Edited version of your written advice

Authorisation Number: 1051359331886

Date of advice: 16 May 2018

Ruling

Subject: Residency and compensation

Question

Is the retention payment you received 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 period

Year ending 30 June 201X

The scheme commenced on

1 July 201X

Relevant facts and circumstances

From 20XX to 20XX you were employed by the employer as part of their contract with a company.

You have supplied a copy of your employment contract with the employer. The contract has redundancy clauses.

In a letter to you of 20XX, the employer informed you that:

● Their contract with the company was not renewed and that, in consequence, your employment with the employer would cease.

● This letter states that it constitutes notice of employment termination.

● The termination date is specified as 20XX which is not a date before the notice but, in fact, three months in the future.

● A retention payment scheme is being finalised.

In the lead up to this, the employer made redundancy payments to employees on wages but refused to acknowledge that any of the salaried staff was entitled to a redundancy payment. In the same letter the employer stated that:

As the cessation of your employment is reflective of the Company’s ordinary and customary turnover of labour, you are not entitled to severance or any other termination payments (except accrued but untaken leave entitlements).

The redundancy clause in your employment contract does not include the term “ordinary and customary turnover of labour” and the phrase does not appear anywhere else in the contract.

After negotiation between you, your colleagues and the employer an agreement was reached. In a second letter to you of 20XX, the employer offered you a retention payment. You would be entitled to receive a retention payment of $X, conditional on you staying with the employer until the specified termination date (20XX):

The figure of $X was calculated as per your contract. You received:

● two weeks salary pay for every year you served with the company; and,

● one weeks’ pay for being over X years old.

The payment was at a time when the date of the termination of your employment was known.

The payment was received within 12 months of the cessation of your employment.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6(1)

Income Tax Assessment Act 1997 Section 83-175

Reasons for decision

Summary

The retention payment is not a genuine redundancy payment for the purposes of section 83-175 of the Income Tax Assessment Act 1997 (ITAA 1997) as it was not made in consequence of the termination of your employment with the employer.

Accordingly, the retention payment is assessable as ordinary income.

Detailed reasoning

Genuine redundancy payments

Section 83-175 of the ITAA 1997 sets out the various requirements for a genuine redundancy payment.

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.

Further, 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 Income tax: genuine redundancy payments (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.

Meaning of received ‘in consequence of’ the 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. 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 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 considered the meaning of the phrase ‘in consequence of’ in the context of the eligible termination payments (ETPs), 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.

As further stated by the Commissioner in paragraph 6 of TR 2003/13, there must be:

… a causal connection between the termination and the payment, although the termination need not be the dominant cause of the payment. The question of whether a payment is made in consequence of the termination of employment will be determined by the relevant facts and circumstances of each case.

If the payment follows as an effect or a result of the termination of employment, the payment will be made in consequence of the termination of employment.

Application to your circumstances

While you may have been made redundant and entitled to a redundancy payment, it does not necessarily follow that retention payment is a genuine redundancy payment because, to be a genuine redundancy payment, it must be established that:

● It is received in consequence of the termination of your employment; and

● It is in excess of what you would have received had you terminated your employment voluntarily.

In your case, based on the information you have provided, the payment would not have been made if you terminated your employment voluntarily before the termination date (20XX). However, if you stayed until the specified date, you would have received the payment whether or not your employment was terminated; and whether it was terminated voluntarily or by the employer. That is, the payment was made because you continued your employment with the employer until the specified date.

Accordingly, there was not a causal connection between the termination of your employment and the receipt of the retention payment. The retention payment was not conditional on the termination of your employment, rather, you received it because you remained with the employer until a specified date. It cannot be said that the retention payment followed on as an effect or a result of the termination of your employment or that it exceeds an amount that you could reasonably expected to receive if you voluntarily terminated your employment at the time of the dismissal.

Therefore, the retention payment is not considered to be a genuine redundancy payment under Section 83-175 of the ITAA 1997. In consequence, is assessable as ordinary income under section 6(1) of the ITAA 1997.