Edited version of private advice

Authorisation Number: 1051773704063

Date of advice: 17 December 2020

Subject: Taxation of a contract completion payment

Question 1

Is the Contract Completion Payment you received from your former employer for the 2018-19 income year an employment termination payment under section 82-130 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 2

Is the Contract Completion Payment you received from your former employer for the 2018-19 income year 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 2019

This scheme commenced on:

1 July 2018

Relevant facts and circumstances

1.         You were under 65 years of age.

2.         We received a private ruling application from your authorised tax agent about the taxation of the Contract Completion Payment you received from your former employer for the 2018-19 income year.

3.         In the private ruling application we received, we were advised the following:

     You were employed on a fixed-term contract with your former employer. The terms and conditions of your employment were set out in an employment contract and an industrial agreement.

     You were subsequently employed on a second fixed-term contract with your former employer.

     You were advised 12 months prior to the cessation of your second fixed-term contract that your position would cease to exist at the end of your second fixed-term contract. You were also advised that a new position would be established in a new location which would incorporate your current roles and responsibilities.

     Your employment with your former employer ceased on the date specified within your second fixed-term contract. Any further issues were to be resolved by a locum or the relevant staff.

     You were not offered another fixed-term contract with your former employer or the new position that was to be established in the new location.

     You received a Contract Completion Payment as specified within the terms and conditions of your employment contract and the relevant industrial agreement with your former employer.

     The new position was then advertised in the new location.

4.         In the private ruling application we received, we were provided with the following additional information:

     An initial offer of employment letter addressed to you from your former employer.

     A signed employment contract between yourself and your former employer for an initial fixed-term which confirmed that it constituted the whole offer made and did not mean that any subsequent offers of employment would be made or any other employment contracts would be entered into between yourself and them.

     A second offer of employment letter addressed to you from your former employer.

     A signed employment contract between yourself and your former employer for a second fixed-term which confirmed that it constituted the whole offer made and did not mean that any subsequent offers of employment would be made or any other employment contracts would be entered into between yourself and them.

     A letter addressed to you which confirmed the following:

-    That you had a discussion about your employment contract.

-    A decision had been made not to offer you a further employment contract.

-    Your employment would cease on the date specified within your second fixed-term contract.

-    You would be paid all your accrued leave entitlements as set out within the relevant industrial agreement.

-    You may be eligible for a Contract Completion Payment.

     The relevant industrial agreement which confirmed when entitlements for annual leave, sick leave and long service leave would be credited or transferred between employment contracts and when a Contract Completion Payment would be paid to an individual upon expiry of their fixed-term contract in the event that they had been unsuccessful in seeking a new employment contract.

     An email which you were copied into that advised the following:

-    You were leaving your position after many years of service.

-    You would be commencing a new role in another location with a different employer.

     An email which advised that your Contract Completion Payment and outstanding leave entitlements would be paid on a certain date. It also confirmed that you would receive a certain amount for your Contract Completion Payment and further amounts for your outstanding annual leave and long service leave entitlements.

     The advertisement for the new full-time fixed-term position in the new location.

     Several edited versions of private rulings available on the ATO Legal Database.

5.         In a telephone conversation between a tax officer from the Australian Taxation Office and your authorised tax agent, we confirmed that your private ruling application had been allocated to be actioned. We provided the contact details of the case officer that would be actioning your private ruling application and apologised for the delay. We discussed the additional information that had been provided and confirmed that this information would be reviewed to determine the taxation of the Contract Completion Payment you received from your former employer for the 2018-19 income year. We also indicated a timeframe for when your private ruling application might be finalised, confirmed your years of service with your former employer and discussed the previous attempts that had been made to contact your former employer and the Australian Taxation Office.

6.         In an email sent from your authorised tax agent addressed to a tax officer from the Australian Taxation Office, the progress of your private ruling application was queried as well as the correspondence you recently received from the Australian Taxation Office about the lodgement of your income tax return for the 2018-19 income year.

7.         In a telephone conversation between a tax officer from the Australian Taxation Office and your authorised tax agent, we discussed the correspondence you recently received from the Australian Taxation Office about the lodgement of your income tax return for the 2018-19 income year. We also provided the case number for your private ruling application and indicated a timeframe for when it might be finalised.

