Edited version of private advice

Authorisation Number: 1012617667006

Ruling

Subject: Employment termination payment - genuine redundancy

Question 1

Is any part of the payment made to an employee an employment termination payment?

Answer

No.

Question 2

Is any part of the payment made to an employee the tax free part of a genuine redundancy payment?

Answer

No.

This ruling applies for the following periods:

Year ending 30 June 2014.

The scheme commences on:

1 July 2013.

Relevant facts and circumstances

You are the employer.

An employee commenced employment with your organisation some time ago.

On the date of which the employee commenced employment they held two separate, part-time positions within your organisation, namely:

• Position A; and

• Position B.

As at the date the employee commenced employment, Position A was remunerated at a different rate per hour in comparison to Position B.

During the 2014 income year you offered the employee a new contract offering them Position B. However, the employee was still employed in Position A and undertaking both roles.

During the 2014 income year, the organisation decided that Position A was no longer required and is to be made redundant. Position A was abolished during the 2014 income year.

You advised that you intend to pay the employee a severance payment and classify it as a genuine redundancy payment in relation to the abolishment of Position A.

You advised that you do not intend to terminate the employee, but only to make a redundancy payment with the employee continuing their employment in Position B.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 82-135.

Income Tax Assessment Act 1997 Section 82-10.

Income Tax Assessment Act 1997 Section 82-130.

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

Income Tax Assessment Act 1997 Subparagraph 82-130(1)(a)(i).

Income Tax Assessment Act 1997 Subparagraph 82-130(1)(b).

Income Tax Assessment Act 1997 Subparagraph 82-130(1)(c).

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 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 any severance payment made to the employee in relation to the abolishment of Position B is an employment termination payment or a genuine redundancy payment. This is because the employee's employment has not been terminated as they have retained one of their positions within your organisation.

Detailed reasoning

Employment termination payment

Section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997) states that:

employment termination payment has the meaning given by section 82-130 of the ITAA 1997.

Subsection 82-130(1) of the ITAA 1997 states that:

A payment is an employment termination payment if:

(a) it is received by you:

(i) in consequence of the termination of your employment; or

(ii) after another person's death, in consequence of the termination of the other person's employment; and

(b) it is received no later than 12 months after that termination (but see subsection (4)); and

(c) it is not a payment mentioned in section 82-135.

Section 82-135 of the ITAA 1997 provides that certain payments are not employment termination payments, including:

_ a payment for unused annual leave or unused long service leave;

_ the tax-free part of a genuine redundancy payment or an early retirement scheme payment.

To determine if a payment constitutes an employment termination payment, all the conditions in section 82-130 of the ITAA 1997 must be satisfied.

Failure to satisfy any of the conditions under subsection 82-130(1) of the ITAA 1997 will result in the payment not being considered an employment termination payment. Furthermore, any termination payments received outside of the 12 months will be taxed as ordinary income at marginal tax rates, unless the taxpayer is covered by a determination exempting them from the 12 month rule.

Paid as a consequence of the termination of your employment

For a payment to be treated as an employment termination payment (ETP), the first condition that needs to be met is that there must be a payment that is made in consequence of the termination of employment of the taxpayer (see subparagraph 82-130(1)(a)(i) of the ITAA 1997).

In this case, you intend on making a severance payment to an employee in consequence of the abolishment of Position A.

However, given a key fact of this case is that the employee will retain one part time employment position within your organisation at the same time as their other part time position was abolished, the critical issue for determining if the severance payment is an ETP is whether or not their employment was terminated in accordance with section 82-130 of the ITAA 1997.

We do not consider the facts of your case to be sufficiently different for Taxation Ruling TR 2009/2, titled Income Tax: genuine redundancy payments to not apply. Our view that the severance payment is not an ETP is consistent with the view set out in TR 2009/2.

Our view is also consistent with the overarching legislative scheme of part 2-40 that seeks to deal cohesively with all payments made in consequence of the termination of a person's common law employment.

This legislative scheme means that while TR 2009/2 is concerned with genuine redundancy payments, the views expressed in the Ruling with respect to the concept of 'termination of employment' apply equally in the context of ETPs. In this regard, paragraph 235 of TR 2009/2 states:

'It is the Commissioner's view that a payment must be in consequence of termination …. before any part of that payment can be treated as a genuine redundancy payment.'

Paragraph 240 further provides:

'…. As it may transpire that part of a genuine redundancy payment is an ETP, the whole of the redundancy payment must have been in consequence of termination.'

Broadly speaking, treatment as an employment termination payment is the default for payments made in consequence of the termination of employment under Part 2-40 of the ITAA 1997. Although separately defined from an employment termination payment, the Commissioner's view expressed at paragraph 232 of TR 2009/2 is that a genuine redundancy payment is an employment termination payment unless and to the extent that it is tax-free. That is, a genuine redundancy payment is a special type of eligible termination payment with the requisite purpose and features. This view is consistent with the note to section 83-170 of the ITAA 1997.

