Edited version of your written advice

Authorisation Number: 1012847866359

Date of advice: 24 July 2015

Ruling

Subject: Genuine redundancy payment

Question

Will any part of the payment the Taxpayer receives on termination of employment be a tax-free part of a genuine redundancy payment under section 83-170 of the Income Tax Assessment Act 1997?

Answer

Yes.

This ruling applies for the following period:

Year ending 30 June 2016.

The scheme commenced on:

1 July 2015.

Relevant facts and circumstances

From the relevant income years the Taxpayer (outgoing employee) was employed the Employer.

The outgoing employee is under 65 years of age and their termination of employment would not have terminated upon reaching a particular age or completion of a particular period of service.

The responsibilities of the outgoing employee include:

• Reporting to the Boards of the Employer and its wholly owned subsidiary;

• Provide governance and statutory advice to comply with various Australian Acts.

• Taking charge of all commercial, technical, organisational, and sponsorship matters;

• Managing relationships with key stakeholders

• Leadership to various departments;

• Strategic planning;

• Annual planning and budget setting;

• Capital expenditure planning;

• Identifying, negotiating and managing all sponsorship arrangements;

• Negotiating broadcast rights agreements;

• Website, social media and communications development;

• Negotiating leasing arrangements with land owners and tenants;

• Developing event management plans and Risk Management Plans for major events;

• Negotiating merchandising and royalty fee arrangements with retailers; and

• Member and guest satisfaction.

A copy of the outgoing employee's employment contract has been supplied which states amongst other matters that the employment may be terminated by the giving a set period's notice in writing by either party or by payment of set period's salary instead of notice

You have stated that the outgoing employee's remuneration package was approximately $X.

Following a restructure of the Employer, the abovementioned responsibilities will be divided between two new employees; a new employee and a new manager.

You have stated that the plan for the incoming employee is to be responsible for strategy, financial and operational related duties, and then delegate all responsibilities associated with the high profile events to the new employee.

You state that it is anticipated the incoming employee's remuneration package will be approximately $Y and the incoming manager's will be $Z.

The outgoing employee's redundancy package is made up as follows:

None of the above payments were made in lieu of superannuation benefits.

You have stated that the outgoing employee's employment was terminated as the role no longer existed under the restructure and there were no suitable roles available for their skill set.

The redundancy package was calculated on an arm's-length basis.

You have stated that whilst there is no arrangement between the Taxpayer and the Employer, or between the Employer and another entity, to re-employ the Taxpayer, there may be situations in future whereby the Employer may consult with the Taxpayer as an independent contractor on an ad hoc basis.

You have stated that the Taxpayer will charge an hourly rate and payment will be made upon production of an invoice from the Taxpayer as a contractor. Further, the Taxpayer will have the ability to accept or refuse work as the Taxpayer sees fit.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 83-10.

Income Tax Assessment Act 1997 Section 83-15.

Income Tax Assessment Act 1997 Section 83-80.

Income Tax Assessment Act 1997 Section 83-85

Income Tax Assessment Act 1997 Section 83-170.

Income Tax Assessment Act 1997 Section 83-175.

Reasons for decision

Summary

The ex-gratia payment of $A that the Taxpayer receives due to the termination of their employment is a genuine redundancy payment. As the amount is below the tax-free amount of a genuine redundancy payment, it is non-assessable, non-exempt income.

Detailed reasoning

Genuine redundancy payment

A payment made to an employee is a genuine redundancy payment 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 and 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 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);

(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)).

Subsection 82-135 of the ITAA 1997 includes (among others):

_ superannuation benefits;

_ the payment of a pension or annuity; and

_ unused annual leave (paragraph 82-135(c)) or long service leave payments (paragraph 82-135(d)).

Accordingly, the payments the Taxpayer receives for unused annual leave and long service leave do not constitute part of a genuine redundancy payment pursuant to subsection 82-135(4) of the ITAA 1997. The taxation treatment of these payments will be discussed in due course.

Similarly, the payment for the pro-rata annual bonus does not constitute part of a genuine redundancy payment. This amount is taxable on an assessment basis at the Taxpayer's marginal tax rate.

Whether the ex-gratia payment of $A the Taxpayer received constitutes a genuine redundancy payment will be addressed below.

In order to satisfy the definition of a genuine redundancy payment under subsection 83-175(1) of the ITAA 1997 there must be a dismissal from employment and the dismissal must result from the position being made genuinely redundant.

