Edited version of your written advice

Authorisation Number: 1012713094296

Ruling

Subject: Termination payment

Questions

1. Do lump sum payments made in lieu of a minimum redeployment period paid on termination of employment by reason of genuine redundancy form part of the genuine redundancy payments?

2. Is a lump sum payment equal to a number of months' salary paid as an additional payment on termination of employment by reason of genuine redundancy which is not a payment in lieu of a minimum redeployment period to be treated differently?

Answers

1. Yes.

2. No.

This ruling applies for the following period:

The year ending 30 June 2015.

The scheme commenced on:

1 July 2014

Relevant facts and circumstances

An employer (the Employer) is an independent statutory authority.

The Employer's terms and conditions for employment are provided under a determination (the Determination) which refers to a notice period.

The Determination provides clauses in relation to the termination of employment, notice payment periods and payments in lieu of notice

The Determination also includes matters relating to redeployment of surplus employees and the provision of departure packages for unplaced surplus employees after a reasonable period.

The Employer states that all ongoing employees that are declared surplus will undergo a minimum redeployment period of a number of months unless agreed otherwise. If redeployment is not achieved at the end of that period, employment will be terminated and the employee will be eligible to receive a departure package (the Package) in accordance with the employer's workplace policies (the Policies).

The Policies state in part that the packages only be used in circumstances of bona fide redundancy. Bona fide redundancies will arise where facilities or functional areas are closing, the organisation is being wound up, or where employees' skills are no longer required.

The Packages are not voluntary, they are compulsory retrenchment packages applied by an employer in circumstances where the work is not required to be performed by the employer and where there is no opportunity for continued employment of the employee.

The Packages comprise of a specified number of weeks' pay in lieu of notice on cessation of employment and also take into account the employee's age and continuous service.

In certain circumstances, the Employer can pay a lump sum equivalent to a number of months' salary in lieu of the redeployment period, in addition to the Package detailed in the Policies.

Relevant legislative provisions

Income Tax Assessment Act 1997 subsection 83-175(1).

Income Tax Assessment Act 1997 section 83-175.

Income Tax Assessment Act 1997 paragraph 83-170.

Reasons for decision

Summary

The lump sum payment on termination of employment equivalent to a number of months' salary in lieu of the minimum redeployment period forms part of a genuine redundancy payment.

A lump sum payment equivalent to a number of months' salary paid as an additional payment on termination of employment, which is not a payment in lieu of the minimum redeployment period, is also part of a genuine redundancy payment.

Detailed reasoning

A payment made to an employee is a genuine redundancy payment (GRP) if it satisfies all the conditions 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 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 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 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 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)).

In this case the main issue is the requirement in subsection 83-175(1) of ITAA 1997, stated above. The facts show that the employees were dismissed from employment because their positions are genuinely redundant. What needs to be determined is whether a lump sum payment equivalent to a number of months' salary exceeds the amount an employee would have received if they had voluntarily resigned.

From the facts, all ongoing employees that are declared surplus must undergo a minimum redeployment period unless agreed otherwise. If redeployment is not achieved at the end of the period, employment is terminated and the employee will be eligible to receive a Package. The Employer stipulates that the Package is only available in circumstances of bona fide redundancy that is genuine redundancy.

However, the Employer may forgo the minimum redeployment period and pay the employee a lump sum equivalent to a number of months' salary. This payment is made in addition to the Package and only available to employees eligible for the Package. Accordingly, the payment in lieu of the number of months redeployment period is more than what an employee would have reasonably expected to receive had they resigned. As such, the requirements under subsection 83-175(1) of the ITAA 1997 are satisfied.

Similarly, even if a lump sum payment equal to a number of months' salary is paid not in lieu of a minimum redeployment period, it will still represent an amount in excess of what would have been received had the employee voluntarily resigned. Therefore, this payment will also satisfy the requirements under subsection 83-175(1) of the ITAA 1997.

Notwithstanding all the above, it should be noted that all the other requirements in section 83-75 of the ITAA 1997 must be satisfied for the payments to be GRPs.

Superannuation Guarantee

Advice has been requested as to whether lump sum payments in lieu of a minimum redeployment period, paid on termination of employment by reason of genuine redundancy, are ordinary time earnings (OTE) for the purposes of the Superannuation Guarantee (Administration) Act 1992 (SGAA). Please note, a private ruling cannot be provided for the purposes of the SGAA.

However, the following general advice is provided which, whilst not binding on the Commissioner, the Tax Office will stand by and will not depart from unless:

•the law has changed since the advice was given;

•a final court decision has affected our interpretation of the law since the advice was given; or

•for any reason, the advice is no longer considered appropriate - for example, if commercial practice has changed, the advice has been exploited in an abusive and unintended way or the advice is found on reconsideration to be wrong in law.

From 1 July 2008, all employers must use OTE as the earnings base to calculate the minimum super guarantee contributions required for your employees.

The phrase 'ordinary time earnings' is defined in subsection 6(1) of the SGAA as follows:

ordinary time earnings, in relation to an employee, means:

(a) the total of:

(i) earnings in respect of ordinary hours of work other than earnings consisting of a lump sum payment of any of the following kinds made to the employee on the termination of his or her employment:

(A) a payment in lieu of unused sick leave;

(B) an unused annual leave payment, or unused long service leave payment, within the meaning of the Income Tax Assessment Act 1997; and …

(ii) earnings consisting of over-award payments, shift-loading or commission; or

(b) if the total ascertained in accordance with paragraph (a) would be greater than the maximum contribution base for the quarter - the maximum contribution base.

In broad terms (and subject to some exceptions), OTE of an employee means earnings in respect of ordinary hours of work. Payments for work performed outside the ordinary hours of work, such as overtime payments, are not OTE.

OTE is usually the amount an employee earns for their ordinary hours of work. It includes commissions, shift-loadings and some allowances, but does not include overtime payments. Superannuation Guarantee Ruling SGR 2009/2 Superannuation guarantee: meaning of the terms 'ordinary time earnings' and 'salary or wages' (SGR 2009/2) provides further guidance on what constitutes OTE.

The expression 'earnings in respect of ordinary hours of work' or any of the terms in that expression are not defined in the SGAA. The Commissioner's view on the meaning of these phrases is expressed in the following paragraphs of SGR 2009/2 as follows:

13. An employee's 'ordinary hours of work' are the hours specified as his or her ordinary hours of work under the relevant award or agreement, or under the combination of such documents, that governs the employee's conditions of employment.

14. The document need not use the exact expression 'ordinary hours of work', but it needs to draw a genuine distinction, for the purposes of the award or agreement, between ordinary hours and other hours. In particular, it would be expected that the other hours are remunerated at a higher rate (typically described as overtime) than the ordinary hours, or otherwise identifiable as a separate component of the total pay in respect of non-ordinary hours

15. Any hours worked in excess of, or outside the span (if any) of, those specified ordinary hours of work are not part of the employee's 'ordinary hours of work'.

Paragraph 38 of SGR 2009/2 state:

38. An employee may be entitled to a period of notice before the employer's termination of his or her employment takes effect. Awards and agreements often provide that, instead of giving this notice, the employer may simply pay an amount equivalent to the ordinary time rate of salary or wages that the employee would have earned during the notice period. Such payments are OTE.