Edited version of your written advice

Authorisation Number: 1012884674804

Date of advice: 24 September 2015

Ruling

Subject: Employment termination payment - genuine redundancy payment

Question

Is any part of the payment made to the employee a genuine redundancy payment under section 83-175 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

This ruling applies for the following period:

The year ended 30 June 2015

The scheme commenced on:

1 July 2014

Relevant facts and circumstances

The Employee is not yet aged 65 in the 2014-15 income year.

The Employee commenced employment with the Company many years ago.

During the 2014-15 income year the Company announced its decision to restructure its operations and relocate manufacturing overseas.

The Company provided the Employee with a letter, notifying them that their position will be made redundant, and their termination date is during the 2014-15 income year. The letter also states that they will be paid 21 weeks' pay (the payment) in accordance with the Company's Redundancy Policy.

After the Company advised their employees that their positions will be made redundant, the Company contacted a third party labour hire firm (the Labour Hire Firm).

The Company asked the Labour Hire Firm to engage with the departing employees to assist them in finding new employment elsewhere. This included the Employee.

During the 2014-15 income year, the Employee signed an employment contract with the Labour Hire Firm. The Company was not a party to the contract.

The Employee was then terminated from their employment with the Company and received a 'redundancy' payment.

After the date the Employee was terminated, the Employee commenced employment with the Labour Hire Firm. On the same day, the Company contacted the Labour Hire Firm seeking labour hire services. The Labour Hire Firm provided the Company with staff, which included the Employee.

The Company's Redundancy Policy provides that the Employee will not receive the payment should they resign voluntarily.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 82-130

Income Tax Assessment Act 1997 Section 82-135

Income Tax Assessment Act 1997 Section 83-170

Income Tax Assessment Act 1997 Section 83-175

Income Tax Assessment Act 1997 Subsection 995-1(1)

Reasons for decision

Summary

The redundancy payment is a genuine redundancy payment in accordance with section 83-175 of the ITAA 1997.

As the total amount of the genuine redundancy payments received in the 2014-15 income year does not exceed the tax-free amount for the 2014-15 income year, the total of the payments received is not assessable income and is not exempt income.

Detailed reasoning

Employment termination payments

By virtue of subsection 995-1(1) of ITAA 1997, employment termination payments are defined in subsection 82-130(1) of the ITAA 1997, which 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.

To determine if a payment is an employment termination payment (ETP), all the conditions in subsection 82-130(1) of the ITAA 1997 must be satisfied. Failure to satisfy any of the conditions under subsection 82-130(1) will result in the payment not being considered an employment termination payment.

Furthermore, any termination payments received more than 12 months after the termination 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 'in consequence of' the termination of employment

For a payment to be treated as an employment termination payment, the first condition that must be met is that the payment is made 'in consequence of' the termination of the taxpayer's employment.

The phrase 'in consequence of' is not defined in the ITAA 1997. However, the courts have interpreted the phrase in a number of cases. Taking into account the courts decisions on the meaning of the phrase, the Commissioner's view on the meaning and application of the 'in consequence of' test are set out in Taxation Ruling TR 2003/13 (TR 2003/13).

While TR 2003/13 considered the meaning of the phrase 'in consequence of' in the context of the eligible termination payments, TR 2003/13 can still be relied upon as both the former provision under the Income Tax Assessment Act 1936 and the current provision under the ITAA 1997 both use the term 'in consequence of' in the same manner.

In paragraph 5 of TR 2003/13 the Commissioner states:

… a payment is made in respect of a taxpayer in consequence of the termination of the employment of the taxpayer if the payment 'follows as an effect or result of' the termination. In other words, but for the termination of employment, the payment would not have been made to the taxpayer.

In the present case, the Employee's employment was terminated on during the 2014-15 income year. Consequently, the Company made the payment to the Employee in accordance with the Company's Redundancy Policy. In other words, but for the termination of the Employee's employment, the payment would not be made to them. Therefore, it is considered that the payment was made to the Employee in consequence of the termination of their employment with the Company.

Payment is received no later than 12 months after termination

As the Employee's employment was terminated during the 2014-15 income year and they received the payment on the same date as their termination date, this condition is satisfied.

Payment is not a payment mentioned under section 82-135 of the ITAA 1997

Based on the information provided, the only payment listed in section 82-135 of the ITAA 1997 which may be relevant in this case, and thus requires consideration, is the part of a genuine redundancy payment worked out under section 83-170 of the ITAA 1997.

