Private ruling: Employer payment
Published: January 2014
Date scheme commenced: 1 July 2012

Ruling: Q1: 1. Is the payment made to an employee in consequence of the termination of the fixed term contract an employment termination payment as defined in section 82-130 of the Income Tax Assessment Act 1997 (ITAA 1997)? 2. Is any part of the payment made to the employee on the termination of employment a tax-free part of a genuine redundancy payment in accordance with section 83-170 of the ITAA 1997? Advice/Answers 1. Yes. 2. Yes. This review applies for the following period Year ended 30 June 2013

Relevant facts and circumstances: In a letter dated in the 2011-12 income year, an employee was offered a fixed term full-time appointment with an employer (the employer). The terms and conditions of the employee's employment were specified in the letter and the employer's workplace agreement (the Agreement). Less than a month later the employee's employment commenced and was to cease on a specified date in the 2015-16 income year. However, subject to the employee's visa status, the employee's appointment may be extended beyond this date. In the 2012-13 income year, the employee was advised that due to changes in funding and the closure of the employee's section, the employee's current employment would be terminated at a specified time in the 2012-13 income year (the Termination Date). At this time the remaining portion of the employee's contract would be paid out in full. Payment in relation to the balance of the contract and other entitlements would be paid in the pay day following departure contingent upon receipt of the employee's completed exit form, and signed release agreement (the Release). The Release made between the two parties, advised that as a result of the changes to funding, the employee's position would not continue and that the employee's employment would terminate on the Termination Date. At a specific clause in the Release, it refers to the employee's obligations prior to the termination of employment to execute the release agreement, and complete the exit form and return all the employer's property. At another clause in the Release, it refers to the employer's obligations that the employer would pay a specified amount, less the applicable tax deduction, relating to the employment and would provide a statement of service to the employee. Due to the funding changes and the closure of the whole section, the employee's position was terminated. As the employee's fixed term contract did not contain a termination clause, the employer paid out the value of the remainder of the employee's fixed term contract. Other staff who were employed in the same section on an ongoing permanent basis were also terminated and received redundancy packages under the employer's employment agreement. These payments were treated as genuine redundancy payments. The applicant has advised that the payment made to the employee, equates to the remainder of the fixed term contract. The PAYG payment summary - employment termination payment for year ending 30 June 2013 shows a taxable component with an amount of tax withheld. The employment termination payment (ETP) code is shown as 'O'.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 82-130. | Income Tax Assessment Act 1997 Subsection 82-130(1). | Income Tax Assessment Act 1997 Subsection 82-130(2). | Income Tax Assessment Act 1997 Section 82-135. | Income Tax Assessment Act 1997 Section 83-170. | 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 Paragraph 83-175(2)(b). | Income Tax Assessment Act 1997 Paragraph 83-175(2)(c). | Income Tax Assessment Act 1997 Subsection 83-175(3). | Income Tax Assessment Act 1997 Subsection 83-175(4). | Income Tax Assessment Act 1997 Section 995-1.

Reasons for decision: Summary: The payment made to the employee on the termination of employment is considered to be a genuine redundancy payment as all the legislative conditions have been satisfied. The portion of the payment in excess of the tax-free amount is the taxable component of the employment termination payment. The genuine redundancy payment is an excluded payment. The amount in excess of the tax free limit is measured under the employment termination payment cap. | Detailed Reasoning - Employment termination payments: Payments made in consequence of the termination of a taxpayer's employment are known as employment termination payments. Employment termination payments are defined in section 82-130 of the Income Tax Assessment Act 1997 (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. To be an employment termination payment, the amount received by an employee must satisfy all three conditions listed above. The first condition requires that there is a payment received by the person in consequence of the termination of their employment. From the facts of the case, it is evident that the payment made to the employee in the 2012-13 income year is made in consequence of the termination of employment. The payment would not have been made if there was no termination of employment. The termination of employment and the payment are intertwined and connected. If not for the termination of employment, the issue of paying a lump sum would not have arisen. Payments mentioned in section 82-135 of the ITAA 1997 include: · payments for unused annual and long service leave; · the tax-free amount of a genuine redundancy payment; and · a superannuation benefit. From the facts of this case, it is clear the payment is not of a type mentioned in section 82-135, with the possible exception of a genuine redundancy payment. As the payment was made in consequence of the termination of employment, and made within 12 months of the termination of employment then, to the extent that the payment the employee received is not the tax-free amount of a genuine redundancy payment, it is considered that the payment is an employment termination payment under section 82-130 of the ITAA 1997. Subsection 82-130(2) of the ITAA 1997 states: A life benefit termination payment is an employment termination payment to which subparagraph (1)(a)(i) applies. The employment termination payment is a life benefit termination payment as defined under subsection 82-130(2) of the ITAA 1997. Further to the above, it should be noted that where a termination payment constitutes