Edited version of your written advice

Authorisation Number: 1051353421114

Date of advice: 5 April 2018

Ruling

Subject: Genuine redundancy payment

Question

Is the payment received by the taxpayer an employment termination payment under section 82-130 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No

Question

Is the payment received by the taxpayer a genuine redundancy payment under section 83-175 of the ITAA 1997?

Answer

No

This ruling applies for the following period:

Income year ending 30 June 2018

The scheme commences on:

1 July 2017

Relevant facts and circumstances

1. The taxpayer is a sole trader operating a business.

2. The taxpayer registered for Goods and Services Tax (GST) prior to signing the contract, and cancelled the GST registration prior to termination of the contract.

3. The taxpayer was contracted under a contract described as a ‘Consultancy Agreement via a Service Company’. The contract had an initial term of three years.

4. The other party to the contract was a foreign entity.

5. Under the terms of the contract the taxpayer was paid a monthly retainer, together with a semi-annual performance bonus.

6. The contract allowed either party to terminate the agreement at any time within three months’ written notice.

7. The contract specifically states that the relationship between the parties is that of principal and independent contractor.

8. The contract further confirms it is a contract for the provision of services only and does not constitute a contract of employment.

9. The contract was terminated by the other party in writing in July 2017.

10. At the time of the termination there was no arrangement between the taxpayer and the other party to employ the taxpayer after the termination.

11. The other party made a payment in accordance with the termination letter, which they described as ‘an ex-gratia payment (the termination payment)’. They also reimbursed the taxpayer expenses incurred during the course of the termination agreement.

12. The taxpayer lodged the income tax return for the year ended 30 June 2016, reporting business income and business expenses.

13. The taxpayer lodged the income tax return for the year ended 30 June 2017, reporting business income and business expenses.

14. The taxpayer did not report any salary or wage income for the years ended 30 June 2016 and 30 June 2017.

15. The taxpayer lodged business activity statements for period 1 July 2015 to 30 June 2017.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 82-130

Income Tax Assessment Act 1997 Section 83-175

Income Tax Assessment Act 1997 Subsection 83-175(1)

Reasons for decision

Summary

1. The ex-gratia termination payment is not an employment termination payment as it was not made in consequence of the termination of the taxpayer’s employment.

2. The ex-gratia termination payment does not form part of a genuine redundancy payment and does not qualify for concessional tax treatment up to the allowed redundancy payment cap amount.

Detailed reasoning

3. The term “employment termination payment” (ETP), as defined in section 82-130 of the ITAA 1997, includes any payment made in consequence of termination of any employment of a taxpayer other than certain specified payments.

4. Subsection 83-175(1) of the ITAA 1997 defines the meaning of a genuine redundancy payment as one received by an employee who is dismissed from employment because their position is genuinely redundant and exceeds the amount that could reasonably be expected to be received by them in consequence of the voluntary termination of their employment at the time of dismissal.

5. Before a payment that meets the basic redundancy requirement in subsection 83-175(1) of the ITAA 1997 can qualify as a genuine redundancy payment, all other conditions in subsection 83-175(2) of the ITAA 1997 must be met.

6. Subsection 83-175(2) of the ITAA 1997 states:

A genuine redundancy payment must satisfy the following conditions:

1. (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);

2. (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;

3. (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.

7. The Commissioner has issued Taxation Ruling TR 2009/2, Income Tax: genuine redundancy payments. The Ruling, which is an expression of the Commissioner's opinion about the way in which a relevant provision applies, or would apply, provides guidance on the factors to be considered in the interpretation of section 83-175 of the ITAA 1997.

8. Paragraph 6 of TR 2009/2 states:

‘Section 83-175 of the ITAA 1997 is located within Part 2-40. Part 2-40 seeks to deal cohesively with all payments made in consequence of the termination of a person’s employment as a common law employee. The treatment of genuine redundancy payments must therefore be determined in this context.’

9. Paragraph 7 of TR 2009/2 then states:

‘Given this, and in particular the tax treatment afforded to genuine redundancy payments, the Commissioner’s view is that a genuine redundancy payment must be made in consequence of a termination of employment. Accordingly, genuine redundancy payments are payments made in consequence of a particular type of termination from employment (dismissal) that is attributable to a particular reason (redundancy).’

10. In discussing what constitute a genuine redundancy payment in accordance with subsection 83-175(1) of the ITAA 1997, paragraph 11 of TR 2009/2 states:

There are four necessary components within this requirement:

● the payment being tested must be received in consequence of an employee’s termination

● that termination must involve the 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.

11. The phrase ‘in consequence of’ is not defined in the ITAA 1997, but 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).

12. Paragraph 6 of TR 2003/13 states that the phrase requires a causal connection between the termination and the payment, and the question of whether a payment is received in consequence of the termination of employment is determined by the facts of each case.

13. The other party to the contract is a foreign entity not registered in Australia.

14. In the taxpayer’s case the contract is clear as particular clauses specify that the relationship between the Taxpayer and the other party is one of principal and contactor, not employer/employee.

15. The taxpayer’s engagement was governed by the contractual agreements he/she made with another party.

16. The “termination payment” you received from the other party appears to represent an amount, expected to be received by the Taxpayer, had the contract ran for the full period of three years.

17. Tax returns, lodged by the Taxpayer for the 2015-16 and the 2016-17 income years, supports a notion, the engagement was that of a principal and a contractor as the Taxpayer declared the income received from the other party as a non-primary production business income.

18. Based on the above, we consider the Taxpayer’s engagement with the other party was a contractual engagement.

19. Accordingly, as the Taxpayer was not an employee of the other party, the payment was not made in consequence of termination of the Taxpayer’s employment.

20. As the Taxpayer does not satisfy the requirements of section 82-130 of the ITAA 1997 the payment is not an ETP.

21. Further, as the Taxpayer does not satisfy all the requirements of section 83-175 of the ITAA 1997, the payment is not a genuine redundancy payment.