Edited version of your written advice

Authorisation Number: 1051177470391

Date of advice: 5 January 2017

Ruling

Subject: Genuine Redundancy

Question

Is the payment made from a redundancy trust a genuine redundancy payment under section 83-175 of the Income Tax Assessment Act 1997?

Answer

No

This ruling applies for the following periods:

The income year ended 30 June 2016

The scheme commences on:

1 July 2015

Relevant facts and circumstances

You are below your preservation age.

You commenced employment with Your Employer in January 2016.

In a letter dated May 2016, you were advised due to a downturn in business, your employment was terminated effective on that date.

Upon termination of employment, you became entitled to claim payments from a redundancy fund A.

A is the trading name for the Redundancy Payment Central Fund Limited (the Fund). It is a trustee company that was established in 1988 to administer industry funds, primarily to provide assistance for workers between jobs in the building and construction industry.

There are two types of payments that workers who are unemployed can apply for through A.

6.1 An Initial Benefit when you finish work. This is an amount not exceeding the maximum initial benefit as prescribed in the Trust Deeds (clause 6 of Existing Fund 2 Trust Deed and clause 10 of the Approved Fund 2 Trust Deed) and as adjusted on 1 October each year or the balance of their account if the amount held is less than the maximum initial benefit.

6.2 The balance of Funds Redundancy Benefits in the form of a lump sum payment (clauses 6.2, 6.3 and 6.4 of the Existing Fund Trust Deed and clauses 10.3, 10.4, 10.5 and 10.7 of the Approved Fund 2 Trust Deed)

On May 2016, you received your initial benefit payment which was subject to tax withheld of 32%.

You have also received the balance of Funds Redundancy Benefit on June 2016 which was also subject to tax withheld of 32%.

You have stated that you believe you would have been entitled to the above listed fund amounts had you left voluntarily.

In accordance with A’s policy the payment is considered to be an Employment Termination Payment (ETP).

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 302-195

Income Tax Assessment Act 1997 Section 302-200

Income Tax Assessment Regulations 1997 Regulation 302-200.01

Income Tax Assessment Regulations 1997 Regulation 302-200.02

Reasons for decision

Summary

The Initial Benefit payment and the balance of Funds Redundancy Benefit payment does not qualify as a genuine redundancy as not all of the conditions have been satisfied.

Detailed reasoning

Employment termination payment

Section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997) states that:

employment termination payment has the meaning given by section 82-130.

Subsection 82-130(1) of the ITAA 1997 declares:

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 the termination (but see subsection (4)); and

(c) it is not a payment mentioned in section 82-135 (discussed below)

The above three conditions need to be satisfied in order for the payment to be treated as an employment termination payment.

Failure to satisfy any of the three conditions will result in the payment not being considered an employment termination payment.

The phrase ‘in consequence of termination of employment’ in subparagraph 82-130(a)(i) of the ITAA 1997 above is not defined in the legislation. However, the courts have considered the meaning of the words ‘in consequence of’ in relation to eligible termination payments (ETPs), the predecessor of employment termination payments.

Of note are the decisions made by the Full High Court in Reseck v. Federal Commissioner of Taxation (1975) 49 ALJR 370; (1975) 6 ALR 642; (1975) 5 ATR 538; (1975) 75 ATC 4213; (1975) 133 CLR 45 (Reseck) and the Full Federal Court in McIntosh v Federal Commissioner of Taxation (1979) 25 ALR 557; (1979) 10 ATR 13; (1979) 45 FLR 279; (1979) 79 ATC 4325 (McIntosh).

Suffice it to say that both Courts views were that for a payment to be made in consequence of the termination of employment it had to follow on as a result or effect of the termination of employment. Additionally, while it is not necessary to show that termination of employment is the sole or dominant cause, a temporal sequence alone would not be sufficient.

The Commissioner in Taxation Ruling TR 2003/13 considered the phrase ‘in consequence of’ as interpreted by the Courts. 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.

According to the facts, your employment with was terminated due to a downturn in the business. As such, the payments follow on as an effect or a result of the termination of employment. The payments would not have been made to you had your employment not been terminated. Therefore the Initial Benefit payment and the balance of Funds Redundancy Benefit payment were made in consequence of the termination of your employment and therefore the requirement pertaining to subparagraph 82-130(1)(a)(i) is satisfied.

Further, as the Initial Benefit payment and the balance of Funds Redundancy Benefit payment was made within 12 months of your employment being terminated, the requirement pertaining to paragraph 82-130(1)(b) is satisfied.

Employment termination payment exclusions

Section 82-135 of the ITAA 1997 provides that certain payments are not employment termination payments, including:

● payment for unused annual leave or unused long service leave;

● the tax-free part of a genuine redundancy payment or an early retirement scheme payment; and

● reasonable capital payments for personal injury.

As such, this provision excludes payments or benefits that compensate or reimburses the taxpayer for or in respect of the particular injury.

As none of the above apply to the circumstances in the present case, the requirements pertaining to paragraph 82-130(1)(c) are satisfied.

Genuine redundancy

A payment made to an employee is a genuine redundancy payment (GRP) 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 employees position is genuinely redundant as 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 employees 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 arms length the payment does not exceed the amount that could reasonably be expected to be made if the dismissal were at arms 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)).

In this case the main issue is the requirement in subsection 83-175(1) of the ITAA 1997, stated above. The facts show that you were dismissed from your employment because your position was made redundant. What needs to be determined is whether the payment you received from A exceeds the amount you would have received if you had voluntarily resigned.

The relevant clauses as prescribed in the Trust Deeds state that both the Initial Benefit payment and the balance of Funds Redundancy Benefit payment will be paid to an employee if they terminate employment for any reason. As these payments may be paid to you on the termination of your employment for reasons other than genuine redundancy, the payments would not be in excess of the amount that could reasonably be expected to be received by you in consequence of the voluntary termination of your employment at the time of dismissal.

A one of the conditions under section 83-175 of the ITAA 1997 has not been met, the payment of the Initial Benefit and the balance of Funds Redundancy Benefit are not genuine redundancy payments for the purposes of section 83-175 of ITAA 1997.

Based on the above reasoning, both payments from A have been correctly treated as employment termination payments and have had the correct amount of tax withheld from them.