Edited version of private advice

Authorisation Number: 1051952829965

Date of advice: 11 March 2022

Ruling

Subject: Genuine redundancy payment for dual capacity employee

Question

Is the payment made to the Taxpayer a genuine redundancy payment under section 83-175 of Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No

This ruling applies for the following period:

1 July 2020 to 30 June 2022

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

•                The Taxpayer and three other people are directors and partners of the Company providing investment and retirement planning services. All four directors hold almost equal shares in the Company.

•                The Taxpayer has held positions as both a director and financial planner and has drawn a salary from the business during this period.

•                The Taxpayer does not have an employment contract with the Company containing the terms and conditions of his employment, nor is he covered by an award or workplace agreement.

•                It has been stated that a Partner meeting was held to discuss the business affairs and future planning around staffing and in particular the Taxpayer's position as a Financial Planner within the Company. It was decided by the three Directors of the Company at the time that the Taxpayer would be made redundant at a later date. This decision was due to the business at that stage being ideally suited as a three Partner/Planner business, not a soon to be four Partner/Planner business with the introduction of another Financial Planner soon to start with the Company.

•                The Company introduced a new Partner/Planner within the business prior to the termination of the Taxpayer's employment.

•                Information provided by the Taxpayer and ATO records indicate that the Company's profits have not decreased in the relevant period.

•                It has been stated that the redundancy date was to cater for the Taxpayer's timely exit from the business as a mark of respect, and to allow his clients to be successfully transferred to the ongoing Financial Planners of the business.

•                The Taxpayer's client book was successfully transferred to the existing Partners/Planners of the Company.

•                No formal notice of termination was given to the Taxpayer as only a verbal discussion between the Directors and the Taxpayer had taken place.

•                The Taxpayer is currently in the process of resigning as a Director of the Company.

•                The Taxpayer has not and will not receive an offer to be reemployed within the business and has a restraint of trade - meaning that he does not have the ability to take with him or contact any of the existing clients if he was to accept employment at another firm.

•                A payment was made to the Taxpayer by the Company and was based on the legislated tax-free treatment of genuine redundancy payments.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 83-175

Other relevant documents

Taxation Ruling TR 2009/2: Income tax: genuine redundancy payments

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''

Reasons for Decision

These reasons for decision accompany the Notice of private ruling for the Taxpayer.

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

Detailed reasoning

Genuine redundancy

A genuine redundancy payment is one 'received by an employee who is dismissed from employment because the employee's position is genuinely redundant'. That is, the employer has made a decision that the job no longer exists, and the employee's employment is to be terminated.

A payment made to an employee is a genuine redundancy payment if it satisfies all of the criteria set out in section 83-175 of the ITAA 1997.

In accordance with subsection 83-175(1) of the ITAA 1997, 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.

Paragraph 11 of Taxation Ruling TR 2009/2: Income tax: genuine redundancy payments (TR 2009/2), outlines the requirements to be satisfied under subsection 83-175(1) of the ITAA 1997. There are four necessary components within this requirement:

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

•                That termination must involve an employee being dismissed from employment.

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

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

Payment 'in consequence of' 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. Whilst the courts have divergent views on the meaning of this 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 contains references to repealed provisions, some of which may have been rewritten, the ruling still has effect 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:

5.... 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.

In this instance, the Taxpayer's employment was terminated because the Company directors had made the decision that the number of Financial Planners in the business should be no more than three. As a result of the termination, the Company paid the Taxpayer an amount that is equal to the tax-free treatment of genuine redundancy payments. If not for the termination, this payment would not have been made to the Taxpayer. Therefore, the payment will be received by the Taxpayer in consequence of the termination of his employment.

Dismissal and redundancy

The term 'dismissal' is not defined in the ITAA 1997 therefore, consistent with basic principles of statutory interpretation, its meaning must be determined according to the ordinary meaning of the words, having regard to the context in which they appear.

Accordingly, the Commissioner's view, as stated at paragraph 18 in TR 2009/2, is that 'dismissal' means a decision to terminate employment at the employer's initiative without the 'consent' of the employee. This stands in contrast to employment that is terminated at the initiative of the employee, for example in the case of resignation.

