Edited version of private advice

Authorisation Number: 1051616567453

Date of advice: 4 December 2019

Ruling

Subject: Eligible termination payments and genuine redundancy payments

Question 1

If the Proposed Amendments (as defined) are made to the Trust Deed by the Trustee for the Trust, will Severance Payments from the Trust to ETP Workers under the Trust Deed be Employment Termination Payments under section 82-130 of the ITAA 1997?

Answer

Yes

Question 2

If the Proposed Amendments (as defined) are made to the Trust Deed by the Trustee for the Trust, will payments from the Trust to Redundancy Workers under the Trust Deed, other than for death, retirement or permanent incapacity, be a genuine redundancy payment under section 83-175 of the ITAA 1997?

Answer

Yes

This ruling applies for the following period:

1 July 20XX to 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The Trust was established on XX month 20XX.

An executed Trust Deed has been provided.

Broadly, the scheme under which the Trustee operates involves Employers within the relevant industry becoming members of the Trust. The Employer members are required to make weekly contributions to the Trustee in respect of their Workers pursuant to obligations under industrial agreements or awards. The Trustee credits these contributions to an account in the name of each of the relevant Workers. At such time as a Worker's employment is terminated, the Trustee is, subject to the class of Worker, generally required to make a severance or redundancy payment to the Worker.

The Trust Fund will be maintained exclusively for making severance payments to Workers.

Broadly, severance payments may be made to Workers up to the amount standing to the credit of the Worker's account at the time of the Severance Event (as defined under the Trust Deed).

A Severance Event is:

·         the termination of employment by reason of a genuine redundancy,

·         the Worker's retirement;

·         the Worker's death; or

·         the termination of the Worker's employment due to Permanent Incapacity.

The Trustee proposes to amend the Trust Deed in line with the marked-up version of the Trust Deed provided in support of this Private Ruling request (Proposed Amendments).

Assumptions in relation to both Question 1 and Question 2

The Proposed Amendments will be made by the effective execution of a deed or instrument in writing in accordance with the Trust Deed.

Assumptions in relation to Question 1 only

For the purpose of answering Question 1 it is assumed (for the purposes of subsection 82-130(1)(b) of the ITAA 1997) that the Severance Payment is received:

·         no later than 12 months after the termination; or

·         if the payment is received later than 12 months after the termination that the Severance Payment is covered by a determination under subsection 82-130(5) or (7) that paragraph 82-130(1)(b) does not apply.

For the purpose of answering Question 1 it is assumed (for the purposes of subsection 82-130(1)(c) of the ITAA 1997) that the Severance Payment received is not a payment mentioned in section 82-135.

Assumptions in relation to Question 2 only

For the purpose of answering Question 2 it is assumed (for the purposes of subsection 83-175(1) of the ITAA 1997) that the Worker has been made 'genuinely redundant', in accordance with Taxation Ruling TR 2009/2.

For the purpose of answering Question 2 it is assumed (for the purposes of subsection 83‐175(2) of the ITAA 1997) that the conditions in paragraphs 83-175(2)(a), (b) and (c) are satisfied in respect to the Severance Payment.

Relevant legislative provisions

Income Tax Assessment Act 1997

Subdivision 50-A

Section 82-130

Subsection 82-130(1)

Paragraph 82-130(1)(a)

Paragraph 82-130(1)(b)

Subsection 82-130(5)

Subsection 82-130(7)

Section 82-135

Paragraph 82-135(e)

Section 83-175

Subsection 83-175(1)

Subsection 83-175(2)

Paragraph 83-175(2)(a)

Paragraph 83-175(2)(b)

Paragraph 83-175(2)(c)

Subsection 83-175(3)

Subsection 83-175(4)

Subsection 995-1(1)

Reasons for decision

Question 1

If the Proposed Amendments (as defined) are made to the Trust Deed by the Trustee for the Trust, will Severance Payments from the Trust to ETP Workers under the Trust Deed be Employment Termination Payments under section 82-130 of the ITAA 1997?

Answer

Summary

As a Severance Payment ('the payment') is a consequence of the happening of a ETP Severance Event (the 'termination of employment'), Severance Payments from the Trust to Workers under the Trust Deed will be Employment Termination Payments under section 82-130 of the ITAA 1997.

Detailed reasoning

The reasoning below, including all clause references, are made on the assumption that the Proposed Amendments have been made by the Trustee and incorporated into the Trust Deed.

