Private ruling: Genuine redundancy payment
Published: September 2014
Ruling period: Year ending 30 June 2015
Date scheme commenced: 1 July 2014

Ruling: Q1: Will the taxpayer accepting a new position with an employer after the termination of employment cause a termination payment to lose any tax-free part of a genuine redundancy payment? | A1: No.

Relevant facts and circumstances: Over 20 years ago, your client commenced employment with an employer (the employer). As part of your client's role your client also conducted specific training sessions. The employer has made a decision to offer voluntary redundancies to a number of employees in specific roles. Your client has accepted the offer of a voluntary redundancy from the employer and your client's employment will be terminated in the second quarter of the 2014-15 income year. The employer advised your client that there may be a shortage of training instructors and raised the possibility that there may be future training contracts to deliver these specific sessions. The employer has stressed that these roles may or may not eventuate. However, if the roles do eventuate, they would be on a short term contract basis and those qualified would need to apply. The employer has advised that your client will receive a termination payment which will include unused annual and long service leave entitlements and redundancy pay. Following the termination of employment, your client intends to travel and may consider applying for future consulting roles. Your client has reached 60 years of age.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 83-175. | Income Tax Assessment Act 1997 Subsection 83-175(1) | Income Tax Assessment Act 1997 Subsection 83-175(2). | Income Tax Assessment Act 1997 Paragraph 83-175(2)(a). | Income Tax Assessment Act 1997 Subparagraph 83-175(2)(a)(i). | Income Tax Assessment Act 1997 Subparagraph 83-175(2)(a)(ii). | Income Tax Assessment Act 1997 Paragraph 83-175(2)(b). | Income Tax Assessment Act 1997 Paragraph 83-175(2)(c). | Income Tax Assessment Act 1997 Subsection 83-175(3). Summary | At the time of dismissal there will be no stipulated arrangement to employ your client after your client's employment is terminated due to redundancy. | Therefore, the tax-free part of the genuine redundancy payment your client is to receive on the termination of employment will not be jeopardised. | Detailed reasoning | Genuine redundancy payment | 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). In addition to basic requirement for a GRP specified in subsection 83-175(1) of the ITAA 1997, subsection 83-175(2) provides that all of the conditions specified in this subsection must be satisfied for a payment to qualify as a GRP. | A GRP is defined in subsection 83-175(1) of the ITAA 1997 as: | …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. | Subsection 83-175(2) of the ITAA 1997 states that for a payment to qualify as a GRP all of the following conditions must be met: | • The payment must be made before the person turns 65 or an earlier mandatory age of retirement [paragraph 83-175(2)(a)]; | • The payment must be made before the end of a fixed period of employment [subparagraph 83-175(2)(a)(ii)]; | • The payment must not exceed an arm's length amount in the event that the employer and employee are not dealing at arm's length [paragraph 83-175(2)(b)]; | • At the time of dismissal, there must be no stipulated arrangement to employ the person after the termination [paragraph 83-175(2)(c)]; and | • The payment must not be in lieu of superannuation benefits [subsection 83-175(3)]. | The Commissioner has issued Taxation Ruling TR 2009/2, titled ' Income tax: genuine redundancy payments' . It provides useful guidance on the factors to be considered in the interpretation of section 83-175 of the ITAA 1997. | In this case, your client's employment is being terminated due to redundancy. Your client may be interested in applying for a new position that may become available in the future with your client's former employer. You are requesting advice as to whether the tax free limits of your client's GRP would be jeopardised if your client later commenced employment with your client's former employer in a new role. | Paragraphs 50 to 52 of TR 2009/2 refer to 'no stipulated arrangement to employ' and states: | 50. Under paragraph 83-175(2)(c), an arrangement to employ an employee after his or her termination prevents a dismissal giving rise to a genuine redundancy payment if that arrangement is entered into between either: | • the employer and the dismissed employee; or | • the employer and another entity. | 51. In the second of these two cases, the other entity would commonly be the new employer, although this need not necessarily be the case. For instance, there could be an arrangement between a subsidiary company, the employer, and a holding company, the other entity, to employ the terminating employee in another subsidiary company within the group. | 52. The Commissioner considers that the phrase 'arrangement… to employ' in paragraph 83-175(2)(c) refers to common law employment only. This condition does not contemplate a situation where there is an arrangement to engage the former employee as an independent contractor. | The apparent purpose of paragraph 83-175(2)(c) of the ITAA 1997 is to limit access to concessional tax treatment where an employee is terminated but is certain of continuing remuneration in the future under a common law employment contract because of an arrangement to which the employer is a party. | Section 995-1 of the ITAA 1997 states that: | arrangement means any arrangement, agreement, understanding, promise or undertaking, whether express or implied, and whether or not enforceable (or intended to be enforceable) by legal proceedings. | In this case, you have advised that at the time of your client's dismissal with your client's former employer there will be no stipulated arrangement to employ your client after your client's employment termination. Therefore, the requirement under paragraph 83-175(2)(c) of the ITAA 1997 has been satisfied. | Therefore, the tax-free part of the GRP your client will receive on the termination of employment with your client's former employer will not be jeopardised.