8.         In a telephone conversation between a tax officer from the Australian Taxation Office and your authorised tax agent, we requested further information about the Contract Completion Payment you received from your former employer for the 2018-19 income year. We discussed the additional information that was required and agreed that any of the initial responses provided would need to be confirmed by you. We also discussed the relevance of the edited versions that had been supplied with your private ruling application.

9.         In an email sent from your authorised tax agent addressed to a tax officer from the Australian Taxation Office, we were provided with additional information about the Contract Completion Payment you received from your former employer for the 2018-19 income year. In the email, we were advised the following:

     You did not have to reapply for your second fixed-term contract with your former employer as it was renewed automatically.

     You were not offered the new position in the new location on the cessation of your second fixed-term contract with your former employer as this position was not available to you at that time. Although the new position in the new location did have similar responsibilities, it was created a year after the cessation of your second fixed-term contract with your former employer.

     You were provided with a letter about the decision that had been made to not offer you a further employment contract.

     You did not voluntarily terminate your employment contract with your former employer.

10.      In another email sent from your authorised tax agent addressed to a tax officer from the Australian Taxation Office, we were provided with further information about the discussion you had about the decision that had been made to not offer you a further employment contract. In the email, we were advised the following:

     A few people, which included your manager and director, advised you that your employment contract with your former employer would not be renewed as the position would be abolished.

     You were advised that a new position would be created in a new location soon and that that position would be advertised.

     You were advised that you could apply for this position.

     The new position in the new location was created a year after the cessation of your second fixed-term contract with your former employer with a different job description.

     You did not apply for the new position in the new location as it did not fit your current situation.

11.      In a telephone conversation between a tax officer from the Australian Taxation Office and your authorised tax agent, we apologised for the delay in actioning your private ruling application and provided an update on its progress. We also confirmed the questions that would be addressed within our response and indicated a timeframe for when it might be finalised. We also briefly discussed the taxation of unused annual leave payments and unused long service leave payments as well as the options available to you if you were dissatisfied with our response.

12.      Information available on Australian Taxation Office records which confirmed that the Contract Completion Payment you received from your former employer for the 2018-19 income year was paid on a certain date.

Your contentions

13.      In the private ruling application we received, the following was contended:

     There were no breaks in your employment with your former employer from the commencement of your first fixed-term contract to the cessation of your second fixed-term contract with them.

     Your former employer was your sole employer for the relevant period and made superannuation guarantee contributions on your behalf.

     You accrued sick leave, annual leave and long service leave during your employment with your former employer and carried these forward with you from one fixed-term contract to the next.

     You had an expectation that your employment with your former employer would continue as your position was valuable and you were an excellent performer.

     The termination of your employment contract with your former employer was at arm's length.

     There were no arrangements between you and your former employer, or your former employer and another person, to re-employ you after the termination of your employment contract with your former employer.

     You were under 65 years of age at the time your employment contract with your former employer was terminated.

     The relevant legislative provision to use in this case is section 83-175 of the ITAA 1997.

     The relevant taxation ruling to use in this case is Taxation Ruling TR 2009/2 Income Tax: genuine redundancy payments (in particular paragraphs 36 and 37).

     There are several edited versions of private rulings available on the ATO Legal Database which are similar to your current facts and circumstances. The edited versions of these private rulings available on the ATO Legal Database confirm in each case that the termination payments received by the employees were genuine redundancy payments and the express terms of each employment contract should be displaced as there was an ongoing employment relationship between the employees and their former employers.

Relevant legislative provisions

  Income Tax Assessment Act 1997, section 82-130

  Income Tax Assessment Act 1997, section 83-175

Reasons for decision

Summary

14.      The Contract Completion Payment you received from your former employer for the 2018-19 income year is an employment termination payment under section 82-130 of the ITAA 1997.

15.      However, the Contract Completion Payment you received from your former employer for the 2018-19 income year is not a genuine redundancy payment under section 83-175 of the ITAA 1997.

Detailed reasoning

Employment termination payments

16.      Section 82-130 of the ITAA 1997 sets out the requirements that must be satisfied for a payment to be considered an employment termination payment. Subsection 82-130(1) of the ITAA 1997 states the following:

(1)       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.

17.      Subsection 82-130(2) of the ITAA 1997 states that a life benefit termination payment is an employment termination payment to which subparagraph 82-130(1)(a)(i) of the ITAA 1997 applies. Subsection 82-130(4) of the ITAA 1997 confirms that the 12-month rule set out in paragraph 82-130(1)(b) of the ITAA 1997 does not apply to genuine redundancy payments, early retirement scheme payments or payments that have been covered by a determination under subsection 82-130(5) of the ITAA 1997 or subsection 82-130(7) of the ITAA 1997.