Subsection 995-1(1) of the ITAA 1997 defines the term 'employment termination payment' as: having the meaning given by section 82-130. That section provides:

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

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

Note 1: If a payment would be an employment termination payment but for paragraph (b), see subsection (4) and section 83-295.

Note 2: The holding of an office is treated as employment for this Part: see section 80-5. Also, the termination of employment is treated as including the termination of employment by retirement or by death: see section 80-10.

Taxation Ruling TR 2003/13 concerns the meaning of the phrase 'in consequence of' in the context of payments made in relation to the termination of employment.

Paragraphs 5 and 6 of that ruling relevantly provide that:

5. The phrase 'in consequence of' is not defined in the ITAA 1997. However, those words appeared in the former provisions of the ITAA 1936 and have been interpreted by the courts in that context. The phrase 'in consequence of' in the former provisions conveys the same idea as in Division 82 of the ITAA 1997, and accordingly the consideration of the phrase by the courts in the context of the former provisions is also applicable to the interpretation of the phrase in Division 82 of the ITAA 1997. Whilst there are divergent views as to the correct interpretation of the phrase, the Commissioner considers that a payment is received by a taxpayer in consequence of the termination of the taxpayer's employment 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 received by the taxpayer.

6. The phrase requires 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 received in consequence of the termination of employment will be determined by the relevant facts and circumstances of each case.

It is a precondition to receiving a payment under the Trust Deed that an ETP Severance Event occur so that a Severance Payment becomes payable to an ETP Worker.

The methods of termination included in the definition of ETP Severance Event collectively satisfy paragraph 82-130(1)(a) of the ITAA 1997 as:

-  (a) the termination of the Worker's employment for any reason whatsoever including the termination of the Worker's employment due to the Worker suffering Permanent Incapacity: The term 'termination' is not defined within the Trust Deed. In Hilton v FC of T 92 ATC 4534, Hill J said that there was no particular reason to suspect that the concept of termination of employment has some special meaning for these purposes. As such, the term is assumed to have its ordinary meaning for current purposes. The Australian Concise Oxford Dictionary defines the term 'termination' as: ' ... the act or an instance of terminating... ' The term 'terminate' is defined as: ' ... bring or come to an end ... ' The crucial requirement is that the employment has terminated, i.e., come to an end and the Trust Deed provides for this (for any reason whatsoever including Permanent Incapacity). This Severance Event satisfies subparagraph 82-130(1)(a)(i) of the ITAA 1997;

-  (b) the Worker's Retirement: Subsection 80-10(a) of the ITAA 1997 provides that for the purposes of Part 2-40 (which includes Division 82) the termination of employment includes: Retirement from employment. This Severance Event satisfies subparagraph 82-130(1)(a)(i) of the ITAA 1997;

-  (c) the Worker's death: Subsection 80-10(b) of the ITAA 1997 provides that for the purposes of Part 2-40 (which includes Division 82) the termination of employment includes: The cessation of employment because of death. This Severance Event satisfies subparagraph 82-130(1)(a)(i) of the ITAA 1997.

[Note: subparagraph 82-130(a)(ii) is also potentially satisfied in respect of any of the above Severance Events in a situation where a person claims Severance Payment through or under a Worker]

As a Severance Payment ('the payment') is a consequence of the happening of a ETP Severance Event (the 'termination of employment') then Severance Payments from the Trust to ETP Workers under the Trust Deed will be Employment Termination Payments under section 82-130 of the ITAA 1997.

(Note the Assumptions made as to the payments to which this conclusion relates; Also, refer to CR 2010/40 and CR 2012/117)

Question 2

If the Proposed Amendments (as defined) are made to the Trust Deed by the Trustee for the Trust, will payments from the Trust to Redundancy Workers under the Trust Deed, other than for death, retirement or permanent incapacity, be a genuine redundancy payment under section 83-175 of the ITAA 1997?

Answer

Summary

Yes

Detailed reasoning

The reasoning below, including all clause references, are made on the assumption that the Proposed Amendments have been made by the Trustee and incorporated into the Trust Deed.

Section 83-175 of the ITAA 1997 addresses the circumstances under which a payment received by an employee is treated as a genuine redundancy payment. That section provides:

83-175 What is a genuine redundancy payment?

(1)       A genuine redundancy payment is so much of a payment received by an employee who is dismissed from employment because the employee's 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 the 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 the employee reached *pension age;

(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);

(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;

(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 the 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)).

Note: Paragraph 82-135(e) provides that the part of a genuine redundancy payment or an early retirement scheme payment worked out under section 83-170 is not an employment termination payment.

