Private ruling: Employment termination payment
Date of advice: 25 October 2024
Published: 9 December 2024
Ruling period: Income year ending 30 June 20XX

Ruling: Q1: Is your payment an employment termination payment (ETP) under section 82-130 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes. | Q2: Is any part of the payment a genuine redundancy payment under section 83-175 of the ITAA 1997? | A2: No.

Relevant facts and circumstances: You were a Representative Director and Chairman of a foreign company (the Company). In response to a request for further information in support of your private ruling application, the following statements were made: • As you were a director, you did not have an employment contract. • In XXXXXXXX 20XX, the directors of the Company concluded that it would 'become increasingly difficult to continue the business due to the impact of the Covid-19 on the business and the uncertainty surrounding the future of the foreign country's economy. Therefore, they determined that the best course of action would be to dissolve the company within this financial year.' • On XX/XX/XXXX, the directors of the Company 'discussed the employment termination payments to be proposed to each director at the shareholders' meeting.' • On XX/XX/XXXX, an extraordinary shareholders' meeting was held and the employment termination payments for each director were proposed and approved. • On XX/XX/XXXX, the Company was dissolved. • On XX/XX/XXXX, termination payments were made to each director, with you receiving a payment, from which tax was withheld. You also provided a 'Statement of Payment of Salary etc. to Non residents', showing the following details. • Payee: XXXXXXXX • Payees address: XXXXXXX • Type of payment: Employment Termination Payment • Gross Amount: XXXXXXX • Tax Withheld: XXXXXXX • Tax free amount: XXXXXXX • Service period: XX years from XX/XX/XXXX to XX/XX/XXXX Payer: XXXXXXXX

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 82-140 | Income Tax Assessment Act 1997 section 83-170 | Income Tax Assessment Act 1997 subsection 83-175(1)

Reasons for decision: Detailed Reasoning - Employment termination payments: By virtue of subsection 995-1(1) of ITAA 1997, employment termination payments are defined in subsection 82-130(1) of the ITAA 1997, which states that 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 that termination (but see subsection (4)); and (c) it is not a payment mentioned in section 82-135. To determine if a payment is an employment termination payment (ETP), all the conditions in subsection 82-130(1) of the ITAA 1997 must be satisfied. Failure to satisfy any of the conditions under subsection 82-130(1) will result in the payment not being considered an employment termination payment. | Detailed Reasoning - Paid as a 'consequence of' the termination of your employment: For a payment to be treated as an ETP, the first condition that must be met is that the payment is made in 'consequence of' the termination of employment of the taxpayer. 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 court's decisions on the meaning of the phrase, the Commissioner's view on the meaning and application of the 'in consequence of' test is set out in Taxation Ruling TR 2003/13 Income tax: employment termination payments (ETP): payments made in consequence of the termination of any employment: meaning of the phrase 'in consequence of' (TR 2003/13). While TR 2003/13 considered the meaning of the phrase 'in consequence of' in the context of eligible termination payments, TR 2003/13 can still be relied upon as both the former provision under the Income Tax Assessment Act 1936 and the current provision under the ITAA 1997 both use the term 'in consequence of' in the same manner. In paragraph 5 of TR 2003/13, the Commissioner states: ... a payment is received by a taxpayer in consequence of the termination of the employment of the taxpayer 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. In this case, according to the document 'Certification of All Historical Details', the Company was 'dissolved on XX/XX/XXXX by resolution of the General Meeting of Shareholders'. According to the document 'Statement of Payment of Salary etc to Non residents', you were paid the amount of XXXXXXXX by the Company on XX/XX/XXXX. This document refers to the payment type as 'Employment Termination Payment' and refers to the 'employment termination date' as XX/XX/XXXX. You received this payment as a consequence of the dissolution of the company and the termination of your employment. In other words, but for the termination, you would not have received the payment. Therefore, it is considered that the payment was received by you in consequence of the termination of your employment. | Detailed Reasoning - Payment is received no later than 12 months after termination: According to documentation provided, your employment was terminated with the Company on XX/XX/XXXX when the company was dissolved, and the payment was made to you on XX/XX/XXXX. As this is less than 12 months after your termination, this condition will be satisfied. | Detailed Reasoning - Payment is not a payment mentioned under section 82-135 of the ITAA 1997: Certain payments made on termination of employment are excluded from being an employment termination payment under section 82-135 of the ITAA 1997. These payments include any accrued annual and long service leave, the tax-free parts of a genuine redundancy payment or an early retirement scheme payment as well as other types of payments which do not apply to your settlement payment. Based on the information provided, the payment listed in section 82-135 of the ITAA 1997 which may be relevant in this case and thus requires consideration is: • the part of a genuine redundancy or an early retirement scheme payment worked out under section 83-170 . | Detailed Reasoning - Genuine redundancy payments: What is a genuine redundancy payment is set out in section 83-175 of the Income Tax Assessment Act 1997 as follows: (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 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. (2) A genuine redundancy payment must satisfy the following conditions: (a) the employee is dismissed before the earlier of the following: (i) the day the employee reached * pension age; (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 the 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. | Detailed Reasoning - Payments not covered: (4) A payment is not a genuine redundancy payment if it is a payment mentioned in section 82-135 (apart from paragraph 82-135(e)). The meaning of a