Private ruling: Genuine redundancy payment
Published: July 2012
Ruling period: 30 June 2013
Date scheme commenced: 1 July 2012

Ruling: Q1: Is the termination of the taxpayer's employment in consequence of genuine redundancy? | A1: No

Relevant facts and circumstances: Your client is over 55 years of age. Your client was employed with the employer for a number of years. Your client sustained compensable injuries. As a result of these injuries the employer has undischarged liabilities to your client, to pay weekly income maintenance, medical and other expenses through an insurance company. Since the injuries, your client has been off work and is receiving weekly compensation payments. The employer is offering a one off lump sum compensation payment to your client to wholly discharge these liabilities. Your client is considering accepting the offer and intending to enter into a redemption agreement to convert the weekly payment into a lump sum in the 2012-13 income year. Under the agreement your client agrees to resign from the employment. The proposed lump sum offer under the redemption agreement comprises two components of: · weekly payments; and · medical expenses and other expenses. In addition, the employer has also offered your client a payment under a Voluntary Separation Package (the Package). Your client also considering accepting the Package however your client will not accept the Package until they receive the private ruling decision. Detail of your client's estimated payments under the Package, shows that the payments included: · Tax-free redundancy payment · Annual recreation leave (ARL) · Untaxed leave loading · Taxed leave loading · Tax withheld on ARL and leave loading

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 Subparagraph 82-130(1)(a)(i). | Income Tax Assessment Act 1997 Paragraph 82-130(1)(b) | Income Tax Assessment Act 1997 Paragraph 82-130(1)(c) | Income Tax Assessment Act 1997 Subsection 82-130(2). | Income Tax Assessment Act 1997 Section 82-145. | Income Tax Assessment Act 1997 Section 82-155. | Income Tax Assessment Act 1997 Section 82-135. | Income Tax Assessment Act 1997 Section 83-175. | Income Tax Assessment Act 1997 Subsection 83-175(1). | Income Tax Assessment Act 1936 Section 27F.

