Edited version of private advice

Authorisation Number: 1051806881339

Date of advice: 26 February 2021

Ruling

Subject: Genuine redundancy

Question

Does the Fixed Term Contract between XXXX (the taxpayer) and XXXXX Pty Ltd satisfy the condition under paragraph 83-175(2)(c) of the Income Tax Assessment Act 1997 (ITAA 1997) in order for the payment on termination of the taxpayer's employment to meet the requirements of being a genuine redundancy payment?

Answer

No

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

Employer 1 was a holding company, owned ultimately by Employer 3, a foreign company.

Employer 1 owned Employer 4, which in turn, owns Employer 2 and other entities.

Employer 2 is an operating entity with employees.

In 20XX, Employer 3 determined that it wanted to divest its operating business in Australia.

This sale concluded late 20XX by Employer 1 selling Employer 4 (and all entities owned by that company on that date) to an unrelated third-party company.

Prior to this sale and as a result of this sale, many employees were made redundant as there was no need for these roles within any potential buyers' organisation.

Whilst many employees were made redundant, some employees were transferred to Employer 1, which became an operating entity with these "transferred" employees as of late 20XX. The taxpayer would have been amongst these employees who transferred to Employer 1, had the taxpayer not been made redundant. The taxpayer's transfer would have been on a transition/fixed term contract basis only, as there is no need for the role going forward and at the end of the transition role, the taxpayer would have been made redundant.

The taxpayer was employed by Employer 2. Some tasks were performed for Employer 1.

As a result of the sale of Employer 4 (and all entities owned by that company, including Employer 2), the taxpayer was made redundant and the taxpayer's employment was terminated in late 20XX.

A deed dated late 20XX between the taxpayer and Employer 2 confirmed the ending of the taxpayer's employment in late 20XX and setting out the settlement matters.

As a result of the taxpayer's expertise in numerous areas, the taxpayer was offered a Fixed Term Transition role in Employer 1.

The Fixed Term Transition role was set to commence 20XX being a fixed five-month period. Subject to the Commissioner's decision, if the transition role is accepted, the delayed commencement date would also mean a later end date, beyond 20XX. However, the contract period would remain a fixed five-month period.

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 83-170

Income Tax Assessment Act 1997 Section 83-175

Income Tax Assessment Act 1997 Paragraph 83-175(2)(c)

Income Tax Assessment Act 1997 Subsection 995-1(1)

Reasons for Decision

Summary

At the time of the taxpayer's dismissal there was an arrangement between Employer 2 and Employer 1 for Employer 1 to reemploy the taxpayer after the dismissal from Employer 2.

The redundancy payment is not a genuine redundancy payment in accordance with section 83-175 of the ITAA 1997.

The payment is an employment termination payment and taxed accordingly

Detailed reasoning

Meaning of genuine redundancy

A payment made to an employee is a genuine redundancy payment (GRP) if it satisfies all the conditions set out in section 83-175 of the Income Tax Assessment Act 1997 (ITAA 1997). This section states

(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 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 employees 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 arms length the payment does not exceed the amount that could reasonably be expected to be made if the dismissal were at arms 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 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)).

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).

No stipulated arrangement to employ

In order to satisfy paragraph 83-175 (2) of ITAA 1997, at the time of dismissal, there must be no arrangement between the employee and the employer, or between the employer and another person, to employ the employee after the dismissal.

An arrangement to employ an employee after his or her termination may prevent a 'dismissal' giving rise to a genuine redundancy.

Paragraph 306 of TR 2009/2 provides that an 'arrangement' is defined widely to mean:

... any arrangement, agreement, understanding, promise or undertaking, whether express or implied, and whether or not enforceable (or intended to be enforceable) by legal proceedings.

Based on the information provided, it is not accepted that at the time of the taxpayer's dismissal in late 20XX, there was not an arrangement between the taxpayer and Employer 2 to re-employ the taxpayer after the dismissal. This is because:

•         The taxpayer has a letter from Employer 2 signed late 20XX advising that the position will be made redundant in late 20XX.

•         The redundancy deed of settlement was signed by the taxpayer and on behalf of Employer 2 in late 20XX.

•         The offer for a Fixed Term Contract with Employer 1 was made in late 20XX to the taxpayer. Whilst the taxpayer has not signed the contract, the taxpayer has commenced to offer their services on a voluntary basis and is able to request payment for these services at a future date.

•         Given the timing of the dismissal from Employer 2 and commencement of the Fixed Term Contract with Employer 1 it is likely at the time of the dismissal there were negotiations in progress to offer the taxpayer employment with Employer 1.