The Assumptions relevantly include for the purpose of answering Question 2 that it is assumed for the purposes of:

·         subsection 83-175(1) of the ITAA 1997 that the employee has been made 'genuinely redundant', in accordance with Taxation Ruling TR 2009/2; and

·         subsection 83‐175(2) of the ITAA 1997 that the conditions in paragraphs 83-175(2)(a), (b) and (c) are satisfied in respect to the Severance Payment.

The Facts also relevantly include:

·         A Severance Payment to a Redundancy Worker under the Trust Deed (i.e., the termination of the Worker's employment by reason of a genuine redundancy) will not consist of:

-        any amount in lieu of superannuation benefits for the purposes of subsection 83-175(3) of the ITAA 1997; or

-        a payment mentioned in section 82-135 (apart from paragraph 82-135(e)) for the purposes of subsection 83-175(4).

·         A Redundancy Worker could not hypothetically qualify for a Severance Payment in consequence of the voluntary termination of his or her employment. A Redundancy Worker only has an entitlement to a Severance Payment upon the occurrence of a Redundancy Severance Event (meaning termination of the Worker's employment by reason of a genuine redundancy, provided the Worker has not yet attained the age prescribed by paragraph 83-175(2)(a)(i) of the Income Tax Assessment Act 1997 at the time of the termination of their employment).

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.

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 (that the payment is received by an employee who is dismissed from employment because the employee's position is genuinely redundant), 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.

As mentioned above, it is assumed for the purposes of the Scheme that is the subject of this private ruling application that, for the purposes of subsection 83-175(1) of the ITAA 1997, the employee has been made 'genuinely redundant', in accordance with Taxation Ruling TR 2009/2.

Second part of subsection 83-175(1) - will the Severance Payment exceed the amount that could reasonably be expected to be received in consequence of a voluntary termination of employment?

The Severance Payment received by a Redundancy Worker calculated in accordance with the Trust Deed must exceed the amount that could reasonably be expected to be received in consequence of the voluntary termination of the Redundancy Worker's employment at the time of the termination.

The amount payable to the Worker will be as follows:

·         Where the balance of the Worker's Account is less than or equal to the Prescribed Amount, an amount equal to the balance of the account (payable upon the occurrence of the Severance Event); or

·         Where the balance of the Worker's Account exceeds the Prescribed Amount, an amount equal to the Prescribed Amount (payable upon the occurrence of the Severance Event), with the balance of the account payable dependent on the different circumstances.

A Redundancy Worker may only receive a Severance Payment in respect of genuine redundancy, and will only have such an entitlement if the Worker has attained the age prescribed by paragraph 83-175(2)(a)(i) of the Income Tax Assessment Act 1997 at the time of the termination of their employment.

It is necessary to identify an amount which is in excess of what would be paid under voluntary termination.

The calculation of the amount payable under voluntary termination needs to have regard to the terms of the Trust Deed, any relevant industrial award, any relevant workplace agreement or any other terms or conditions which could provide a basis for a payment under a voluntary termination.

In the case of a voluntary termination a Redundancy Worker will not have an entitlement to a Severance Payment under the Trust Deed. This is because a voluntary termination does not meet the requirements of being a genuine redundancy.

The excess of what would be payable under a voluntary termination (for the purposes of calculating the amount which falls for consideration as a genuine redundancy payment under section 83-175 of the ITAA 1997) would not include the amount that would have been paid had that Worker voluntarily terminated their employment (including by retiring).

The Commissioner can only provide a favourable ruling in relation to subsection 83-175(1) of the ITAA 1997 in respect of '... that part of the payment that is specifically attributable to the fact that employment has been terminated because of redundancy...' (Paragraph 57 of TR 2009/2).

As such, amounts which a particular employee would have received in any case as the result of a 'voluntary termination' [the 'voluntary termination element'] would need to be excluded.

A Redundancy Worker could not qualify under the Trust Deed for a Severance Payment for the voluntary termination of their employment, as a Redundancy Worker will only be entitled to a Severance Payment on the happening of a Redundancy Severance.

As no Redundancy Worker could have a 'voluntary termination element' or 'excess' then all of the relevant conditions set out in section 83-175 of the ITAA 1997 are satisfied. Consequently it is considered that Severance Payments from the Trust to Redundancy Workers under the Trust Deed, other than for death, retirement or permanent incapacity, will be genuine redundancy payments under section 83-175 of the ITAA 1997.