Genuine redundancy payments

In accordance with subsection 83-175(1) of the ITAA 1997, a genuine redundancy payment is so much of a payment that:

• is 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 their employment at the time of the dismissal.

Meaning of genuine redundancy

The requirements to be satisfied before any payment made to a person whose employment is terminated qualifies for treatment as a genuine redundancy payment under section 83-175 of the ITAA 1997 are discussed in Taxation Ruling TR 2009/2 (TR 2009/2).

With regard to the first requirement set out in subsection 83-175(1) of the ITAA 1997, the Commissioner considers that there are four necessary components within this requirement:

• the payment must be received in consequence of an employee's termination;

• the termination must involve the employee being dismissed from employment;

• dismissal must be caused by the redundancy of the employee's position; and

• the redundancy payment must be made genuinely because of a redundancy.

Each of these requirements will be considered in turn below.

Payment must be received 'in consequence of' an employee's termination

For the reasons stated in above, it is considered that, in this case, the payment was received by the Employee in consequence of the termination of their employment.

Termination must involve the employee being 'dismissed' from employment

The term 'dismissal' is not defined in the ITAA 1997 therefore, consistent with basic principles of statutory interpretation, its meaning must be determined according to the ordinary meaning of the words, having regard to the context in which they appear.

Accordingly, the Commissioner's view, as stated in Taxation Ruling TR 2009/2, is that 'dismissal' means a decision to terminate employment at the employer's initiative without the 'consent' of the employee. This stands in contrast to employment that is terminated at the initiative of the employee, for example in the case of resignation.

Furthermore, the loss of a particular position with an employer is not a dismissal for the purposes of subsection 83-175(1) of the ITAA 1997 unless all employment with the employer is severed (paragraph 16, TR 2009/2).

In the present case, the Company advised the Employee by letter that their position will no longer exist as a result of a restructure in the Company's operations.

The Employee's employment was terminated during the 2014-15 income year.

Therefore, the termination is without the Employee's consent and this requirement is satisfied.

Dismissal must be caused by the redundancy of the employee's position

A position is redundant when the functions, duties and responsibilities formerly attached to the position are determined by the employer to be superfluous to the current needs and purposes of the organisation (paragraph 25, TR 2009/2).

In this case, the Company has deemed the Employee's position to be excess to requirements after the Company's decision to relocate manufacturing from Australia to Malaysia. Therefore this requirement is satisfied.

The redundancy payment must be made genuinely because of a redundancy

Contrived cases of redundancy will not meet the conditions in section 83-175 of the ITAA 1997. The fact that an employer and employee have an understanding that a payment on termination is caused by redundancy, or that the employer treats the payment as a redundancy payment for tax purposes, does not of itself establish genuine redundancy (paragraph 32, TR 2009/2).

Based on the reasons above, we accept that the payment is made genuinely because of a redundancy.

Exceeds the amount that could reasonably be expected

The payment that the Employee received must exceed the amount that could reasonably be expected to be received by them in consequence of the voluntary termination of their employment at the time of the dismissal.

In this case the Employee received the payment in accordance with the Company's Redundancy Policy. According to the terms of the Redundancy Policy, had the Employee voluntarily resigned they would not have received the payment.

As the amount that the Employee received is more than the amount that would have been reasonably expected had they voluntarily resigned, this requirement is satisfied.

Further conditions for a genuine redundancy payment

Further conditions must be satisfied in order for the payment to be considered a genuine redundancy payment (see subsection 83-175(2) of the ITAA 1997).

Age-based limits

The first condition requires that the taxpayer is dismissed before the earlier of the day the taxpayer turns 65 or the day they reach a particular age or completed a particular period of service that would have terminated the taxpayer's employment.

This condition is satisfied as the Employee was dismissed before they turned 65 years of age.

Arm's length amount

The second condition requires that if the dismissal were not at arm's length, that the payment does not exceed the amount that could be reasonably expected to be made if the dismissal were at arm's length.

This condition does not apply as the dismissal is at arm's length.

No stipulated arrangement to employ

The third condition is that at the time of dismissal, there was no arrangement between the employee and the employer, or between the employer and another person, to employ the employee after the dismissal.

An arrangement to employ an employee after his or her termination may prevent a 'dismissal' giving rise to a genuine redundancy.

Paragraph 306 of TR 2009/2 provides that an 'arrangement' is defined widely to mean:

… any arrangement, agreement, understanding, promise or undertaking, whether express or implied, and whether or not enforceable (or intended to be enforceable) by legal proceedings.