genuine redundancy payment is set out in detail under Taxation Ruling 2009/2 Income tax: genuine redundancy payments (TR 2009/2) as follows: | Detailed Reasoning - The basic requirement for a genuine redundancy payment: 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'. There are four necessary components within this requirement: • The payment being tested must be received 'in consequence of' an employee's termination. • That termination must involve the 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. The satisfaction of this requirement establishes the essential character of the payment. However, there are further conditions that must also be satisfied before a payment can be treated as a genuine redundancy payment. These four components are examined further in paragraphs 13 to 32 of TR 2009/2, as follows: | Detailed Reasoning - 'Component 1: Payment 'in consequence of' termination: [13] As discussed above, the Commissioner considers that any payment must be made 'in consequence of' the employee's termination before it can be a genuine redundancy payment. Taxation Ruling TR 2003/13 sets out the Commissioner's views on when a payment is made 'in consequence of' termination of employment. [14] It follows that any payment that meets the requirement identified at paragraph 11 of this Ruling will satisfy the 'in consequence of' condition for employment termination payments under paragraph 82-130(1)(a). [15] Some other payments, such as unused annual leave and unused long service leave, may also be made in consequence of termination. Any such payments that receive a more specific tax treatment are excluded from being genuine redundancy payments by subsection 83-175(4).' As set out under the heading 'Employment termination payments' (above) it is accepted that the payment was made' in consequence of' the termination of your employment. | Detailed Reasoning - 'Component 2: 'Dismissal' from employment: [16] Subject to the exception recognised in paragraph 17 of this Ruling, the loss of a particular position with an employer is not a dismissal for the purposes of subsection 83-175(1) unless all employment with the employer is severed. The Commissioner's view is that a genuine redundancy payment can only arise where there is no suitable job available for the employee with the employer, meaning that he or she must therefore be dismissed. [17] The exception to this general principle is the case of a person holding an office with the employer at the same time as having a common law employment relationship with the same employer. In this case dismissal from either the office or common law employment involves a dismissal from employment for the purposes of subsection 83-175(1). An example is a person who is both a director of the employer company and a common law employee of the company who is terminated from one of these two capacities. [18] Dismissal is a particular mode of employment termination. It requires a decision to terminate employment at the employer's initiative without the consent of the employee. This stands in contrast to employment that is terminated at the initiative of the employee, for example in the case of resignation. [19] Consent in this context refers to the employee freely choosing to agree to or approve the act or decision to terminate employment in circumstances where the employee has the capacity to make such a choice. Determining whether an employee has consented to their termination requires an assessment of the facts and circumstances of each case. Consent may be either expressly stated by the employee or implied by their behaviour or conduct. [20] A dismissal can still occur even where an employee has indicated that they would be interested in having their employment terminated, provided that the final decision to terminate employment remains solely with the employer. Such a case may arise where expressions of interest in receiving a redundancy package are sought from employees as part of a structured process undertaken by the employer as a means of promoting industrial harmony. [21] Where an employee is given notice from their employer that they will be terminated at a specified time in the future due to genuine redundancy, that employee will be dismissed because of redundancy for the purposes of section 83-175. This will be the case even where an employee, following notification, negotiates with the employer or nominates to end their employment at an earlier time. Negotiation or nomination of the earlier date relates to the timing of the termination and not to the character of the termination as a dismissal. In determining whether any payment made in these circumstances would qualify as a genuine redundancy payment, the other conditions in section 83-175 would still need to be met. [22] Cases of 'constructive dismissal' are a dismissal for the purposes of subsection 83-175(1). Constructive dismissal is currently recognised to occur where the actions or behaviour of the employer in relation to the employment relationship effectively curtails the element of consent on the employee's behalf. The simplest example of constructive dismissal is where an employee resigns under threat (explicit or implicit) of dismissal. Another example is where the employee resigns after the employer offers work in an alternative position which is inappropriate given the employee's particular circumstances (for example, their skills or experience). While in form this appears to be a termination at the employee's initiative, it is recognised at law to be a dismissal.' The minutes of the Extraordinary General Meeting of Shareholders (EGMS) of XX/XX/XXXX state: 'The Chairman reported that the Company would be disbanded at the end of this term (XX/XX/XXXX), and in association with the retirement of all directors on that same date, he wished to pay them the following retirement benefit in appreciation for their great contribution to the advancement and continuation of the Company over many years, and when he put the motion to the floor it was approved unanimously and the motion was passed.' As you were the Chairman, and one of the Representative Directors of the Company, you proposed and approved the payment of XXXXXXXXXXX. It cannot be said that you were 'dismissed' from employment, as you were clearly a decision-maker involved in making the decision for the Company to 'disband'. Not only that, you proposed for the payment of the 'retirement benefit' to each of the directors. A dismissal requires a decision to terminate at the employer's initiative, without the consent of the employee, as per paragraph 18 of TR 2009/2 