Edited version of your written advice

Authorisation Number: 1012907931591

Date of advice: 10 November 2015

Ruling

Subject: Genuine redundancy payment

Questions

1. Is any part of the payment to be received by Your Client an employment termination payment in accordance with subsection 82-130(1) of the Income Tax Assessment Act 1997 (ITAA 1997)?

2. Is any part of the payment to be received by Your Client a genuine redundancy payment in accordance with section 83-175 of the ITAA 1997?

Answers

1. Yes.

2. No

This ruling applies for the following period

Income year ending 30 June 2016

The scheme commenced on

1 July 2015

Relevant facts and circumstances

Your Client is under 65 years of age.

Your Client was employed by the Employer A.

In late 20XX, the Employer A's contract for the provision of certain services was put out to tender.

Subsequently, Employer A's contract for the provision of the relevant services was awarded to another company (Employer B). Part of the contractual requirements imposed on Employer B was that employees currently servicing Employer A's contract would be offered positions with Employer B.

In the 20YY-ZZ income year, Your Client's union filed a Dispute Notification with Fair Work Australia in relation to certain matters, including redundancy payments to employees made redundant by Employer A.

Employer B subsequently made an offer of part-time employment to Your Client. All leave entitlements accrued with Employer A were to be transferred to/continue to accrue with Employer B.

Your Client was advised by Employer A that:

• The work Your Client was performing for Employer A will now be provided by Employer B.

• As a result of Employer B taking over services, and Your Client accepting an offer of employment with Employer B, the position which Your Client is currently performing will continue but they will perform it as an employee of Employer B.

Your Client's employment was then terminated by the Employer A with no redundancy entitlements.

A day later, Your Client then commenced employment with Employer B.

In the 20ZZ-AA income year Your Client's union made an application in the Federal Court (Fair Work Division) for breach of terms and conditions by Employer A.

During the 20CC-DD income year Your Client, other affected employees and the Employer decided to resolve the dispute in private.

In the 20CC-DD income year a written agreement was entered into to settle the Federal Court proceeding.

A Deed of Settlement signed in the 20CC-DD income year, as far as relevant, states:

• Your Client's employment with Employer A was ended by Employer A in the 20YY-ZZ income year due to redundancy.

• Your Client accepted an offer of employment with Employer B as a result of an arrangement involving Employer A and Employer B.

Your client will be paid the settlement sum within 14 days of the date of this ruling.

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 83-175

Income Tax Assessment Act 1997 Section 995-1

Further issues for you to consider

Not applicable.

Anti-avoidance rules

Not applicable.

Reasons for decision

Summary of decision

The payment to be received by Your Client from Employer A is an employment termination payment as defined in section 82-130 of the ITAA 1997.

No part of the payment received by Your Client is a genuine redundancy payment as defined in section 83-175 of the ITAA 1997 because, at the time Your Client was dismissed from employment, there was an arrangement between Employer A and Employer B to employ Your Client after the dismissal.

Detailed reasoning

Employment termination payment

Section 995-1 of the 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 (ETP)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.

Payment received by Your Client from the Employer will be an ETP only if all the conditions in section 82-130 of the ITAA 1997 are satisfied. Failure to satisfy any of the conditions will result in the payment not being considered an ETP.

Paid as a consequence of the termination of employment

The phrase 'in consequence of' is not defined in the ITAA 1997. However, the words have been interpreted by the courts in several cases. In light of these decisions, the Commissioner discusses the meaning of the phrase 'in consequence of' in the context of the expression 'in consequence of the termination of any employment' (as used in Subdivisions A and AA of Division 2 of Part III of the Income Tax Assessment Act 1936) in Taxation Ruling TR 2003/13 Income tax: eligible termination payments (ETP): payments made in consequence of the termination of any employment: meaning of the phrase 'in consequence of' (TR 2003/13).

While TR 2003/13 contains references to repealed provisions, some of which may have been rewritten, the ruling still has effect. At paragraphs 5 and 6 of TR 2003/13, it states:

5… Whilst there are divergent views as to the correct interpretation of the phrase, the Commissioner considers that 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.

6. The phrase requires a causal connection between the termination and the payment, although the termination need not be the dominant cause of the payment. The question of whether a payment is made in consequence of the termination of employment will be determined by the relevant facts and circumstances of each case.

In this case, Your Client's employment with Employer A was terminated in the 20YY-ZZ income year and, as agreed between Employer A and Employer B, Your Client commenced employment with Employer B immediately after the termination. Employer A treated this arrangement (which included an offer of suitable alternative employment) as a 'Transfer of Business' rather than a redundancy and, as such, did not make any redundancy payments to Your Client.

Your Client (together with other employees of Employer A) applied to the Federal Court seeking redundancy entitlements against Employer A. The legal action against Employer A was settled out of Court and Your Client is to be paid an amount (the Settlement Sum) by Employer A as the result of the settlement.

Consequently, the Settlement Sum will be paid in consequence of the termination of Your Client's employment because it is paid to settle the legal proceedings which were commenced because of the termination of Your Client's employment. That is, this payment 'follows as an effect or result of' the termination of Your Client's employment. In other words, if not for the termination of Your Client's employment the Settlement Sum would not be paid.