The Commissioner's view is that a genuine redundancy payment can only arise where there is no suitable job available for the employee with the employer, meaning that he or she must therefore be dismissed. TR 2009/2 states:

25. An employee's position is redundant when an employer determines that it is superfluous to the employer's needs and the employer does not want the position to be occupied by anyone. Accordingly, it is fundamentally the employer's decision that a position is redundant. On occasion the decision may be unavoidable due to the circumstances surrounding the employer's operations.

Dual capacity employee

The Taxpayer is a dual capacity employee. Because a dual capacity employee can terminate their own employment or actively participate in or influence an act or decision to terminate their own employment, careful consideration of all the facts and circumstances is required to determine whether a dual capacity employee has not consented to their termination (paragraph 82, TR 2009/2).

The question of consent for a dual capacity employee can be addressed by considering the following two matters (paragraph 84, TR 2009/2):

•                First, did the person agree to or approve the employer's act or decision to terminate their own employment? If not, the termination is without the person's consent and is therefore a dismissal.

•                Secondly, if the person did agree to or approve the employer's act or decision to terminate their own employment, were the circumstances surrounding the act or decision such that the person did not have any real or practical choice in terminating their own employment. If so, the termination is without the person's consent and is therefore a dismissal.

In this case there was a directors' meeting, including the Taxpayer, that resulted in the decision to terminate the Taxpayer's employment. There is insufficient evidence to conclude that the Taxpayer did not consent to his dismissal. Therefore, it needs to be established that the Taxpayer did not give his consent freely as there were external circumstances influencing the decision and he did not have any real or practical choice in terminating his own employment.

External circumstances include a termination decision that is dictated by legal or economic pressure originating from outside the business. An industry specific or a general economic downturn is also more likely to give rise to these types of circumstances. This recognises a form of constructive dismissal for dual capacity employees where they participate in and agree to a decision to terminate their own employment.

Common examples of no real or practical choice include:

•                where a company loses the contract that is the only source of its business

•                business receives a generous offer for its sale

•                downsizing a business

•                economic compulsion to wind up the business

•                loss of key employees

In this case it has been stated that the decision to terminate the Taxpayer was due to the business not being able to support four Partner/Financial Planners. There were three Partner/Planners, including the Taxpayer, when the decision was made to terminate the Taxpayer and to recruit a new Partner/Planner.

It is arguable that the decision to recruit the new Partner/Planner was for the primary purpose of replacing the Taxpayer when he was to leave employment later in the year.

The financial position of the Company does not indicate that there were economic pressures to terminate the Taxpayer's employment, especially when considering a new Partner/Planner was recruited to help absorb the Taxpayer's client book when he was to leave the business.

Based on the available facts the termination of the Taxpayer's employment does not meet the definition of a dismissal for a dual capacity employee.

The redundancy payment must be made genuinely because of a redundancy

Contrived cases of redundancy will not meet the conditions in section 83-175 of the ITAA 1997. The fact that an employer and employee have an understanding that a payment on termination is caused by redundancy, or that the employer treats the payment as a redundancy payment for tax purposes, does not of itself establish genuine redundancy (paragraph 32, TR 2009/2).

Without further evidence to substantiate otherwise, it appears that the sequence of events leading up to the termination payment was related to the voluntary resignation of the Taxpayer, and not that of a genuine redundancy.

Arm's length amount

Paragraph 83-175(2)(b) of the ITAA 1997 states that if a dismissal was not at arm's length, the payment does not exceed the amount that could be reasonably expected to be made if the dismissal were at arm's length.

In this case the Taxpayer has received a redundancy payment which mirrors the tax-free treatment of genuine redundancy payments under section 83-170 of the ITAA 1997. The Taxpayer was not covered by any employment contract, award or enterprise agreement.

The National Employment Standards (NES) establish minimum redundancy entitlements for those employees under the national workplace relations system. This includes those employees not covered by an employment contract, award or enterprise agreement.

The NES provides employees with 10 or more years continuous service with 12 weeks redundancy pay.

The maximum amount that could be paid to the Taxpayer is 12 weeks redundancy. The payment made by the Company to the Taxpayer exceeds the maximum amount. Therefore, the redundancy payment made to the Taxpayer would not meet the condition of an arm's length payment on dismissal.

Conclusion

As all four components under subsection 83-175(1) of ITAA 1997 are not satisfied, the payment made to the Taxpayer is not a genuine redundancy payment.