18.      Section 82-135 of the ITAA 1997 identifies payments that are not employment termination payments. These include unused annual leave payments, unused long service leave payments and the tax-free part of a genuine redundancy payment or an early retirement scheme payment.

Genuine redundancy payments

19.      Section 83-175 of the ITAA 1997 sets out the requirements and conditions that must be satisfied for a payment to be considered a genuine redundancy payment. This section was recently amended by the Treasury Laws Amendment (2019 Measures No. 2) Act 2019. However, the amendments made to section 83-175 of the ITAA 1997 by the Treasury Laws Amendment (2019 Measures No. 2) Act 2019 only applies to payments received by employees on or after 1 July 2019 effective from 29 October 2019.

20.      Section 83-175 of the ITAA 1997 formerly read:

(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 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);

(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)).

Basic requirements for a payment to be a genuine redundancy payment

21.      Taxation Ruling TR 2009/2 Income tax: genuine redundancy payments (TR 2009/2) states that there are four main requirements that must be satisfied before a payment can be considered a genuine redundancy payment. These requirements are that:

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

     The termination must involve the employee being dismissed from employment.

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

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

22.      TR 2009/2 states that for a payment to be considered a genuine redundancy payment the termination must involve the employee being dismissed from employment. Generally, the loss of a particular position by an employee will not be considered a dismissal unless all employment with the employer is severed. A payment will only be considered a genuine redundancy payment where there is no suitable job available for the employee and as a result he or she must be dismissed.

23.      Dismissal is not synonymous with termination. It is a particular mode of employment termination that requires a decision to be made by the employer to terminate the employee without their consent. Determining whether an employee has freely consented to their termination requires an assessment of all the facts and circumstances of the case. An employee may expressly state their consent or it may be implied through their behaviour or conduct.

24.      The word 'dismissal' was examined by Bleby J in Advertiser Newspapers Pty Ltd v Industrial Relations Commission of South Australia [1999] SASC 300; (1999) 74 SASR 240; (1999) 90 IR 211. In that case, Bleby J adopted the definition of 'dismissal' expressed by the Full Industrial Court of New South Wales in Smith v Director-General of School Education (1993) 31 NSWLR 349 and held that:

It follows that where an employee voluntarily abandons employment or lawfully terminates the contract (for example by giving the requisite notice) or where the contract of employment terminates by effluxion of time or by agreement, there is no dismissal... [emphasis added].

25.      Where an employee is given notice from their employer that they will be terminated at a specified time in the future due to a genuine redundancy, he or she will be dismissed for the purposes of section 83-175 of the ITAA 1997. However, it may benecessary to establish that the dismissal was in fact due to a genuine redundancy where the length of the notice period is significant.

26.      TR 2009/2 provides further guidance on when a termination involves an employee being dismissed from employment at paragraphs 16 to 22 and paragraphs 241 to 258. It also provides further guidance on when a payment is received in consequence of an employee's termination at paragraphs 13 to 15 and paragraphs 235 to 240, when a dismissal is caused by the redundancy of an employee's position at paragraphs 23 to 30 and paragraphs 259 to 276 and when a redundancy is considered genuine at paragraphs 31 to 32 and paragraphs 277 to 280.

Further conditions for a payment to be a genuine redundancy payment

27.      There are five further conditions that must be satisfied before a payment can be considered a genuine redundancy payment. These conditions are:

     The dismissed employee is not older than the specified age limit.

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

     The actual 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 employee and employer are in fact not dealing at arm's length in relation to the dismissal.

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

     The payment is not in lieu of superannuation benefits.

28.      TR 2009/2 states that for a payment to be considered a genuine redundancy payment the termination cannot be at the end of a fixed period of employment.

29.      Generally, where an employee has been employed on a fixed-term contract with an employer they cannot be dismissed at the end of their fixed-term contract. Their employment with that employer would simply terminate because their fixed-term contract stipulated that it would cease at that time.

30.      In limited circumstances, a 'rolling' fixed-term contract may establish an ongoing employment relationship between an employee and their employer. However, evidence would need to be provided to demonstrate an ongoing employment relationship between the employee and the employer and to displace the express terms of the fixed-term contract as this is the exception rather than the rule. The express terms of a fixed-term contract would normally govern the relationship unless implied terms to the contrary can be established.