It is also necessary to consider if, at the time of the taxpayer's dismissal in late 20XX, there was an arrangement between Employer 2 and Employer 1 that offered the Fixed Term Contract.

The AAT briefly considered an independently sought arrangement, aided by the first employer, in Re Valentino Stanuovo v Commissioner of Taxation [2002] AATA 701. In this case the applicant had ceased employment 3 January 1998; however, due to unsuitable work the taxpayer put their name down with their previous employer as a relief cleaner where possible. Temporary relief was subsequently taken. Although not considered necessary, the Tribunal considered whether this constituted an arrangement for the purpose of 27F(1)(d) of ITAA36 (since repealed and replaced with s83-175 ITAA97) [at paras 35-7]. The wording of 27F(1)(d) is fundamentally similar to the wording of 83-175(2)(c) and states that:

"there was, at the time of termination, no agreement between the taxpayer and the employer or the employer and another person, to employ the taxpayer after the termination time".

After consideration the Tribunal concluded, at [37], that:

"The word "agreement" is defined in subsection 27A(1) to mean any agreement, arrangement or understanding whether formal or informal, whether express or implied and whether or not enforceable, or intended to be enforceable, by legal proceedings. Notwithstanding the amplitude of the definition, it should be observed that the test relates to an agreement to employ the taxpayer. Can it be said that a policy whereby the employer will attempt to find a position for the former employee comes within the understanding of being an agreement to employ? Having regard to the circumstances existing in December 1997, the Tribunal thinks not. Something more was required."

Whilst the taxpayer has not formally signed and entered into the Fixed Term Agreement, the taxpayer does have the right to request payment for their services since late 20XX, as if the taxpayer had signed the fixed term contract with Employer 1. As per the above, we therefore consider the Fixed Term Contract to have commenced in late 20XX.

Given the taxpayer has advised in the present circumstances, Employer 2 and Employer 1 are part of the same group of companies. The link between the company that made the taxpayer redundant and subsequently offered the fixed term contract are one in the same. The following supports this:

•         Employer 1 owned Employer 4, which in turn, owns Employer 2 and other entities.

•         Employer 4 is a holding company. Employer 2 is an operating entity with employees.

•         In addition to the taxpayer's role at Employer 2, the taxpayer also assisted in some specialist roles that were needed. Some of these included consolidated financial statements for Employer 1. This further supports our contention that Employer 2 and Employer 1 are intertwined and related, resulting in the dismissal from Employer 2 and the subsequent Employer 1 Fixed Term Contract being linked.

As such, it was not like in the case in Valentino Stanuovo, something more would be required for an arrangement to be realised. The Fixed Term Contract for all intent has commenced. Furthermore, the taxpayer did not act independently of the company that made him redundant, Employer 2, in seeking out employment opportunities through the group of companies. The paperwork signed on behalf of Employer 2 to terminate the taxpayer and also on behalf of Employer 1 with respect to the offer of the Fixed Term Contract are by the same HR person, suggesting the companies are intertwined in their leadership and management, as does the fact that the taxpayer performed tasks for Employer 2 and Employer 1 prior to termination of the taxpayer's employment with Employer 2.

Hence, it is not accepted that at the time of the taxpayer's dismissal in late 20XX, there was not an arrangement between the company that made the taxpayer redundant (Employer 2) and the entity offering the Fixed Term Contract (Employer 1) to re-employ the taxpayer after the dismissal given:

•         There is evidence of an arrangement between the company that made the taxpayer redundant and the company offering the Fixed term contact to employ the taxpayer after the dismissal; and

•         At the time of dismissal from Employer 2, the arrangement for the Fixed Term Contract is between the taxpayer and a related company Employer 1; and

•         This arrangement was not established independently of Employer 2 and Employer 1. The entities are part of the same group of companies, controlled by the same leadership team and part of the same group of related companies, ultimately owned by Employer 3.

Accordingly, it is considered that at the time of the taxpayer's dismissal there was an arrangement between Employer 2 and Employer 1, to offer the taxpayer the Fixed Term Contract, after the dismissal.

All conditions set out in section 83-175 of the ITAA 1997 must be met for a payment to be a genuine redundancy payment. As the taxpayer has not met one of the conditions under section 83-175 of the ITAA 1997, it is not necessary to discuss whether the taxpayer meets the other conditions under section 83-175 of the ITAA 1997.

Therefore, the payment the taxpayer received upon termination from Employer 2 will not be a genuine redundancy payment under section 83-175 of the ITAA.