role on a project.

Your client's employment commenced prior to the 2013 financial year and was required to work in accordance with a specific roster.

It was noted in your client's offer of employment that as there are different work requirements across their scope of work, manning levels will fluctuate from time to time and your clients employment may terminate.

You advised what your client's scope of work constituted. At the time when this scope of work was coming to a completion, your client was given the offer of continued employment by the employer.

You advised what your client's new scope of work constituted.

Your client's employment with the employer was terminated during the 2013 financial year.

You advised that your client's scope of work was coming to an end when your client's employment was terminated.

You provided a copy of your client's PAYG payment summary - employment termination payment summary for the year ended 30 June 2013

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 27F.

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 83-85.

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

No part of the employment termination payment is a genuine redundancy payment. This is because your client was employed under a fixed period of employment specified under subparagraph 83-175(2)(a)(ii) of the ITAA 1997.

Detailed reasoning

Genuine redundancy payment

A payment made to an employee is a genuine redundancy payment if it satisfies all the criteria set out in section 83-175 of the Income Tax Assessment Act 1997 (ITAA 1997).

For a payment to be a genuine redundancy payment it must satisfy paragraph 83-175(2)(a) of the ITAA 1997 which states:

(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 states:

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 states:

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.
...

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 this case, your client received an offer of employment from the employer to work in a specified role on a project. Your client's employment commenced prior to the 2013 financial year.

It was clear from your client's offer of employment that their position was tied exclusively to the project and their employment would expire on the completion of their scope of work, unless there was a requirement of their particular discipline. This was specifically stated in the job offer issued to them by the employer.

You advised that your client's initial scope of work had ceased, however your client was given the offer of continued employment by the employer. Upon accepting this offer, your client's scope of work changed.

On completion and fulfilment of your client's employer's contractual obligations for the new scope of work, your client's employment was terminated during the 2013 financial year.

In this case, your client's payment is a payment made at the end of a fixed period of employment as specified under subparagraph 83-175(2)(a)(ii) of the ITAA 1997. Therefore, no part of the payment is a genuine redundancy payment in accordance with section 83-175 of the ITAA 1997.