31.      TR 2009/2 provides further guidance on when an employee's termination is at the end of a fixed period of employment at paragraphs 36 to 39 and paragraphs 284 to 290. It also provides guidance on when:

     An employee is not older than the specified age limit at paragraphs 34 to 35 and paragraphs 282 to 283.

     The actual amount paid is not greater than what could reasonably be expected to have been paid had the parties been dealing at arm's length in relation to the dismissal at paragraphs 40 to 49 and paragraphs 291 to 305.

     There is no arrangement entered into between the employee and the employer or an employer and another entity to employ the dismissed employee after termination at paragraphs 50 to 52 and paragraphs 306 to 309.

     A payment is not in lieu of superannuation benefits at paragraphs 53 to 54 and paragraphs 310 to 312.

Application to your circumstances

32.      You were employed on an initial fixed-term contract with your former employer. You were then subsequently employed on a second fixed-term contract with your former employer.

33.      You received a Contract Completion Payment from your former employer for the 2018-19 income year which was paid on a certain date as you were unsuccessful in seeking a new employment contract with them.

34.      The Contract Completion Payment you received from your former employer for the 2018-19 income year was received by you in consequence of the termination of your employment. The Contract Completion Payment was received by you within 12 months of the termination of your employment from your former employer and was not a payment mentioned within section 82-135 of the ITAA 1997.

35.      Therefore, the Contract Completion Payment you received from your former employer for the 2018-19 income year satisfies all of the requirements contained within section 82-130 of the ITAA 1997 to be considered an employment termination payment.

36.      However, the Contract Completion Payment you received from your former employer for the 2018-19 income year does not satisfy all of the requirements and conditions contained within section 83-175 of the ITAA 1997 to be considered a genuine redundancy payment.

37.      Section 83-175 of the ITAA 1997 sets out the requirements and conditions that must be satisfied for a payment to be considered a genuine redundancy payment. These requirements and conditions include that the termination must involve an employee being dismissed from employment and that the termination is not at the end of a fixed period of employment.

38.      You were not dismissed from your employment with your former employer as the decision to terminate your employment was not made without your consent. You demonstrated your consent when you signed your second fixed-term contract with your former employer which stipulated your set period of employment. There can be no dismissal where an employment contract merely terminates by effluxion of time or by agreement.

39.      The termination of your employment with your former employer was also at the end of a fixed period of employment. The termination of your employment with your former employer was confirmed with you when you received a letter from them which advised that your period of employment with them would cease on a certain date. This termination of your employment was consistent with the express terms and conditions contained within your second fixed-term contract with your former employer which stipulated your set period of employment.

40.      Whilst it is acknowledged that you may have had an expectation that your employment with your former employer would continue as you were an excellent performer and your position was valuable, this expectation was contrary to the express terms and conditions you agreed to when you signed your second fixed-term contract with your former employer. The express terms and conditions of your second fixed-term contract with your former employer specifically stated that it constituted your whole offer of employment and did not mean that any subsequent offers of employment would be made to you or any other employment contract would be entered into between yourself and your former employer.

41.      The express terms and conditions of your second fixed-term contract with your former employer (which included the clauses contained within the relevant industrial agreement) also stipulated when your entitlements for annual leave, sick leave and long service leave would be credited or transferred between employment contracts. Whilst you contended that the recognition of your previously accrued annual leave, sick leave and long service leave signified the existence of an implied ongoing employment relationship, this was expressly provided for and governed by the terms and conditions contained within your second fixed-term contract with your former employer and the clauses contained within the relevant industrial agreement.

42.      It is accepted that there were no breaks in your employment with your former employer from the commencement of your initial fixed-term contract to the cessation of your second fixed-term contract and that your former employer was your sole employer during that period. However, the payment of superannuation guarantee contributions on your behalf by your former employer would have occurred irrespective of whether you had an ongoing employment relationship with them or had been employed on a fixed-term contract as you were an employee of your former employer.

43.      Whilst it is recognised that section 83-175 of the ITAA 1997 does set out other requirements and conditions that must be satisfied for a payment to be considered a genuine redundancy payment they are not considered to be contentious in this case.

44.      As the Contract Completion Payment you received from your former employer for the 2018-19 income year does not meet some of the requirements and conditions set out in section 83-175 of the ITAA 1997 it cannot be considered to be a genuine redundancy payment.