Private ruling: Genuine redundancy - arrangement
Published: April 2013
Ruling period: Year ending 30 June 2013
Date scheme commenced: 1 July 2012

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

Relevant facts and circumstances: You were employed with an employer (the employer) in a specified position. In the first quarter of the relevant income year, you were advised that as a consequence of organisational reform, the duties of your role were no longer required and that your employment would terminate in the second quarter of the relevant income year. In addition to the value of accrued leave entitlements and payment in lieu of notice you would receive a contractual termination payment. The payment in excess of the value of your accrued leave entitlements and payment in lieu of notice has been treated as a genuine redundancy payment for taxation purposes. The residual of your contract was paid out on termination of employment in accordance with its terms due to your position being made redundant. In the subsequent year, you were advised that there may be a casual part-time position available with your former employer, commencing midway through the relevant year. You would be interested in applying for this position. You are under the age of 65 years.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 83-175. | 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).

Reasons for decision: Summary: At the time of your dismissal there was no stipulated arrangement to employ you after your employment was terminated due to redundancy. Therefore, the tax-free part of the genuine redundancy payment you received 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), 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. Where a payment is made to an employee after 30 June 2007, 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 employees 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 you are interested in applying for a position that may become available with your former employer. You are requesting advice as to whether the tax free limits of your GRP would be jeopardised if you commenced employment with your 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, at the time of your dismissal with your former employer there was no stipulated arrangement to employ you after your employment. Therefore, the requirement under paragraph 83-175(2)(c) of the ITAA 1997 has been satisfied. Therefore, the tax-free part of the GRP you received on the termination of employment with your former employer will not be jeopardised.