Edited version of your written advice

Authorisation Number: 1013026672532

Date of advice: 6 June 2016

Ruling

Subject: Genuine redundancy

Question 1

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

Answer

No.

This ruling applies for the following periods:

Year ending 30 June 20ZZ.

The scheme commences on:

1 July 20YY.

Relevant facts and circumstances

On a date in the 20VV-WW income year, the Taxpayer commenced employment with the Employer.

The Taxpayer was employed on a fixed term basis. On a date in 20WW-XX, the Contract was varied and the Taxpayer was offered a new fixed-term to end on a date in the 20XX-YY year. All the other terms and conditions of the Taxpayer's employment remained the same.

The Taxpayer's contract with the Employer was rolled over a second time on a date in the 20YY-ZZ year.

The terms and conditions of the Taxpayer's most recent period of employment were set out in a letter, hereafter referred to as the Contract, as well as in the Agreement.

The Taxpayer accepted that the terms set out in the Contract and the Agreement constituted the entire understanding between the Taxpayer and the Employer in relation to the terms and conditions of employment.

The Contract specified that employment was on a Fixed Term - Full Time basis for a period beginning in 20YY-ZZ and ending on another date in that period.

Prior to the end of the fixed term, the Taxpayer was notified by letter that the present contract would expire and would not be renewed. Consequently, the Taxpayer's employment cease on the end date specified in their Contract.

In accordance with the Agreement, the Employer is required to pay to the Taxpayer a severance payment for reasons of redundancy. Relevantly, clause 14.4 of the Agreement states:

14.4.1 A fixed-term employee whose contract of employment is not renewed in circumstances where the employee seeks to continue the employment shall be entitled to the following Severance Payment in the following circumstances:

a) where the employee is employed on a second or subsequent fixed term contract to do work required for the circumstances described in sub-clauses 13.5.1 and 13.5.2 and the same or substantially similar duties are no longer required; or

b) where the employee is employed on a fixed term contract to do work required for the circumstances described in sub-clause 13.5.1 and 13.5.2 and the duties of the kind performed in relation to work continue to be required but another person has been appointed, or is to be appointed, to the same or substantially similar duties.

The Taxpayer received the severance payment on a date in the 20YY-ZZ income year, within 12 months of the termination of their employment.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 82-130

Income Tax Assessment Act 1997 Subsection 82-130(1)

Income Tax Assessment Act 1997 Paragraph 82-130(1)(a)

Income Tax Assessment Act 1997 Subparagraph 82-130(1)(a)(i)

Income Tax Assessment Act 1997 Subparagraph 82-130(1)(a)(ii)

Income Tax Assessment Act 1997 Paragraph 82-130(1)(b)

Income Tax Assessment Act 1997 Paragraph 82-130(1)(c)

Income Tax Assessment Act 1997 Section 82-135

Income Tax Assessment Act 1997 Paragraph 82-135(e)

Income Tax Assessment Act 1997 Section 83-170

Income Tax Assessment Act 1997 Subsection 83-170(1)

Income Tax Assessment Act 1997 Subsection 83-170(2)

Income Tax Assessment Act 1997 Subsection 83-170(3)

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 Paragraph 83-175(2)(a)

Income Tax Assessment Act 1997 Subparagraph 83-175(2)(a)(i)

Income Tax Assessment Act 1997 Subparagraph 83-175(2)(a)(ii)

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

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

Income Tax Assessment Act 1997 Subsection 83-175(3)

Income Tax Assessment Act 1997 Subsection 83-175(4)

Income Tax Assessment Act 1997 Subsection 955-1(1)

Reasons for decision

Summary

The Taxpayer's employment terminated on a date mutually agreed to with the Employer and not because the Taxpayer is being dismissed at the initiative of the Employer without the Taxpayer's consent. Therefore, the severance payment that the Taxpayer received on termination of their employment with the Employer is not a genuine redundancy payment.

