Edited version of your written advice

Authorisation Number: 1012998280494

Date of advice: 20 April 2016

Ruling

Subject: Genuine Redundancy

Question

1. Will the condition under paragraph 83-175(2)(c) of the Income Tax Assessment Act 1997 (ITAA 1997) be satisfied in connection with the redundancy of a number of employees on the closure of the employer's manufacturing operations?

Answer

1. Yes

This ruling applies for the following period:

Income year ending 30 June 20YY

Income year ending 30 June 20ZZ

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

During the 20VV-WW income year, a company (the Employer) announced its intention to close the manufacturing operations of its business.

A number of employees will be made redundant.

Following the announcement, the Employer established a program (the Program) to assist redundant employees with a respectful transition following the closure of manufacturing operations to employment in a new area of employment or industry or self-employment, or alternatively, to retirement.

The Program assists employees through Program centres and through a Program web portal, which provide employees with:

• Access to vocational training and tertiary education;

• Information about employment opportunities on a job board;

• Career advice; and

• Other information, resources and support services.

The type of assistance provided by the Employer through the Program to each of the affected employees will typically fall within one or more of the six scenarios outlined below.

Scenario 1 - The Employer supports employees to enrol in and complete courses with an industry based learning or work experience component

• The Employer has undertaken to financially support courses that will enable employees to be job ready before the closure of manufacturing operations.

• Many of these courses have industry based learning or work experience components. It is possible that participation in these components may lead to a job offer being made. However, the Employer will not be involved in the recruitment process.

Scenario 2 - The Employer provides job search assistance and the referral of advertised vacancies to groups of suitable employees.

• The Employer will communicate job vacancies to employees through a job board. To identify available positions, the Employer will monitor vacancies at third party employers and may cold call these third party employers. Employees will be required to make their own enquiries about a vacant position.

• The Employer may also liaise with and refer employees to external recruitment agencies. However, employees will be required to make independent contact with the external recruitment agencies and follow the normal application process with these agencies. The Employer will not be involved in the process beyond the initial referral and any decision to employ an employee will rest with the prospective employer.

Scenario 3 - The Employer assists employees with job applications and various preparatory tasks

• The Employer will assist employees to ensure they are prepared for recruitment processes by assisting them with resumes, cover letters and interview preparation.

• However, employees will be required to independently apply for positions with any third party employers. The Employer will not make contact with a third party employer on behalf of any employee and any decision to employ an employee will rest with the third party employer.

Scenario 4 - The Employer maintains a prospective employer database and intends to invite prospective employers to advertise current vacancies to affected employees

• The Employer will contact prospective employers and invite them to advertise vacancies to the affected employees on the Program job boards and to attend Program job expos. The Employer may also invite prospective employers to tour its facilities and present to affected employees on their vacancies and the types of skills they are looking for.

• The employees will be required to apply to the prospective employees through an independent recruitment process. The Employer will not be involved in this process but aims only to facilitate the introduction of employees to potential employers. Any decision to employ an employee will rest with the prospective employer.

Scenario 5 - Managers of the Employer directly contact the parent company, affiliates or third party prospective employers on behalf of employees

• Managers of the Employer may directly contact the parent company or an affiliate to introduce an employee from their team and these employees may then be invited to apply for a position.

• There has been no direction by the Employer, either through senior management or internal policies, to managers to make these introductions.

• The Employer has no arrangement or agreement with the parent company, affiliates or the third party prospective employers under which those entities have committed to hiring certain employees or a certain number of affected employees following the closure of manufacturing operations. Any decision to hire an affected employee will be made by the relevant recruiting company independently of the Employer.

Scenario 6 - Advertisement by the Employer of vacancies collated by the parent company with the parent company and its affiliates to affected employees

• The parents company collates a list of vacancies with the parent company and its affiliates which the Employer distributes to all employees by email and via the Program job boards.

• The affected employees may review the vacancies and are required to make enquiries directly with the relevant recruiting affiliate. The Employer has no involvement in the recruitment process once the vacancy is advertised.

• The Employer has no arrangement or agreement with the parent company, affiliates or the third party prospective employers under which those entities have committed to hiring certain employees or a certain number of affected employees following the closure of manufacturing operations. Any decision to hire an affected employee will be made by the relevant recruiting company independently of the Employer.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 83-175

Income Tax Assessment Act 1997 Paragraph 83-175(2)(c)

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

Reasons for decision

Summary

The condition under paragraph 83-175(2)(c) of the ITAA 1997 will be satisfied in connection with the redundancy payments as there will not be any arrangements in place at the time of dismissal to employ the affected employees after dismissal.