The payment is received no later than 12 months after termination

Paragraph 82-130(1)(b) of the ITAA 1997 requires that the payment must be received within 12 months of the employee's termination of employment.

However, paragraph 82-130(4)(a) of the ITAA 1997 states that the 12 month rule prescribed in paragraph 82-130(1)(b) of the ITAA 1997 does not apply if:

(a) a person is covered by a determination made by the Commissioner under subsection 82-130(5) or (7) of the ITAA 1997; or

(b) the payment is a genuine redundancy payment.

The Employment Termination Payments (12 month rule) Legislative Instrument 2007 is a legislative instrument made by the Commissioner of Taxation pursuant to subsection 82-130(7) of the ITAA 1997. It applies to ETPs received after 30 June 2007 and provides that a payment received more than 12 months after termination of person's employment will be an ETP if the delay in the payment was due to the commencement of legal action concerning either or both:

(a) the person's entitlement to the payment;

(b) the amount of the person's entitlement;

and the legal action was commenced within 12 months of the termination of employment.

In this case, Your Client's employment with Employer A was terminated in the 20YY-ZZ income year without entitlements to redundancy. However, prior to this, Your Client's union had lodged an application with FWA to recover Your Client's (and other employees') termination of employment entitlements. At that time, FWA (now Fair Works Commission) was a national workplace relations tribunal with the authority to adjudicate legal disputes between the parties.

Therefore, legal action to recover You Client's entitlements commenced within 12 months of the termination of their employment. That being the case, the 12 month rule found in paragraph 82-130(1)(b) of the ITAA 1997 does not apply in this case.

Not a payment mentioned in section 82-135 of the ITAA 1997

Section 82-135 of the ITAA 1997 lists payments that are not ETPs. Relevantly, these include the tax free part of a genuine redundancy payment worked out under section 83-175 of the ITAA 1997.

Genuine redundancy payment

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 their position is genuinely redundant; and

• exceeds the amount the employee might otherwise be expected to receive in consequence of the voluntary termination of the 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 considered by the Commissioner in Taxation Ruling TR 2009/2 Income tax: genuine redundancy payments (TR 2009/2).

The Commissioner considers that there are four necessary elements within the first requirement in subsection 83-175(1) of the ITAA 1997:

• The payment must be received in consequence of an employee's termination.

• That termination must involve an employee being dismissed from employment.

• That dismissal must be caused by the redundancy of the employee's position.

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

Payment is made in consequence of the termination of employment

For the reasons stated above, it is considered that the Settlement Sum will be paid in consequence of the termination of Your Client's employment.

Dismissal and Redundancy

The terms 'dismissal' and 'redundancy' are not defined in the ITAA 1997 therefore, consistent with basic principles of statutory interpretation, their 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 paragraphs 18, 25, 28 and 31 of TR 2009/2, is that:

18.Dismissal is a particular mode of employment termination. It requires 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.

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.

28. A dismissal is not caused by redundancy where personal acts or default are the prevailing or most influential cause for the termination. For example, a person may be dismissed due to unsatisfactory performance or behaviour.

31. Contrived cases of redundancy will not meet the conditions in section 83-175. Whether a redundancy is 'genuine' is determined on an objective basis.

Your Client's employment with Employer A was terminated at the employer's initiative because Your Client's position with Employer A ceased to exist having regard to the needs and purposes of Employer A at the time. There is nothing to indicate that the redundancy was in any way contrived or caused by personal acts or default by Your Client. Therefore, the first requirement of subsection 83-175(1) of the ITAA 1997 has been satisfied in this case.

Further conditions for a genuine redundancy payment

Subsection 83-175(2) of the ITAA 1997 sets out further criteria that must be satisfied for a payment to be regarded as a genuine redundancy payment. These are:

• the employee is dismissed before the earlier of:

• the day he or she turned 65; or

• 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 that age or complete the period of service (as applicable);

• if the dismissal was not at arm's length - the payment must not exceed the amount that could reasonably be expected to be made if the dismissal was at arm's length;

• 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 the dismissal.

Also, subsection 83-175(3) of the ITAA 1997 provides that 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 of the payment or at a later time.

In this case, Your Client was under 65 years of age at the time of the dismissal; the dismissal was at arm's length and the Settlement Sum will not be paid in lieu of superannuation benefits to which Your Client may be entitled to at the time or at a later time.

However, at the time of dismissal, there was an arrangement between Employer A and Employer B to employ Your Client after the dismissal. This is supported by a letter in which Employer A advised that Employer B will be taking over services provided by Employer A and, as a result, the position which Your Client was performing would continue but they would perform it as an employee of Employer B.

In addition, the Deed of Settlement states that Your Client has accepted offers of employment with Employer B as a result of an arrangement involving Employer A and Employer B.

Based on the above, the Settlement Sum to be received by Your Client is not a genuine redundancy payment under section 83-175 of the ITAA 1997.

Hence, the settlement sum is an ETP and will be taxed accordingly.