Private ruling: Redundancy Payment
Date of advice: 16 March 2018
Published: July 2018
Ruling period: Income year ending 30 June 20XX
Date scheme commenced: 3 January 20XX

Ruling: Q1: Does the payment received upon the termination of your position as a Director constitute a redundancy payment? | A1: No | Q2: What is the tax free component of the redundancy payment? | A2: No tax free component | Q3: What is the amount to be declared at item 1 on the ITR? | A3: All assessable income

Relevant facts and circumstances: You commenced employment as a Director of your own company since June 20XX. The company, you were a Director of was sold in December 20XX. Settlement occurred in January 20XX. It was the decision of the Directors to sell the Company allowing themselves to retire. Due to the sale, new Directors were appointed in January 20XX, the same day you were required to resign from your position as Director. You remained employed with the new company with no position, assisting in the transition of the business till 30 June 20XX.

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)(c)

Reasons for decision: Summary: At the time of your termination of employment as a Director, there was an arrangement between you and the new owner to continue your common law employee position till 30 June 20XX to assist the transition of the business. Therefore, the termination payment received does not constitute a redundancy payment. As the termination payment is not a genuine redundancy payment, the amount does not have a tax free component. The amount is considered all assessable income. | Detailed Reasoning - Question 1: 1. A payment made to an employee is a genuine redundancy payment (GRP) if it satisfies all the criteria set out in section 83-175 of the ITAA 1997. 2. In accordance with subsection 83-175(1) of the ITAA 1997, a genuine redundancy payment is so much of a payment that: (a) Is received by an employee who is dismissed from employment because the employee’s position is genuinely redundant; and (b) exceeds the amount that could reasonably be expected to be received by the employee in consequence of the voluntary termination of their employment at the time of dismissal. 3. Under subsection 83-175(1), a genuine redundancy payment is a payment resulting from a dismissal and a redundancy. The Explanatory Memorandum to the Income Tax Assessment Amendment Act (No.3) 1984 provides clarification on the meaning of the terms dismissal and redundancy: The terms dismissal and redundancy are not defined in the legislation and, therefore, should be given their ordinary meanings. Dismissal carries with it the concept of the involuntary (on the taxpayer’s part) termination of employment. Redundancy carries the concept that the requirements of the employer for employees to carry out work of a particular kind, or for employees to carry out work of a particular kind in the place where they were so employed, have ceased or diminished or are expected to cease or diminish. Redundancy, however, would not extend to the dismissal of an employee for personal or disciplinary reasons or for reasons that the employee was inefficient. 4. The Commissioner of Taxation has issued Taxation Ruling TR 2009/2 Income tax: genuine redundancy payments (TR 2009/2). Paragraph 18 of TR 2009/2 discusses what constitutes a dismissal. It requires the employer to make a decision to terminate the employment at their own initiative without the employee’s consent. In this case, the termination has occurred at the employer’s initiative with your consent. 5. TR 2009/2, also outlines the requirements to be satisfied before any payment made to a person whose employment is terminated qualifies for treatment as a GRP under section 83-175 of the ITAA 1997. 6. In discussing what constitutes a GRP in accordance with subsection 83-175(1) of the ITAA 1997, paragraph 11 of TR 2009/2 states: There are four necessary components within this requirement: a) The payment being tested must be received in consequence of an employee’s termination. b) That termination must involve an employee being dismissed from employment. c) That dismissal must be caused by the redundancy of the employee’s position. d) The redundancy payment must be made genuinely because of a redundancy. 7. Based on the information provided, not all the components of subsection 83-175(1) of the ITAA 1997 have been satisfied in this instance. 8. Before a payment that meets the basic redundancy requirement in subsection 83-175(1) of the ITAA 1997 qualifies as a genuine redundancy payment, all other conditions in subsections 83-175(2) and (3) of the ITAA 1997 must be met. These conditions include: ● the payment must be made before a person turns 65 or an earlier mandatory age; ● the termination was not at the end of a fixed period of employment; ● the actual amount that was paid is not greater than the amount that could reasonably be expected to be paid had the parties been dealing at arm’s length; ● there was no arrangement for re-employment with the employer or a related party after the termination date; and ● the payment was not in lieu of superannuation benefits. 9. Subsection 83-175(2) of the ITAA 1997 lists further conditions that a genuine redundancy payment must meet and, as far as relevant, states: (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 dismissal. *To find definition of asterisked terms, see the Dictionary, starting at section 995-1. 10. Paragraphs 50 and 51 of TR 2009/2 discuss the requirement under paragraph 83-175(2)(c) of the ITAA 1997 and state: 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. 11. Example 6 Paragraphs 124 to 127 of TR 2009/2 discuss dual capacity employees and the voluntary sale of a business, the paragraph states: 124. Assume the same facts as in Example 5, except that Angelina and Maria decide to sell the business when sales and profits indicate a viable ongoing business. There is significant capital retained in the business at the time. The ultimate purchaser pays an amount for the business that is greater than what Angelina and Maria were prepared to sell it for, based on their own valuations. Before transferring the business to the purchaser, Angelina and Maria pay themselves four weeks salary each. 125. In these circumstances, Angelina and Maria consent to the decision to sell the business and terminate their employment. They are not dismissed from employment. The fact that a decision is made to terminate employment, which can be argued to be the best available or the most rational in the circumstances does not indicate that there is no real or practical choice present in the decision-making process. 126. This is so even where the directing minds have a fiduciary duty to act in the best interests of the employing entity. This duty is operative at all levels of decision-making on behalf of the entity. Fulfilling this duty will involve an effective lack of consent only where external circumstances mean that that there is no real or practical choice being exercised. 127. Accordingly, no part of the payments received by Angelina and Maria are genuine redundancy payments in these circumstances. 12. Further, paragraphs 306 to 309 of TR 2009/2 state: 306. Under paragraph 83-175(2)(c), an arrangement to employ an employee after his or her termination may prevent a dismissal giving rise to a genuine redundancy payment. An arrangement in this context is defined widely: 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. 307. In the Commissioner's view, the phrase 'arrangement...to employ' is confined to common law employment relationships. The apparent purpose of paragraph 83-175(2)(c) 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. 308. For the condition in paragraph 83-175(2)(c) to fail, it is necessary for the employment arrangement to be entered into between either: ● the employer and the employee; or ● the employer and another entity. 309. Accordingly, if the employee has independently entered into an arrangement with another entity for that entity to employ him or her after the time of the dismissal from the original employer, the condition in paragraph 83-175(2)(c) will still be met. On the other hand, given the breadth of the meaning of 'arrangement', an implied understanding between two related companies at the time of an employee's dismissal with one of those companies to the effect that the employee will be employed at a later time with the other is sufficient for this condition not to be met. 13. At the time of the termination of your employment as a Director, there was an arrangement for the new company to employ you continually to assist the transition of the business. Accordingly, paragraph 83-175(2)(c) of the ITAA 1997 has not been satisfied and the payment is not as a genuine redundancy payment under section 83-175 of the ITAA 1997. | Detailed Reasoning - Question 2: Section 83-175 of the ITAA 1997 has not been satisfied therefore there is no tax free component to the payment. | Detailed Reasoning - Question 3: Based on the facts provided there is no tax free component, hence all amounts are assessable income.