Edited version of your written advice

Authorisation Number: 1051209181185

Date of Advice: 20 April 2017

Ruling

Subject: Employment termination payment-genuine redundancy

Question

Is any part of the payment received by a person (the Taxpayer) on the termination of employment 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:

Income year ended 30 June 2016

The scheme commences on:

1 July 2015.

Relevant facts and circumstances

The Taxpayer was employed by a private company (the Company).

The Taxpayer was the sole director and shareholder of the Company.

The Taxpayer had no written employment agreement with the Company.

The Company went into voluntary administration, with an entity (the Liquidators) appointed as administrators.

Subsequently, the Company went into liquidation and the Taxpayer's employment with the Company was terminated by the Liquidators.

At the time of the termination, the Taxpayer's employment was subject to the Fair Works Act 2009 (FWA).

Several months later, the Liquidators advised the Taxpayer that they were in a position to pay a final dividend to priority employee creditors.

Subsequently, the Taxpayer was paid a specified lump sum comprising of the following employee entitlements:

i. Wages in lieu of notice

ii. Redundancy

iii. Unused annual leave (including leave loading), and

iv. Unused long service leave

The Taxpayer's is aged less than 65 years.

Relevant legislative provisions

Income Tax Assessment Act 1997, section 82-135.

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, subsection 83-175(3).

Income Tax Assessment Act 1997, subsection 83-175(4).

Reasons for decision

Summary

A part of the lump sum payment received by the Taxpayer (the amount consisting of the payment in lieu of notice and the redundancy payment) is a genuine redundancy payment (GRP) as defined in section 83-175 of the ITAA 1997.

The remainder of the lump sum payment, being an amount which comprises the Taxpayer's unused annual leave and unused long service leave is not a GRP as defined in section 83-175 of the ITAA 1997.

Detailed reasoning

A payment made to an employee is a GRP if it satisfies all the criteria in section 83-175 of the ITAA 1997.

In accordance with subsection 83-175(1) of the ITAA 1997, a GRP 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 their employment.

The Commissioner of Taxation (the Commissioner) has issued Taxation Ruling TR 2009/1 Income tax: genuine redundancy payments (TR 2009/2), which outlines the requirements to be satisfied before any payment made to a person whose employment is terminated qualifies for treatment as a GRP under section 83-175 of the ITAA 1997.

In discussing what constitutes a GRP for the purposes of subsection 83-175(1) of the ITAA 1997, paragraph 11 of TR 2009/2 states:

i. There are four necessary components within this requirement:

ii. The payment being tested must be received in consequence of an employee's termination.

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

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

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

Payment 'in consequence of' termination

The phrase 'in consequence of' is not defined in the ITAA 1997. However, the courts have interpreted the phrase in a number of cases. Whilst the courts have divergent views on the meaning of this 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 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 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:

5. ... 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 this instance, the Taxpayer's employment was terminated by the Liquidators because the Company had gone into liquidation. As a result of the termination, the Liquidators paid a dividend to the Taxpayer as a priority employee creditor for outstanding employee entitlements. If not for the termination, this payment would not have been made to the Taxpayer. Therefore, the payment was received by the Taxpayer in consequence of the termination of their employment.

Dismissal' and 'redundancy'

The Commissioner's view, as stated in paragraphs 18 and 25 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 the employment that is terminated at the initiative of the employee.

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.

It is clear from the facts that, in this case, the Taxpayer did not voluntarily resign from their employment. Rather, their employment was terminated by the Liquidators because the Taxpayer's position no longer existed and would not be occupied by anyone else. The decision to terminate the Taxpayer's employment was unavoidable due to the circumstances surrounding the Company's operations.

Consequently, it is considered that the Taxpayer was dismissed from employment because their position was redundant. In addition, there is nothing to indicate that the redundancy was in any way contrived, therefore the redundancy was genuine.

However, while it is accepted that the Taxpayer was dismissed from their employment because their position was genuinely redundant, subsection 83-175(1) of the ITAA 1997 also requires that the payment received in consequence of redundancy exceeds the amount that the Taxpayer would have received had they voluntarily resigned from employment.

In accordance with section 117 of the FWA, an employer must not terminate an employee's employment unless the employer has given the employee written notice of the day of the termination, or the employer has paid to the employee payment in lieu of notice of at least the amount the employer would have been liable to pay to the employee for the hours the employee would have worked had the employment continued until the end of the minimum period of notice.

Relevantly, under section 119 of the FWA, an employee is entitled to be paid redundancy pay by the employer if the employee's employment is terminated because of the insolvency or bankruptcy of the employer. The amount of the redundancy pay is calculated with reference to the period of service with the employer at the employee's base rate of pay for their ordinary hours of work.

As the amount in lieu of notice and the redundancy amount would not have been paid to the Taxpayer if they voluntarily terminated their employment, the amount consisting of the payment in lieu of notice and the redundancy pay, which was paid to the Taxpayer as a result of the liquidation of the Company, exceeds the amount that the Taxpayer would have received had they voluntarily terminated their employment.

However, the amount comprising the annual leave amount and the long service amount would have been payable to the Taxpayer even if they voluntarily terminated their employment at the time of the dismissal.

Further conditions for a genuine redundancy payment

In addition to the basic requirement for a genuine redundancy payment found in subsection 83-175(1) of the ITAA 1997, the further conditions for genuine redundancy payment treatment in subsections 83-175(2), (3) and 4 of the ITAA 1997 require that:

i. the employee is dismissed before the earlier of 65 or a specified age;

ii. the termination is not at the end of a fixed period of employment;

iii. the amount paid is not greater than the amount that could reasonably be expected had the parties been dealing at arm's length, (in the event that the employer and employee are in fact not dealing at arm's length in relation to the dismissal);

iv. there is no arrangement entered into between the employer and the employee or the employer and another entity to employ the dismissed employee after the termination;

v. the payment is not in lieu of superannuation benefits; and

vi. the payment is not mentioned in section 82-135 (apart from paragraph 82-135(e)) of the ITAA 1997.

On the basis of the information provided, it is considered that all the conditions of subsections 83-175(2), (3) and (4) of the ITAA 1997 are satisfied in respect of the amount consisting of the payment in lieu of notice and the redundancy pay . As such, this amount is a GRP as defined in section 83-175 of the ITAA 1997.

The amount comprising of annual leave and long service leave pay is not a GRP because it does not exceed the amount that the Taxpayer would have received if they voluntarily terminated their employment at the time of the dismissal, and the unused annual leave and unused long service leave payments are mentioned in section 82-135 of the ITAA 1997.