Long v Commissioner of Taxation
Document type: Decision Impact Statement
Venue: Administrative Appeals Tribunal (VT2004/237)
Judgment date: 30 April 2007
Date published: 16 February 2011
Decision outcome: Adverse

Summary of decision:
Outlines the Tax Office's response to this case which concerned the question of whether an eligible termination payment (ETP) is a bona fide redundancy payment where the person terminated is both employee and director of the employer, and also whether the amount paid was reasonable.

Overview of facts:
The Applicant, her husband and their sons were directors of a company, VBS Pty Ltd (VBS), which conducted the family business, involving the installation and maintenance of television satellite dishes as a contractor to Austar Entertainment Pty Ltd (Austar). | The Applicant and her husband were the active and joint controlling minds of VBS. Each member of the Long family was employed in the business by VBS as common law employees. The Applicant was employed full time, broadly fulfilling the duties of office manager. VBS employed 5 other unrelated employees as at December 2001. | In September 2001, Austar advised VBS that it decided to cease the contractual relationship. On 12 December 2001, VBS, through the Applicant and her husband in their roles as directors, determined that it would close the business and terminate the jobs of all employees, including their own. It was an agreed fact that all employees were terminated by reason of redundancy. | The Applicant, her husband and one of their sons each received an eligible termination payment of $18,535 from VBS. | The son and all of the 5 unrelated employees were also paid their accrued annual leave entitlements. The Applicant, her husband, their son and 3 of the 5 unrelated employees were paid through to 31 December 2001, in line with an undertaking the Applicant and her husband made to all employees just prior to the business closing. | Issues decided by the court or tribunal | Was the Applicant's receipt of an eligible termination payment (ETP) of $18,535 a bona fide redundancy payment (BFRP) within the meaning of s.27F of the Income Tax Assessment Act 1936 (the Act)? The Tribunal decided that the full amount was a BFRP as: 1. The Applicant was dismissed from her employment by reason of bona fide redundancy (paragraph 27F(1)(a))[BK 1]. 2. The amount the Applicant received was not in excess of the amount of an ETP that could reasonably be expected in relation to the Applicant had she and her employer been dealing with each other at arm's length in relation to the termination (paragraph 27F(1)(c)). 3. The amount that could reasonably be expected to be paid to the Applicant had she voluntarily retired from employment at the time of her termination was zero (closing words of subsection 27F(1)). | 1. The Applicant was dismissed from her employment by reason of bona fide redundancy (paragraph 27F(1)(a))[BK 1]. 2. The amount the Applicant received was not in excess of the amount of an ETP that could reasonably be expected in relation to the Applicant had she and her employer been dealing with each other at arm's length in relation to the termination (paragraph 27F(1)(c)). 3. The amount that could reasonably be expected to be paid to the Applicant had she voluntarily retired from employment at the time of her termination was zero (closing words of subsection 27F(1)).

Issues decided:
Was the Applicant's receipt of an eligible termination payment (ETP) of $18,535 a bona fide redundancy payment (BFRP) within the meaning of s.27F of the Income Tax Assessment Act 1936 (the Act)? The Tribunal decided that the full amount was a BFRP as: 1. The Applicant was dismissed from her employment by reason of bona fide redundancy (paragraph 27F(1)(a))[BK 1]. 2. The amount the Applicant received was not in excess of the amount of an ETP that could reasonably be expected in relation to the Applicant had she and her employer been dealing with each other at arm's length in relation to the termination (paragraph 27F(1)(c)). 3. The amount that could reasonably be expected to be paid to the Applicant had she voluntarily retired from employment at the time of her termination was zero (closing words of subsection 27F(1)). 1. The Applicant was dismissed from her employment by reason of bona fide redundancy (paragraph 27F(1)(a))[BK 1]. 2. The amount the Applicant received was not in excess of the amount of an ETP that could reasonably be expected in relation to the Applicant had she and her employer been dealing with each other at arm's length in relation to the termination (paragraph 27F(1)(c)). 3. The amount that could reasonably be expected to be paid to the Applicant had she voluntarily retired from employment at the time of her termination was zero (closing words of subsection 27F(1)).

ATO view of decision:
The Commissioner considers that the outcome in this case is one limited to the facts found by the Tribunal. In his decision, Senior Member Pascoe stated that decisions in cases of this nature depended on their particular facts. If a matter demonstrates essentially the same factual scenario as found by Senior Member Pascoe, the Commissioner will apply the outcome in this case. In matters that are factually inconsistent with this decision, the Commissioner will apply the law as reflected in the general principles set out in TR 94/12. | Nevertheless, the Commissioner accepts that the mere fact that an employee is involved in a decision to terminate their own employment may not automatically lead to a conclusion that the employee was not 'dismissed' by reason of having 'consented' to the termination decision in their capacity as an employee. | The facts in each case will reveal: • whether a person who is both an employee and a decision maker of the employer (a dual capacity employee) consented to the termination decision such that it amounts to a 'dismissal'; • whether the amount paid to the dual capacity employee could reasonably be expected had the parties been dealing at arm's length; • whether there was an agreement to employ the dual capacity employee after his or her termination; and • the amount that could reasonably be expected on the dual capacity employee's voluntary retirement. | • whether a person who is both an employee and a decision maker of the employer (a dual capacity employee) consented to the termination decision such that it amounts to a 'dismissal'; • whether the amount paid to the dual capacity employee could reasonably be expected had the parties been dealing at arm's length; • whether there was an agreement to employ the dual capacity employee after his or her termination; and • the amount that could reasonably be expected on the dual capacity employee's voluntary retirement.

Administrative treatment:
Implications on current Public Rulings & Determinations | Taxation Ruling TR2009/2, which issued on 22 April 2009, considers the issues associated with cases of this type, as well as a range of other issues relating to section 83-175 of Income Tax Assessment Act 1997, which deals with the tax treatment of genuine redundancy payments from 1 July 2007. TR 2009/2 replaced TR 94/12, the previous ATO ruling dealing with the treatment of BFRPs under section 27F of the Income Tax Assessment Act 1936. | The Commissioner also considers that the facts underlying ATO ID 2001/529 reveal a termination decision made by a dual capacity employee, precipitated by a voluntary sale of a business, to which the employee consented. Therefore, the Commissioner's view is that this ATO ID reflects a correct application of the relevant principles to the facts there stated.

Legislative references: Income Tax Assessment Act 1936 27F 27A(1)
Case references: Smith v Director General of School Education (1993) 31 NSWLR 349 Quality Bakers of Australia Ltd v Goulding (1995) 60 IR 327
Subject references: Bona fide redundancy payment applicant both employer's director and employee whether 'dismissal' whether arms' length amount expected amount if voluntary retirement