Based on the information provided, it is accepted that at the time of the Employee's dismissal there was not an arrangement between the Employee and the Company to re-employ them after their dismissal. This is because:

• the Employee signed the Labour Hire Firm's employment contract before their termination and began working for the Labour Hire Firm after they were terminated; and

• The Company was not a party to the contract between the Employee and the Labour Hire Firm; and

• The Employee as an employee of the Labour Hire Firm was assigned to work for the Company.

It is also necessary to consider if, at the time of the Employee's dismissal, there was an arrangement between the Company and the Labour Hire Firm to employ the Employee after their dismissal.

The AAT briefly considered an independently sought arrangement, aided by the first employer, in Re Valentino Stanuovo v Commissioner of Taxation [2002] AATA 701. In this case the applicant had ceased employment 3 January 1998; however, due to unsuitable work the taxpayer put their name down with their previous employer as a relief cleaner where possible. Temporary relief was subsequently taken. Although not considered necessary, the Tribunal considered whether this constituted an arrangement for the purpose of 27F(1)(d) of ITAA36 (since repealed and replaced with s83-175 ITAA97) [at paras 35-7]. The wording of 27F(1)(d) is fundamentally similar to the wording of 83-175(2)(c) and states that:

"there was, at the time of termination, no agreement between the taxpayer and the employer or the employer and another person, to employ the taxpayer after the termination time".

After consideration the Tribunal concluded, at [37], that:

"The word "agreement" is defined in subsection 27A(1) to mean any agreement, arrangement or understanding whether formal or informal, whether express or implied and whether or not enforceable, or intended to be enforceable, by legal proceedings. Notwithstanding the amplitude of the definition, it should be observed that the test relates to an agreement to employ the taxpayer. Can it be said that a policy whereby the employer will attempt to find a position for the former employee comes within the understanding of being an agreement to employ? Having regard to the circumstances existing in December 1997, the Tribunal thinks not. Something more was required."

In the present circumstances, the Company assisted the Employee by engaging the Labour Hire Firm to discuss other employment opportunities after termination. It is here that the link between the Company and Flexiforce ceased, with regards to the Employee. As such, and as was the case in Valentino Stanuovo, something more would be required for an arrangement to be realised. Furthermore, the Employee acted independently of the Company in seeking out employment opportunities through the Labour Hire Firm.

Hence, it is accepted that at the time of the Employee's dismissal there was not an arrangement between the Company and the Labour Hire Firm to re-employ them after their dismissal given:

• There is no evidence of an arrangement between the Company and the Labour Hire Firm, to employ the Employee after their dismissal; and

• At the time of dismissal, the arrangement for employment is between the Employee and another entity (the Labour Hire Firm); and

• This arrangement was established independently of the Company.

Accordingly it is considered that at the time of the Employee's dismissal there was not an arrangement between the Company and the Labour Hire Firm, to employ the Employee after their dismissal.

Therefore this condition is satisfied.

The payment is not in lieu of superannuation benefits

Under subsection 83-175(3), a payment is not a genuine redundancy payment to the extent that it is made in place of superannuation benefits due at the time or in the future.

Based on the facts, the payment is not in lieu of superannuation benefits. Therefore this condition is satisfied

The payment is not a payment mentioned in 82-135 of ITAA 1997

It is not a payment mentioned in section 82 135 of the ITAA 1997 (apart from paragraph 82-135(e)). Therefore this condition is satisfied.

The 'redundancy' payment is a genuine redundancy payment

Based on the above, the 'redundancy' payment is a genuine redundancy payment under section 83-175 of the ITAA 1997.

Taxation of genuine redundancy payments

Section 83-170 of the ITAA 1997 provides that so much of the genuine redundancy payment that does not exceed the amount worked out using the formula in subsection (3) is not assessable income and is not exempt income, that is, it is tax-free. The formula for working out the tax-free amount is:

Base amount + (Service amount x Years of service)

The Base amount and the Service amount for the 2014-15 income year are:

Base amount - $9,514

Service amount - $4,758

Years of service for the purposes of subsection 82-170(3) of the ITAA 1997 means the number of whole years in the period, or sum of periods, of employment to which the payment relates. It should be noted that six months, eight months or even eleven months do not count as a whole year for the purposes of this calculation.

As the total amount of the genuine redundancy payments received does not exceed the tax-free amount calculated above, the total of the payment received is not assessable income and is not exempt income.