The payment received by the Taxpayer is an employment termination payment (ETP) in accordance with subsection 82-130(1) of the ITAA 1997 .

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 Taxpayer's employment was to terminate on a specific date when their fixed-term contract expired. Consequently, the Employer paid to the Taxpayer a severance payment as required under the Agreement. In other words, but for the termination of the Taxpayer's employment, the payment would not be made to the Taxpayer. Therefore, it is considered that the payment was made to the Taxpayer in consequence of the termination of their employment with the Employer.

As the Taxpayer received the severance payment within 12 months after the termination of their employment, the payment will be an ETP unless it is a payment mentioned in 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 paragraph 10 above, it is considered that, in this case, the payment was received by the Taxpayer 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.

A 'dismissal' would not ordinarily occur for an employee employed under a fixed-term contract. In paragraph 284 of TR 2009/2 the Commissioner states:

It would normally be the case that someone employed on a contract for a set period could not be dismissed at the end of that period. Their employment would simply terminate because an arrangement stipulated that the employment would cease at that time [emphasis added].

The view outlined above, is supported in the case of Winsen v C o T (para 285 of TR 2009/2) where Member Sweidan found that at the end of the last contract no continuation of employment or renewal would occur, even though there were past renewals.

Senior Member Sweidan summed up by saying;

…….the respondent, the applicant's argument is misconceived as it is quite clear that the applicant's employment with her employer would necessarily have terminated on 31 December 2002 under the terms of the contract. The applicant's contention that absent a decision by the employer to not renew or extend the contract, termination of the employment would not necessarily have occurred, appears to the Tribunal to be without any foundation in fact or in law. As noted in the decision in Fisher v. Edith Cowan University (No 2 ) (1997) 72 IR 464

Facts such as the continuation of the employment position after the expiration of the period of Ms Fisher's contract and Ms Fisher's expectation that she would continue in the position would have been relevant .

Under a fixed-term contract the decision to terminate employment could not be said to be at the employer's initiative because the employee and the employer would have a mutual understanding at the time the contract was signed that the employment would end at a pre-determined date. Thus, a 'dismissal' would not normally occur when an employee's employment ends at the expiration of a fixed-term contract.

However, in paragraph 37 of TR 2009/2 the Commissioner states:

However, some rolling fixed-term contracts may, as a matter of fact, establish an ongoing employment relationship. The reference to rolling contracts contemplates the situation where fixed-term contracts are renewed on one or more occasions following the expiry of the contracted term. However, where a contract is not renewed at the end of a contractually stipulated term, evidence is required to displace the express terms of the contract and establish an ongoing employment relationship [emphasis added]. This is likely to be the exception rather than the rule.

Additionally, in paragraph 287 of TR 2009/2 the Commissioner states:

The question of whether an employment relationship continues to exist after what would otherwise be its expiration is a question of fact. If a set term is expressly stipulated in an employment contract, the Commissioner considers that this will govern the relationship unless implied terms to the contrary can be established [emphasis added].

In the present case, the set term is expressly stipulated in the Contract. The taxpayer's employment was to end on a date in the 20YY-ZZ income year and would not be renewed. The Taxpayer has acknowledged that the Contract constitutes the entire agreement as it relates to the terms and conditions of their employment, and there is no evidence to indicate that the express terms of the Contract should be displaced and that an employment relationship, in fact, exists.

Accordingly, the Taxpayer's employment was terminated on the date as previously agreed with the Employer. As such, it cannot be said that the decision to terminate employment was at the Employer's initiative without the consent of the Taxpayer, Therefore, it is considered that the Taxpayer was not be 'dismissed' from their employment.

As the Taxpayer has not satisfied all the requirements of subsection 83-175(1) of the ITAA 1997, the severance payment that they received is not a genuine redundancy payment and the exception in section 82-135 of the ITAA 1997 does not apply

Therefore, the severance payment that the Taxpayer received is an ETP in accordance with subsection 82-130(1) of the ITAA 1997.