Edited version of private advice

Authorisation Number: 1052320700650

Date of advice: 18 November 2024

Ruling

Subject: ETP - genuine redundancy payments

Question 1

Is the payment of $XXX,XXX.XX, also referred as X Bonus Program payment (the Deed Payment), made to you under the Deed of Release an employment termination payment (ETP) as defined in section 82-130 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

Question 2

Is the Deed Payment of $XXX,XXX.XX, made to you under the Deed of Release 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 2024

Relevant facts and circumstances

You were employed by your employer.

You received an email (X Bonus Program Proposal Email) from your employer advising you that due to Y transaction, you will be receiving the Bonus Payment.

The Bonus Payment was subject to conditions including:

•         completion of the Y transaction

•         you remain employed until the completion of the Y transaction.

Before the satisfaction of the above conditions, your employment was terminated.

You and your employer signed a Deed of Release.

Under the Deed of Release, the payments included:

...

the Deed Payment of $XXX,XXX.XX, also referred as X Bonus Program payment, subject to the condition of completion of the Y transaction within X months from the termination date.

In signing the Deed of Release, you released the employer from any future claims against them and acknowledged there was no admission of liability on the part of the employer.

You received the Deed Payment within several weeks of signing the Deed of Release.

Income Statement from your employer reported the Deed Payment of $XXX as Bonuses and Commissions.

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

We followed these ATO view documents

Taxation Ruling 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)

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

Reasons for decision

Question 1

Is the payment of $XXX,XXX.XX, also referred as X Bonus Program payment (the Deed Payment), made to you under the Deed of Release an employment termination payment (ETP) as defined in section 82-130 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Summary

The Deed Payment you received under the Deed of Release is not an ETP.

Detailed reasoning

Employment Termination Payment

A payment is an ETP if it satisfies all the requirements in section 82-130 of ITAA 1997 and is not specifically excluded under section 82-135 of the ITAA 1997.

Subsection 82-130(1) of the ITAA 1997 states:

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

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

In order for the Deed Payment made to you to constitute employment termination payment, all the conditions in section 82-130 of the ITAA 1997 will need to be satisfied.

Payment made 'in consequence of' the termination of employment

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 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).

Paragraphs 5 and 6 of TR 2003/13 state that:

5.... 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.

At paragraph 30 of TR 2003/13 the Commissioner considers payments such as golden handshakes:

A severance payment that is made in respect of a taxpayer by a former employer after the termination of the taxpayer's employment, such as a golden handshake, is a payment that follows as an effect or result of the termination. Accordingly, the payment is made in consequence of the termination of employment. In such circumstances there is a causal connection between the payment and the termination of employment in that the payment would not have been made to the taxpayer but for the termination of the employment.

In relation to the Deed Payment under subclause X.X(x) of the Deed of Release, we noted that in the X Bonus Program Proposal Email dated XX XX 20XX, you were proposed to receive the Bonus Payment in the amount of $XXX,XXX.XX subject to two main conditions:

1. the completion of the Y transaction, and

2. you remain employed until completion of the Y transaction.

We believe that the first condition above for the Bonus Payment was in fact satisfied as you have satisfied a similar condition in the subclause X.X(x) of the Deed of Release 'Y transaction completed within X months from termination', to qualify for the Deed Payment under subclause X.X(x). We therefore consider that 'but for' the termination, the Bonus Payment under the X Bonus Program Proposal Email would have been made, as you had an entitlement to the payment had you remained employed, which would satisfy the second condition above.

We are of the opinion that your entitlement for the Deed Payment was not 'dependant on' the termination, where if the employment continued, you could have received the Bonus Payment under the Bonus Program Proposal Email, which is a payment with a character and a value similar or same to the Deed Payment under subclause X.X(x) of the Deed of Release.

In other words, where the entitlement to the payment was not dependant on termination, we do not consider it received 'in consequence of' termination of employment.

As such, along with the reason that the Income Statement issued by your Employer supports that the Deed Payment is 'bonus or commission', we believe that it was made in respect of the Bonus Program rather than in respect of the termination.

It is not considered that the Deed Payment was received 'in consequence of' the termination of your employment with the Employer as in paragraph 82-130(1)(a) of the ITAA 1997.

Conclusion regarding the definition of ETP

To determine if a payment is an ETP, all the conditions in subsection 82-130(1) of the ITAA 1997 must be satisfied. As analysed above, the first condition under paragraph 82-130(1)(a) was not satisfied, the Deed Payment is not considered an ETP.

Question 2

Is the Deed Payment $XXX,XXX.XX a genuine redundancy payment under section 83-175 of the ITAA 1997?

Summary

The Deed Payment $XXX,XXX.XX is not a genuine redundancy payment under section 83-175 of the ITAA 1997.

Detailed reasoning

Paragraph 82-135(e) of the ITAA 1997 excludes from ETP the part of a genuine redundancy payment worked out under section 83-170 of the ITAA 1997.

The matter of what is a genuine redundancy payment is defined by section 83-175 of the ITAA 1997. The section identifies:

•         the conditions that must be satisfied for at least part of a payment to be treated as a genuine redundancy payment;

•         how to work out what amount of the payment is a genuine redundancy payment; and

•         what payments are excluded from being a genuine redundancy payment?

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

As can be seen above, subsection 83-175(1) contains two elements to be satisfied for a payment to be considered a genuine redundancy payment:

•         The payment is received by an employee who is dismissed because their position is genuinely redundant; and

•         The payment exceeds the amount that could reasonably be expected to be received by the employee if their employment was terminated voluntarily at that time.

For a genuine redundancy payment to exist, both elements need to be satisfied.

The Commissioner has issued Taxation Ruling TR 2009/2 Income tax: genuine redundancy payments (TR 2009/2), which outlines the requirements to be satisfied before any payment made to a person whose employment is terminated qualifies for treatment as a genuine redundancy under section 83-175 of the ITAA 1997.

Paragraph 10 and paragraph 11 of the TR 2009/2 state:

10. Under subsection 83-175(1), a genuine redundancy payment is one 'received by an employee who is dismissed from employment because the employee's position is genuinely redundant'.

11. There are four necessary components within this requirement:

•         The payment 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 made 'in consequence of' the termination of employment

As analysed in Question 1 of this Ruling, it is not considered that the Deed payment was made 'in consequence of' the termination of your employment. The first component under paragraph 11 of the TR 2009/2 is therefore not satisfied.

Conclusion regarding genuine redundancy payment

Given there is at least one of the four necessary components under paragraph 11 of the TR 2009/2 not being satisfied, it means at least one of the elements under subsection 83-175(1) is not satisfied. As a result, the Deed payment is not considered a genuine redundancy payment under section 83-175(1) ITAA 1997.