above. You had multiple roles within the Company, and in your role as Chairman, you communicated the decision to dissolve the Company, and you proposed the payment to be made. In effect, you initiated, participated in, and consented to, the termination of your own employment. Even were this not the case, and you met all criteria for a 'genuine redundancy', there would be no 'genuine redundancy payment' to apply that tax treatment to. As stated above, 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, 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. In your response to a request for further information, it was stated that you believe the amount you would have received if you had voluntarily resigned, would have been 'almost the same' as the current payment amount. Where an employee receives the same amount due to genuine redundancy, as they would have received due to voluntary termination of employment, there can be no genuine redundancy payment. | Detailed Reasoning - 'Component 3: Dismissal caused by 'redundancy': [23] As noted in paragraph 18 of this Ruling, dismissal is a particular mode of employment termination. Section 83-175 further requires that the dismissal be caused by redundancy of the employee's position, and not for some other reason. [24] As is the case in determining if there is a dismissal, the reason for a dismissal is to be established in light of the facts and circumstances of each case. The redundancy of the relevant position must be the prevailing or most influential reason for the dismissal if there is more than one contributing cause. [25] An employee's position is redundant when an employer determines that it is superfluous to the employer's needs and the employer does not want the position to be occupied by anyone. Accordingly, it is fundamentally the employer's decision that a position is redundant. On occasion the decision may be unavoidable due to the circumstances surrounding the employer's operations. [26] In some circumstances, an employer may reallocate the duties and functions attached to a particular position to another position within the employer's organisational structure. In such cases, the former position is redundant. However, if the employee who had been working in that position is still employed by the employer following the reallocation of duties and functions, there will not be a dismissal. [27] On the other hand, 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. [28] A dismissal is not caused by redundancy where personal acts or default are the prevailing or most influential cause for the termination. For example, a person may be dismissed due to unsatisfactory performance or behaviour. [29] In some cases, an employer may decide to restructure their organisation at the same time as identifying underperformance of particular members of staff or areas within the existing organisational structure. In the event that employees are dismissed in these circumstances, careful consideration will need to be given to what was the prevailing or most influential cause of dismissal. [30] In circumstances where an employee resigns after being offered alternative employment with an employer following an organisational restructure, it will be necessary to assess whether the termination of employment amounts to a constructive dismissal.' From the information provided, it appears that your position has been made redundant. It is clearly the case that no one will be performing that role for the Company, as it has ceased to operate. However, as stated above, there is no dismissal. As such, there can be no dismissal caused by redundancy. | Detailed Reasoning - 'Component 4: 'Genuine' redundancy: [31] Contrived cases of redundancy will not meet the conditions in section 83-175. Whether a redundancy is 'genuine' is determined on an objective basis. [32] The fact that an employer and employee have an understanding that a payment on termination is caused by redundancy or that the employer treats the payment as a redundancy payment for tax purposes does not of itself establish genuine redundancy.' While it is clear that your former position has been made redundant, it is not considered that there is a genuine redundancy. Rather, it is a contrived case of redundancy, due to your role in making the decision to close the company, thus making your own position redundant. In your position as both Chairman and Representative Director, you essentially made and approve the decision to terminate your own employment, and to pay yourself a payment in relation to that termination. As all four of the basic conditions above are required to be met, no part of the payment made to you constitutes a genuine redundancy payment under section 83-175 of the ITAA 1997. Please note that, in addition to the basic requirement for a genuine redundancy payment found in subsection 83-175(1), the further conditions for genuine redundancy payment treatment in subsections 83-175(2) and (3) require that: • the dismissed employee is not older than the specified age limits; • the termination is not at the end of a fixed period of employment; • the actual amount paid is not greater than the amount that could reasonably be expected had the parties been dealing at arm's length, in the event that the employer and employee are in fact not dealing at arm's length in relation to the dismissal; • there is no arrangement entered into between the employer and employee or the employer and another entity to employ the dismissed employee after the termination; and • the payment is not in lieu of superannuation benefits. As the basic requirements have not been met, we have not provided analysis of the above further requirements. As the payment is not a genuine redundancy payment, nor any other payment mentioned under section 82-135 of the ITAA 1997, the third requirement for an ETP is met. The payment is an ETP. | Detailed Reasoning - Completing your tax return - employment termination payments: As you have received an ETP that does not support the description of a 'foreign termination payment' to be non-assessable non-exempt income, you are required to complete Item 4 on employment termination payments in the 'Income' section and Item 20 on foreign source income in the 'Supplement Income' section. This will ensure you record the employment termination payment and work out your eligibility to the foreign income tax offset from the foreign tax that was withheld. | Detailed Reasoning - 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 82-140 Income Tax Assessment Act 1997 section 83-170 Income Tax Assessment Act 1997 subsection 83-175(1)