a genuine redundancy payment (section 83-175 of the ITAA 1997), only the amount of that payment in excess of the tax free amount (section 83-170) is an employment termination payment. | Detailed Reasoning - Genuine redundancy payment: To determine if any part of the payment made to the employee from an employer (the employer) constitutes a genuine redundancy payment, all the conditions in section 83-175 of the (ITAA 1997 will need to be satisfied. A genuine redundancy payment 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 genuine redundancy payment all of the following conditions must be met: · the employee is dismissed before the earlier of the following: · the day he or she turned 65; · 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); · 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; · 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 the dismissal. In addition, subsection 83-175(3) of the ITAA 1997 provides that 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 of the payment or at a later time. In addition, subsection 83-175(4) provides that a payment is not a genuine redundancy payment if it is a payment mentioned in section 82-135. The Commissioner has issued Taxation Ruling TR 2009/2 which outlines the Commissioner's view of the requirements to be satisfied for a payment to qualify as a genuine redundancy payment under section 83-175 of the ITAA 1997. It is proposed to examine each of these provisions. | Detailed Reasoning - The requirement under subsection 83-175(1) of the ITAA 1997: The first requirement which is specified in subsection 83-175(1) of the ITAA 1997 has three criteria: (a) the payment is received by an employee who is dismissed from employment; (b) the employee is dismissed because the employee's position is genuinely redundant; and (c) the payment 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. | Detailed Reasoning - Dismissal from employment: The first criterion is that there has been a dismissal from employment, which usually means that the termination of employment is involuntary on the part of the employee concerned and is instigated by the employer. According to the facts, the employee's employment was terminated by the employer on a specified date in the 2012-13 income year. As a result of the changes to funding, a specific section of the employer would not continue therefore the employee's position was no longer required. The termination of the employee's employment is clearly a dismissal for the purposes of subsection 83-175(1) of the ITAA 1997, because the employee's employment was terminated at the instigation of the employer. Therefore, it is considered that the employee has satisfied the first criterion under subsection 83-175(1) in this instance. | Detailed Reasoning - Genuine redundancy: Having established that there was a dismissal from employment for the purposes of subsection 83-175(1) of the ITAA 1997, the next criterion that needs to be considered is whether the employee was dismissed because the employee's position is genuinely redundant. Redundancy is a situation where the dismissal of an employee is not caused by any consideration peculiar to the employee. Redundancy does not extend to a situation where an employee is dismissed for personal or disciplinary reasons or because the employee was inefficient, but rather because an employer no longer requires employees to carry out work of a particular kind or to carry out work of a particular kind at the same location. At paragraph 27 of TR2009/2 it states: … if an employer decides after downsizing or some other structural reorganisation to terminate an employee, the former position of the employee is redundant as long as the downsizing or reorganisation is the prevailing or most influential cause of the termination. The employee was advised that as a result of the changes being made, the employee's current employment would be terminated on a specific date in the 2012-13 income year. Furthermore, the applicant has advised that due to the closure of the whole section, other staff who were employed in the same section as the employee, but on an ongoing permanent basis, their positions were terminated and they received genuine redundancy packages. Due to the closure of the employee's whole section, the employee was paid out the value of the remainder of the employee's fixed term contract on termination of employment on a specific date in the 2012-13 income year. The termination of the employee's employment was not on account of any personal act or default on the employee's part, and was not due to the ordinary and customary turnover of labour. Rather the employer no longer required anyone to perform the job the employee had been doing. Therefore the employer's decision to terminate the employee's employment is due to a redundancy. Accordingly, it is considered that the employee has also satisfied the second criterion under subsection 83-175(1) of the ITAA 1997 in this instance. The payment exceeds what the employee would have received in consequence of the voluntary termination of the employee's employment at the time of the employee's dismissal The third criterion that needs to be considered is whether the payment exceeds the amount that the employee could reasonably be expected to receive in consequence of the voluntary termination of employment will be treated as a genuine redundancy payment. The Commissioner considers that it is necessary to show how the amount an employee is entitled to be paid exceeds the amount that is payable to employees who voluntarily terminate their employment. Paragraphs 61 to 63 of TR 2009/2 state: 61. It would generally be expected that a greater amount would be paid on redundancy than voluntary termination. This recognises the purpose of redundancy payments, being primarily to compensate for loss of non-transferable entitlements (for example accrued sick leave and accrued long service leave prior to 10 years service) and the peculiar hardship associated with being made redundant. 