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 ITAA 1997. According to this section:

(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)).

Section 83-175 of the ITAA 1997 requires a number of conditions to all be satisfied in order for a payment to an employee to be a genuine redundancy payment. For the purposes of this private ruling application, only the condition under paragraph 83-175(2)(c) of the ITAA 1997 will be considered.

Arrangement to employ

In order to satisfy the condition under paragraph 83-175(2)(c) of the ITAA 1997 there must not have been, at the time of dismissal, an arrangement between Employer and the employee receiving the redundancy payment, or between the Employer and another entity, to employ the employee following the dismissal.

For the purposes of paragraph 83-175(2)(c) of the ITAA 1997, the term 'arrangement' is defined in section 995-1 of the ITAA 1997 as follows:

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

Further guidance on the issue of arrangements to employ was provided by the Commissioner in Taxation Ruling 2009/2 Income tax: Genuine redundancy payments (TR 2009/2). According to paragraphs 307 to 309 of TR 2009/2:

307 In the Commissioner's view, the phrase 'arrangement...to employ' is confined to common law employment relationships. The apparent purpose of paragraph 83-175(2)(c) is to limit access to concessional tax treatment where an employee is terminated but is certain of continuing remuneration in the future under a common law employment contract because of an arrangement to which the employer is a party.

308 For the condition in paragraph 83-175(2)(c) to fail, it is necessary for the employment arrangement to be entered into between either:

- the employer and the employee; or

- the employer and another entity.

309 Accordingly, if the employee has independently entered into an arrangement with another entity for that entity to employ him or her after the time of the dismissal from the original employer, the condition in paragraph 83-175(2)(c) will still be met. On the other hand, given the breadth of the meaning of 'arrangement', an implied understanding between two related companies at the time of an employee's dismissal with one of those companies to the effect that the employee will be employed at a later time with the other is sufficient for this condition not to be met.

In this case, there are no arrangements in place between the Employer and the employee to re-hire the affected employees after termination. Instead, through the Program, the Employer will communicate with prospective employers and recruitment agencies in an effort to assist the affected employees. The primary issue in this case will be whether the Employer's interactions with these prospective employers will amount to an 'arrangement' to employ.

According to the facts of this case, the role that the Employer plays through the Program is limited. In all six of the provided scenarios, it is quite clear that the Employer will not play a role beyond notifying the employee of a vacancy or introducing the employee to the prospective employer. Despite the assistance that the Program provides, the affected employee is ultimately responsible for applying for the new job themselves through the normal application processes. Any hiring decisions will be made by the third party employer independently of the Employer.

The activities undertaken by the Employer through the Program in this case is thus best characterised as the provision of aid or assistance.

The Administrative Appeals Tribunal briefly considered an arrangement, aided by the employer, in Re Valentino Stanuovo v Commissioner of Taxation [2002] AATA 701. In this case the employee had ceased employment as a cleaner in January 1998 but prior to termination had also put their name down in a relief book for casual work. Casual work was offered and accepted several months later. Although not considered necessary, the Tribunal considered whether this constituted an arrangement for the purpose of the now repealed paragraph 27F(1)(d) of the Income Tax Assessment Act 1936 (ITAA 1936). The wording of paragraph 27F(1)(d) of the ITAA 1936 is fundamentally similar to the wording of paragraph 83-175(2)(c) of the ITAA 1997 and contains the following requirement:

(d) 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 paragraphs 36-37, that:

36 The Tribunal accepts the testimony of the applicant that, in January 1998, the client demand for the services of the employer had considerably abated and that, when entering his name in the relief book, there were about thirty entrants before him. In the circumstances, it is reasonable to conclude that, at best, the chances of the applicant then being re-engaged on a permanent part-time basis were remote. The question to be asked is whether a situation of the kind outlined is capable of being categorised as an agreement to re-employ.

37 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 case, any link between the Employer and the new job ceases at the point of application of the new job, as the Employer is not involved in the recruitment process. Just as the act of putting a name down in a relief book is not enough to guarantee re-employment, simply applying for a job does not guarantee selection. In both Re Valentino Stanuovo and in the present case, something more was required. Mere assistance provided by an employer will not amount to an arrangement to employ if it does not give rise to a certainty of continuing remuneration in the future under a common law contract.

This is consistent with the apparent purpose of paragraph 83-175(2)(c) of the ITAA 1997, as outlined in paragraph 307 of TR 2009/2, which is to:

…limit access to concessional tax treatment when an employee is terminated but is certain of continuing remuneration in the future…" [emphasis added]