As paragraph 16 (and paragraph 241) of TR 2009/2 provides, the loss of a particular position with an employer is not a dismissal (a particular type of termination of employment) for the purposes of subsection 83-175(1) unless all employment with the employer is severed. The only exception to this is the case of a dual capacity employee who holds an office with the employer at the same time as having a common law employment relationship. This exception arises because of the operation of section 80-5 of the ITAA 1997 as explained in TR 2009/2. This exception does not apply if the person is employed only in the capacity of a common law employee.

Example 13/14 of TR 2009/2 is synonymous with the facts of this case and illustrates that the loss of a particular position with an employer is not a dismissal or termination unless all employment with the employer is terminated.

Example 13 - Business acquisition leading to redundancy, constructive dismissal

161. Dave Dolphin works as the Sales Manager for the Big Fish Company (Big Fish) which sells swimwear.

162. Big Fish acquires Plankton Pty Ltd (Plankton), a company that sells leisure clothing. As part of the acquisition, Big Fish employs Plankton's Sales Manager, Marion Minky. Marion assumes the role of Sales Manager in respect of all of Big Fish's expanded operations. Dave is offered a role as a swimwear sales representative for a particular district. This offer involves a considerable pay cut. As Dave sees his experience is better suited to the management of a team of salespeople rather than in front line sales, he decides to resign.

163. While Dave may have the skills to do the job he is offered, the job has significantly different duties and functions to that he performed previously. Accordingly, the synergies created by the acquisition of Plankton make Dave's former position redundant.

164. Therefore, a termination payment received by Dave in these circumstances may be characterised as a genuine redundancy payment on the basis that Dave was constructively dismissed due to redundancy.

Example 14 - Business acquisition, acceptance of demotion

165. Assume the same facts as Example 13, except Dave chooses to accept the swimwear sales representative position together with a lump sum payment to compensate him for the loss of his Sales Manager position.

166. In these circumstances, Dave's employment with Big Fish is not terminated. Therefore, the lump sum payment cannot be characterised as a genuine redundancy payment.

Unless all employment with the employer is terminated there cannot be an employment termination payment. In this instance the employee has retained one position within your organisation and as a result there has not been a termination of employment. Therefore, it is considered that any payment made to the employee in relation to the abolishment of Position A will not be an employment termination payment.

Genuine redundancy payment

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

(1) A genuine redundancy payment is so much of a payment received by an employee who is dismissed from employment because the employees 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 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 employees 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 arms-length the payment does not exceed the amount that could reasonably be expected to be made if the dismissal were at arms-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 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)).

Section 82-135 of the ITAA 1997 lists payments that are not employment termination payments. Paragraph 82-135(e) provides that the part of a genuine redundancy payment worked out under section 83-170 is not an employment termination payment.

Dismissal and redundancy

A genuine redundancy payment is defined under subsection 83-175(1) of the ITAA 1997 as a payment resulting from both:

(a) a dismissal; and

(b) a genuine redundancy.

The terms 'dismissal' and 'redundancy' are not defined in the ITAA 1997. Therefore, it is necessary to consider the ordinary meaning of the terms and the meaning the courts have ascribed to each word.

The Explanatory Memorandum to the Income Tax Assessment Amendment Act (No.3) 1984, which inserted former section 27F of the Income Tax Assessment Act 1936 (ITAA 1936), the predecessor to section 83-175 of the ITAA 1997, states at page 91:

The terms "dismissal" and "redundancy" are not defined in the legislation and, therefore, should be given their ordinary meanings. "Dismissal" carries with it the concept of the involuntary (on the taxpayer's part) termination of employment. "Redundancy" carries the concept that the requirements of the employer for employees to carry out work of a particular kind, or for employees to carry out work of a particular kind in the place where they were so employed, have ceased or diminished or are expected to cease or diminish. Redundancy, however, would not extend to the dismissal of an employee for personal or disciplinary reasons or for reasons that the employee was inefficient. (bold emphasis added)

The Commissioner has issued Taxation Ruling TR 2009/2, titled Income Tax: genuine redundancy payments. The Ruling provides guidance on the factors to be considered in the interpretation of section 83-175 of the ITAA 1997.

Paragraph 11 of TR 2009/2 states:

There are four components within the basis genuine redundancy requirement:

_ The payment must be received in consequence of a termination.

_ The termination must involve an employee being dismissed from employment.

_ The dismissal must be caused by the redundancy of the employee's position.

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

The payment is in consequence of the termination of employment

As noted previously, it has been determined that any payment made in relation to the abolishment of Position A will not be received in consequence of termination of employment. Therefore, the requirement in subsection 83-175(1) of the ITAA 1997 that the payment is in consequence of your termination of employment will not be satisfied. Accordingly, any severance payment made in relation to the abolished Position A cannot be classified as a genuine redundancy payment.