62. Contractual or other entitlements payable by an employee on voluntary termination are generally a sound guide as to what might reasonably be expected … 63. There may be industry norms that could be used as a guide as to what payments would be made on voluntary termination … The employee was entitled to only an amount of accrued annual leave had the employee resigned from employment prior to the employee's contract expiring in the 2015-16 income year. The payment was made on termination of the employee's employment due to the employee's role being redundant. The payment is paid in circumstances of genuine redundancy, and is in excess of the amount that could reasonably be expected to be received by a worker in consequence of voluntary termination. According to the facts, the employee received an employment termination payment. It is accepted that this payment exceeds the amount the employee could reasonably expect to receive if the employee had resigned or retired from employment in the position the employee held at the time of the dismissal. Therefore, it is considered that the employee has satisfied the third criterion under subsection 83-175(1) of the ITAA 1997 in this instance. | Detailed Reasoning - Conclusion: All the criteria stipulated in subsection 83-175(1) of the ITAA 1997 have been satisfied. Consequently it is considered that the amount constitutes a genuine redundancy payment within the meaning of subsection 83-175(1) of the ITAA 1997. However, a genuine redundancy payment must also satisfy the conditions in subsections 83-175(2) to 83-175(4). | Detailed Reasoning - The requirements under paragraphs 83-175(2)(a) and (b) of the ITAA 1997: As already noted previously, paragraph 83-175(2)(a) of the ITAA 1997 prescribes that the employee must be dismissed before the earlier of: · the day he or she turned 65; or · 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 applicable). The employee was not required to terminate employment before a specific date in the 2015-16 income year. Also given that the employee was under 65 years of age at the time of the employee's dismissal, the employee has satisfied the requirements of paragraph 83-175(2)(a) of the ITAA 1997. Additionally it is accepted that all dealings between the employee and the employer were at arm's length. Therefore it follows that the employee has also satisfied the requirement under paragraph 83-175(2)(b) of the ITAA 1997. | Detailed Reasoning - The requirement under paragraph 83-175(2)(c) of the ITAA 1997: Also as noted previously, paragraph 83-175(2)(c) of the ITAA 1997 requires that 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 the dismissal. In the present case, there was no re-employment by the employer or evidence of any re-employment arrangement for the employee with another entity, so it is accepted that the employee has satisfied the requirement under paragraph 83-175(2)(c) of the ITAA 1997 in this case. | Detailed Reasoning - The requirements under subsections 83-175(3) and 83-175(4) of the ITAA 1997: Subsection 83-175(3) of the ITAA 1997 provides that a genuine redundancy payment does not include any part of a payment that is received in lieu of superannuation benefits. No part of the employee's payment was made to the employee in lieu of superannuation benefits. Therefore it is accepted that the requirement under subsection 83-175(3) is satisfied. Also as noted previously, subsection 83-175(4) of the ITAA 1997 provides that a payment is not a genuine redundancy payment if it is a payment mentioned in section 82-135 (other than a genuine redundancy payment or early retirement scheme payment). Section 82-135 of the ITAA 1997 includes payments such as pensions, foreign termination payments, unused annual leave and unused long service leave. An examination of the payment made to the employee shows that the requirement in subsection 83-175(4) of the ITAA 1997 has been satisfied. | Detailed Reasoning - A genuine redundancy payment under sections 83-170 and 83-175 of the ITAA 1997: The employee has satisfied all the criteria set out in section 83-175 of the ITAA 1997 and consequently it is considered that the amount constitutes a genuine redundancy payment for the purposes of section 83-170. | Detailed Reasoning - Tax-free treatment of a genuine redundancy payment: Subsection 83-170(2) of the ITAA 1997 provides that so much of the genuine redundancy payment that does not exceed the amount worked out using the formula prescribed in subsection 83-170(3) is not assessable income and is not exempt income. Any amount in excess of the tax-free amount is taxed as an employment termination payment. The formula for working out the tax-free amount is: | Detailed Reasoning - Base amount + (Service amount × Years of service): For the 2012-13 income year the Base amount is $8,806 and the Service amount is $4,404. Years of service is the number of whole years in the period, or sum of periods, of employment to which the payment relates. Therefore the amount calculated under the formula in accordance with subsection 83-170(3) of the ITAA 1997, is the tax-free part of a genuine redundancy payment the employee can receive in the 2012-13 income year. Accordingly, the tax-free amount is not assessable income and is not exempt income under subsection 83-170(2) of the ITAA 1997. The remaining amount is a taxable component of an employment termination payment. | Detailed Reasoning - Tax Treatment of the employment termination payment: An employment termination payment made on or after 1 July 2007 will be comprised of the following components: · Tax free component - this includes the pre-July 83 segment (if any) and/or the invalidity segment (if any); and · Taxable component - the amount remaining after deducting the tax free component from the total payment. In this case, there is no tax free component of the employment termination payment. The amount of the taxable component of the employment termination payment is to be included in the employee's assessable income for the 2012-13 income year (subsection 82-10(2) of the ITAA 1997). The employment termination payments cap (ETP cap) for the 2012-13 income year is $175,000. As the employee is under preservation age, the amount up to the ETP cap (that is, $175,000) will be taxed at 30% plus Medicare levy. The amount in excess of the cap is taxed at the top marginal rate plus Medicare levy. The ETP cap is reduced by the amount of any earlier employment termination payment the employee receives in the same income year or, in relation to the same employment termination, in previous income years. Any tax-free amounts are not counted towards the cap.