Dismissal caused by redundancy

From the facts the Taxpayer's employment was terminated during the 20XX income year and that termination of employment satisfies 'dismissal' for the purposes of the first component of subsection 83-175(1) of the ITAA 1997.

However, whether or not the dismissal resulted from the Taxpayer's position being made genuinely redundant needs to be, determined.

The facts state that the outgoing employee's responsibilities will be split between an incoming employee and a new manager. Specifically, the incoming employee will be responsible for strategy, financial and operational related duties and all responsibilities associated with high profile events will be delegated to the new manager.

This is similar to a situation outlined in Taxation Ruling TR 2009/2 Income Tax: genuine redundancy payments, which states:

25. An employee's position is redundant when an employer determines that it is superfluous to the employer's needs and the employer does not want the position to be occupied by anyone. Accordingly, it is fundamentally the employer's decision that a position is redundant. On occasion the decision may be unavoidable due to the circumstances surrounding the employer's operations.

26. In some circumstances, an employer may reallocate the duties and functions attached to a particular position to another position within the employer's organisational structure. In such cases, the former position is redundant. However, if the employee who had been working in that position is still employed by the employer following the reallocation of duties and functions, there will not be a dismissal.

The division of the outgoing employee's responsibilities is in line with the above. The fact that the outgoing employee's remuneration package was equal to the remuneration packages of the incoming employee and new manager confirms this division. Whilst the responsibilities will still be undertaken by someone within the company, they no longer rest with the original employee position as it no longer exists.

In relation to the ex gratia payment it is accepted that, in light of the facts provided, particularly the employment contract, this payment exceeds the amount that the Taxpayer could reasonably expect to receive if they had voluntarily resigned or retired from the employment in the position they held at the time of the dismissal.

Consequently, the requirements under subsection 83-175(1) of the ITAA 1997 have been satisfied.

Under subparagraph 83-175(2)(c) of the ITAA 1997, there must not be an arrangement between the Taxpayer and the Employer, or between the Employer and another person, to employ the Taxpayer following the termination of their employment.

Paragraph 52 of Taxation Ruling TR 2009/2 Income Tax: genuine redundancy payments states:

52. The Commissioner considers that the phrase 'arrangement... to employ' in paragraph 83-175(2)(c) refers to common law employment only. This condition does not contemplate a situation where there is an arrangement to engage the former employee as an independent contractor.

According to the facts, the Employer intends to consult with the Taxpayer on an ad hoc basis as an independent contractor for assistance with running global events. As there is no intention of the Taxpayer being treated as an employee in future, subparagraph 83-175(2)(c) of the ITAA 1997 is satisfied.

The remaining conditions under section 83-175 of the ITAA 1997 are satisfied as:

• The Taxpayer's employment was terminated before the end of a fixed period of employment;

• The actual amount paid is not greater than an arms-length amount;

• The Taxpayer is less than 65 years of age; and

• No amount was received by the Taxpayer was in lieu of superannuation.

Tax treatment of genuine redundancy payments

Subsection 83-170(2) of the ITAA 1997 provides that so much of the genuine redundancy payment that does not exceed the amount worked out using the formula prescribed in subsection 83-170(3) is non-assessable, non-exempt income. Any amount in excess of the tax-free amount is taxed as an employment termination payment (ETP). The formula for working out the tax-free amount is:

Base amount + (Service amount × Years of service)

For the 2015-16 income year:

Base amount is $9,780;

Service amount is $4,891; and

Years of service is the number of whole years in the period, or sum of periods, of employment to which the payment relates.

As the ex-gratia payment of $A is below the tax-free amount calculated above, the amount represents the tax-free part of a genuine redundancy payment. This tax-free amount is non-assessable, non-exempt income under subsection 83-170(2) of the ITAA 1997.

Taxation treatment of unused annual leave and unused long service leave

Unused annual leave is assessable income under section 83-10 of the ITAA 1997 and is ordinarily subject to marginal rates of tax. However, in this case, as the payment will be made in connection with the Taxpayer's genuine redundancy payment, section 83-15 allows a tax offset to ensure that the rate of tax on this amount does not exceed 30%.

Similarly, unused long service leave is assessable income under section 83-80 of the ITAA 1997 and ordinarily subject to marginal rates of tax. However, in this case, as the payment will be made in connection with the Taxpayer's genuine redundancy payment, section 83-85 allows a tax offset to ensure that the rate of tax on this amount does not exceed 30%.