Edited version of private advice

Authorisation Number: 1051610735817

Date of advice: 24 February 2020

Ruling

Subject: Genuine redundancy payment

Question 1

Is any part of the retention bonus your client 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 2019

The scheme commences on:

1 July 2018

Relevant facts and circumstances

Your client commenced employment at the Employer in an executive position in the first quarter of 2017.

In the third quarter of 2018, the Employer announced the exit of the business managed by your client by way of sale. This sale encountered issues and the matter proceeded to court. During the process, the Employer advised the closure of the business managed by your client by the end of 2018.

In the third quarter of 2018 your client received a letter from the Employer, inviting your client to participate in a retention plan. The retention plan was introduced due to the exit of the business managed by your client and will:

• encourage the ongoing retention and motivation of key employees during the transition period
• provide a financial incentive for your client to remain with the Employer and continue to play an integral role as the Employer exits the business your client is managing
• provide a retention bonus payment if all payment terms and conditions are met.

Conditions to receive the retention bonus include:

• your client must continue to be employed by the Employer in their current role (or as otherwise agreed) for a specified period
• your client must undertake their duties and any activities resulting from the exit of business as requested by the Employer to an acceptable level of performance
• the business must exit the Employer's portfolio
• the Employer reserves the right to exercise its discretion to lapse the retention bonus if your client does not meet these performance conditions and conduct expectations
• the Employer reserves the right to pay an amount earlier or later than the specified date if appropriate
• in the event that your client's employment with the Employer ceases before the specified date, through resignation or due to poor performance, the retention bonus will lapse and any other entitlements under the scheme will be forfeited.

In the third quarter of 2018 your client signed the letter to participate in the retention plan.

In the fourth quarter of 2018, the Employer announced the sale of the business managed by your client.

In the second quarter of 2019 your client received a letter form the Employer advising that their position has been made redundant. Relevant to the present case, the letter shows that:

• as part of the sale of the business, your client's position is no longer required
• alternative employment opportunities have not been identified
• the Employer will terminate your client's employment by way of redundancy on a specified date in the second quarter of 2019
• your client's notice period will be paid in lieu. This period of notice is three months.

Your client received a payslip which showed the payment of the retention bonus.

The Employer classified the retention bonusas ordinary income which was taxed at your client's marginal rate.

Your client states that the retention payment was made for closure of the business, rather than for a sale transaction.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 82-130

Income Tax Assessment Act 1997 section 82-135

Income Tax Assessment Act 1997 section 83-175

Reasons for decision

Summary

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

Further, as the retention payment is not in consequence of the termination of employment it also does not satisfy subparagraph 82-130(1)(a)(i) of theITAA 1997, one of the main conditions that must be satisfied for it to be treated as an employment termination payment.

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 (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 (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.

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.

The phrase in consequence of termination of employment has been interpreted by the courts in several cases.

Of note are the decisions made by the 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).

In Reseck Justice Gibbs stated:

Within the ordinary meaning of the words, a sum is paid in consequence of the termination of employment when the payment follows as an effect or result of the termination... It is not in my opinion necessary that the termination of the services should be the dominant cause of the payment....

While Justice Jacobs stated:

It was submitted that the words 'in consequence of' import a concept that the termination of the employment was the dominant cause of the payment. This cannot be so. A consequence in this context is not the same as a result. It does not import causation but rather a 'following on'.

In looking at the phrase 'in consequence of' the Full Federal Court in McIntosh considered the decision in Reseck. Justice Brennan considered the judgments of Justice Gibbs and Justice Jacobs in Reseck and concluded that their Honours were both saying that a causal nexus between the termination and payment was required, though it was not necessary for the termination to be the dominant cause of the payment.

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.

Furthermore, in Le Grand v. Federal Commissioner of Taxation [2002] FCA 1258; (2002) 124 FCR 53; (2002) 195 ALR 194; (2002) 2002 ATC 4907; (2002) 51 ATR 39 (Le Grand), the issue before the court was whether an amount received by the applicant as a result of accepting an offer of compromise in respect of claims brought by him against his former employer, in relation to the termination of his employment was in whole, or in part, an ETP. It was held that a settlement payment for litigation in relation to a taxpayer's dismissal was an ETP.

Justice Goldberg stated:

I am satisfied that there is a sufficient connection between the termination of the applicant's employment and the payment to warrant the finding that the payment was made 'in consequence of the termination' of the applicant's employment. I am satisfied that the payment was an effect or result of that termination in the sense that there was a sequence of events following the termination of the employment which had a relationship and connection which ultimately led to the payment. True it is that the payment was made not only to settle the applicant's claim for common law damages for breach of the employment agreement but also for statutory damages...

Justice Goldberg concluded that the test for determining when a payment is made in consequence of the termination of employment is that which was articulated by Justice Gibbs in Reseck. Thus, for the payment to have been made in consequence of the termination of employment, the payment must follow as an effect or result of the termination of employment. As earlier stated in paragraph 6 of TR 2003/13, there must be 'a causal connection between the termination and the payment even though the termination need not be the sole or dominant cause of the payment'.

The essence of this analysis is that 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.

The question of whether a payment is made in consequence of the termination of employment is determined by the relevant facts and circumstances of each case.

From the facts provided, the Employer announced the intention to exit the business managed by your client. The exit involved legal issues which proceeded to court. During this process, the Employer announced the intention to close the business by a certain date.

The Employer invited your client to participate in a retention plan with a financial incentive. This incentive, a retention payment was provided to ensure the ongoing retention and motivation of key employees during the transition period where the business was progressing to exit.

The offer of the retention payment was conditional on your client remaining employed for a specified period or upon the exit of the business, and to perform their role to an acceptable level for that period. Your client would be required to undertake their duties and any activities resulting from the exit as requested by the Employer. Further, a condition of receiving the retention payment was that your client could not terminate employment through resignation or poor performance before the specified period. There was no condition for your client to terminate employment.

Your client's position was made redundant by the Employer. While the retention payment coincided with the termination of your client's employment, the retention payment was not made in consequence of the termination of their employment. Rather, the retention payment was made as a financial incentive to ensure that your client's employment continued for a specified period.

Accordingly, there is no causal connection between the termination and the retention payment. The retention payment was not conditional on the termination of your client's employment. It cannot be said that the retention payment followed on as an effect or a result of the termination of employment. Therefore, the retention payment is not considered to be made in consequence of the termination of employment.

Ultimately, a distinction has been made between the retention payment being paid as a consequence of retaining your client's employment as opposed to being paid as a consequence of the termination of that employment.

Notwithstanding your client's position was made redundant, a payment made to an employee is a genuine redundancy payment only if it satisfies all criteria set out in section 83-175 of the ITAA 1997. One of the main requirements of a genuine redundancy payment that must be satisfied (also discussed in TR 2009/02) is that the payment must be made in consequence of termination of employment.

In this case as the retention payment is not made in consequence of the termination of employment, the payment cannot be treated as a genuine redundancy payment.

Further matters for consideration

A payment is an employment termination payment if it satisfies all the requirements in section 82-130 of the ITAA 1997.

One of the main requirements that must be satisfied is that the payment must be in consequence of the employee's termination of employment (subparagraph 82-130(1)(a)(i) of the ITAA 1997).

In the client's case, as previously mentioned, the retention payment is not considered to be received in consequence of the termination of employment. Hence, the requirement under subparagraph 82-130(1)(a)(i) of the ITAA 1997 has not been satisfied and the retention payment is not considered to be an employment termination payment.

Accordingly, the retention payment is assessable as ordinary income.