Edited version of your written advice

Authorisation Number: 1012746090753

Ruling

Subject: Genuine Redundancy

Question 1

Are final termination payments made to Case One employees, genuine redundancy payments?

Answer

No.

Question 2

Are final termination payments made to Case Two employees, genuine redundancy payments?

Answer

No.

This ruling applies for the following periods:

For the year ended 30 June 2015.

The scheme commences on:

1 July 2014.

Relevant facts and circumstances

The Employer is a company who employs employees on projects around Australia.

The Employer classes its employees into two separate streams. The first being those who are covered by a relevant enterprise agreement under the Fair Work Act 2009 and who are paid for every hour they work (Weekly Paid Employees). The second being those who are not covered by an enterprise agreement and who are paid an annual salary (Monthly Paid Employees).

The Weekly Paid Employees may be further classified into two relevant cases, being:

• Case One - Employees who continuously work on a number of successive projects; and

• Case Two - Employees who are terminated upon completion of their first project.

It is the Employer's intention that when it hires a Weekly Paid Employee that it will move that employee from project to project if there are ongoing employment opportunities available. However, this is dependent upon the projects that the Employer has bid and won. In this regard:

• A Case One employee may move to multiple consecutive projects if the Employer has these projects available; and

• A Case Two employee may only work on one project as there are no further projects for that that employee to go to.

If a Case Two employee is offered work on another project at the completion of their current project, then the employee enters into a new full time employment contract in relation to the new project.

You provided a sample employment contract. The sample employment contract notes that:

The period of your assignment to this Project will be as required by the Company for its contracted works at the Project or until the Company has an operational requirement for your services at another location, or your services are terminated in accordance with the Agreement.

If no further projects can be found for a Case One or Case Two employee, their employment is terminated and they are paid a final termination payment.

The Employer pays out a redundancy accrual as defined in a clause of the Project Specific Terms and Conditions:

Redundancy payment

Entitlement

An employee will accrue a redundancy payment of two hours pay at the ordinary hourly rate of pay (including any All Purpose Allowance) for each completed week of service, excluding the period of service as a casual employee.

…

Payment

At the time of termination of employment, the redundancy payment will be paid to the employee.

You advised that the redundancy payment is made directly to an employee upon termination of employment in the following circumstances:

• Where an employee's position is made redundant (the termination is initiated by the Employer); and

• Where an employee resigns (the termination is initiated by the employee).

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 made to a Case One employee or a Case Two employee is a genuine redundancy payment. This is because in both situations the employees were employed for a fixed period of employment specified under subparagraph 83-175(2)(a)(ii) of the ITAA 1997.

Furthermore, the amount the employee's receive upon the termination of their employment is no more than the amount they would have received upon voluntarily terminating their employment in accordance with their contract with the Employer.

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, Case One and Case Two employees receive an offer of employment from the Employer to work on a specific project. It is the intention of the Employer that when it hires Weekly Paid employees that it will move the employees from project to project. However, this cannot be guaranteed as it is dependent upon the available projects that the Employer has bid and won.

It was clear from the sample contract of employment you provided that the offer of employment is tied exclusively to that specific project and employment would expire on the completion of the particular project, unless the Employer is able find further opportunities with a different project. This was specifically stated in the sample employer contract:

The period of your assignment to this Project will be as required by the Company for its contracted works at the Project or until the Company has an operational requirement for your services at another location, or your services are terminated in accordance with the Agreement.

You advised that Case One employee's work on a number of successive projects. However, upon the completion of every project they are given a new contract which sets out the new conditions of employment in addition to a new scope of work i.e. sets out the new project on which the employee will be required to work on.

You advised that Case Two employees only work on one project before their employment is terminated.

In both instances, the final termination payments made to Case One and Case Two employees are made at the completion of their scope of work. That is, the payment is made in accordance with their current contract which limits the period of assignment to the present project.

In particular with Case One employees, even though they may have worked on numerous projects, each project is covered by a separate contract which limits the period of assignment to that current project.

Therefore, any final termination payment made to Case One or Case Two employees 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.

The payment exceeds what would have been received in consequence of the voluntary termination of employment

Whilst it has already been considered that the final termination payment would not form part of a genuine redundancy payment, it is also relevant to note that subsection 83-175(1) of the ITAA 1997 requires the payment exceeds the amount that an employee could reasonably be expected to receive in consequence voluntarily terminating their employment.

This subsection states:

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.

Paragraphs 61 to 63 of TR 2009/2 further state:

61. It would generally be expected that a greater amount would be paid on redundancy than voluntary termination. This recognises the purpose of redundancy payments, being primarily to compensate for loss of non-transferable entitlements (for example accrued sick leave and accrued long service leave prior to 10 years of service) and the peculiar hardship associated with being made redundant.

62. Contractual or other entitlements payable by an employee on voluntary termination are generally a sound guide as to what might reasonably be expected…

63. There may be industry norms that could be used as a guide as to what payments would be made on voluntary termination…

As you advised that the redundancy payment calculated in accordance with the Project Specific Terms and Conditions made to an employee whose termination is initiated by the Employer is the same amount received by an employee who voluntarily terminate their employment, then then the final termination payments made to Case One and Case Two employees would not meet the requirements of subsection 83-175(1) of the ITAA 1997.

Consequently, the final termination payments made to both Case One and Case Two employees are not considered to be made in circumstances of a genuine redundancy, and are not in excess of the amount that could reasonably be expected to be received in consequence of a voluntary termination.