Reasons for decision: Summary: The Voluntary Separation Package amount (the Payment) to be received by your client is an employment termination payment as the Payment has been made in consequence of the termination of your client's employment. In addition, the Payment does not include a genuine redundancy payment as it is considered that the prevailing, or most influential, cause of the termination of your client's employment was not redundancy. The Payment is a life benefit employment termination payment. | Detailed Reasoning - Employment termination payment: A payment is an employment termination payment if the payment satisfies all the requirements in section 82-130 of the Income Tax Assessment Act 1997 (ITAA 1997), and is not specifically excluded under section 82-135 of the ITAA 1997. Subsection 82-130(1) of the ITAA 1997 states: (1) 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. Based on the redemption agreement provided, by signing the agreement, your client agrees to resign from their employment. Consequently, the Payment will be made to your client in consequence of the termination of your client's employment (i.e. resignation) because there is a nexus between the termination of your client's employment and the Payment. Accordingly, the Commissioner accepts the condition under paragraph 82-130(1)(a) of the ITAA 1997 has been met. The payment is made no later than 12 months after the termination of employment The second condition for the payment to meet the criteria as an employment termination payment, stated under paragraph 82-130(1)(b) of the ITAA 1997, is that the employment termination payment was paid to the taxpayer no later than 12 months after their employment was terminated. It is accepted that the proposed Package will be made to your client within 12 months of the termination of employment. As it is accepted that the Package will be made to your client within 12 months of the termination of employment, the condition under paragraph 82-130(1)(b) of the ITAA 1997 has been met. The payment is not a payment specifically excluded under section 82-135 of the ITAA 1997 The third condition for the payment to meet the criteria as an employment termination payment, stated under paragraph 82-130(1)(c) of the ITAA 1997, is that the payment must not be specifically excluded under section 82-135 of the ITAA 1997. Section 82-135 of the ITAA 1997 provides that certain payments are not employment termination payments, including: · payment for unused annual leave or unused long service leave; · the tax-free part of a genuine redundancy payment or an early retirement scheme payment; · reasonable capital payments for personal injury. With the possible exception of being a genuine redundancy payment, discussed below, the Package is not a payment that is specifically excluded under section 82-135 of the ITAA 1997, therefore the condition under paragraph 82-130(1)(c) of the ITAA 1997 has been met. | Detailed Reasoning - Genuine redundancy payment: A payment made to an employee is a genuine redundancy payment if it satisfies all criteria set out in section 83-175 of the ITAA 1997. Section 83-175 of the ITAA 1997 replaces former section 27F of the Income Tax Assessment Act 1936 (ITAA 1936) where such payments were previously referred to as bona fide redundancy payments. Section 83-175 of the ITAA 1997 states: (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 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 he or she turned 65; (ii) if the employees 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 arms length the payment does not exceed the amount that could reasonably be expected to be made if the dismissal were at arms 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 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)). | Detailed Reasoning - Dismissal and Redundancy: Under subsection 83-175(1) of the ITAA 1997, a genuine redundancy payment is a payment resulting from: (i) a dismissal; and (ii) a redundancy. The terms 'dismissal' and 'redundancy' are not defined in the ITAA 1997. Therefore, it is necessary to consider the ordinary meaning of the terms and the meaning the courts have ascribed to each word. The Explanatory Memorandum to the Income Tax Assessment Amendment Act (No.3) 1984 , which inserted former section 27F into ITAA 1936 states, at page 91: 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. The Commissioner has issued Taxation Ruling TR 2009/2, titled Income Tax: genuine redundancy payments (TR 2009/2). The Ruling provides guidance on the factors to be considered in the interpretation of section 83-175 of the ITAA 1997. Paragraph 11 of TR 2009/2 states: 11. There are four necessary components within the basis genuine redundancy requirement: · The payment being tested must be received in consequence of a termination. · That termination must involve an 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. Each of the requirements will be discussed individually. | Detailed Reasoning - The payment is in consequence of the termination of employment: It was previously determined that the payment was made in consequence of your client's termination of employment. Therefore, the first requirement that the payments must be received in consequence of a termination of employment is met. | Detailed Reasoning - Dismissal from employment: Paragraph 18 of TR 2009/2 discusses what constitutes a dismissal: 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. A payment is classified as a genuine redundancy payment only upon meeting all of the requirements set under section 83-175 of the ITAA 1997 and dismissal only forms part of those requirements. It can be seen from the above dismissal carries with it the concept that the termination of a person's employment is normally involuntary and instigated by the employer. Consequently, resignation by the employee would not, ordinarily, be considered a dismissal. In this case, your client was not dismissed from employment by the employer in any ordinary sense because, by signing the agreement, your client is resigning from employment as documented in the Deed. | Detailed Reasoning - Dismissal caused by redundancy: As stated by the Commissioner in paragraph 23 of TR 2009/2, section 83-175 of the ITAA 1997 requires that the dismissal be caused only by redundancy of the employee's position, and not for some other reason. It follows, therefore, that redundancy must be the reason for termination of employment by way of dismissal. Paragraphs 23 and 25 of TR 2009/2 provide the following in relation to the meaning of 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. It is evident from the above that if the prevailing or most influential cause of termination was not redundancy; notwithstanding that the position occupied by a dismissed employee may have been abolished, the dismissal would not constitute a redundancy. The Commissioner expands on the issue of determining the cause of dismissal at paragraphs 268 to 269 of TR 2009/2: 268. There are various reasons why an employee may be dismissed from employment. Redundancy may be only one of these reasons. 269. In circumstances where more than one reason can be identified for the dismissal, the Commissioner considers that redundancy must be the primary cause of the dismissal. This suggests an analysis of what is the prevailing or most influential cause of the dismissal. This question is to be answered in light of the facts and circumstances of each case. In the present case, the employer made an offer to your client to convert the weekly compensation payment into a lump sum. Your client is considering accepting the offer and entering into an agreement with the employer. By signing the Deed your client is agreeing to resign from the employment. Apart from the redemption payment, the employer also offered a voluntary separation package (the Package) to your client. Your client is also considering accepting the Package. The redemption agreement does not mention or indicate that your client's termination of employment was on account of a genuine redundancy. The redemption agreement only indicates that, to settle the compensation liabilities, the employer is willing to offer a one off lump sum payment instead of paying weekly compensation payments to your client. As mentioned previously, by signing the redemption agreement is your client is agreeing to resign from their employment. Given the above evidence, it is concluded that your client will resign from their employment and your client's dismissal will not be caused by a genuine redundancy. Consequently, it is considered that the prevailing, or most influential, cause of the termination of your client's employment is not redundancy. The fact that the employer may subsequently decide to re-allocate or abolish the position your client formerly occupied does not change this. As it is considered that the dismissal was not caused by the redundancy of your client's position, the third requirement of a genuine redundancy has not been satisfied. Consideration of the other requirements under section 83-175 of the ITAA 1997 is therefore not necessary. As the TVSP satisfies all the conditions under subsection 82-130(1) of the ITAA 1997, the entire payment is employment termination payment under section 82-130 of the ITAA 1997. | Detailed Reasoning - The settlement payment constitutes a life benefit termination payment: Subsections 82-130(1) and 82-130(2) of the ITAA 1997, provide that where an employment termination payment is made during the life of a taxpayer, the payment is known as a life benefit termination payment (LBTP). In particular, 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. Because the Payment is an employment termination payment to which subparagraph 82-130(1)(a)(i) of the ITAA 1997 applies, the Payment constitutes a LBTP within the meaning of subsection 82-130(2) of the ITAA 1997. | Detailed Reasoning - Tax Treatment of the payment as an LBTP: An employment termination payment will be comprised of the following components: · Tax free component - as provided in section 82-140 of the ITAA 1997, this includes an invalidity segment within the meaning of section 82-150 of the ITAA 1997 (if any) and/or a pre-July 83 segment within the meaning of section 82-155 of the ITAA 1997 (if any); and · Taxable component - the amount remaining after deducting the tax free component calculated in accordance with section 82-140 from the total payment, as prescribed in section 82-145 of the ITAA 1997. Your client commenced employment with the employer after 30 June 1983. Accordingly the period of employment to which the Payment relates commenced after 1 July 1983. Hence, the LBTP does not have a pre-July 83 segment within the meaning of section 82-155 of the ITAA 1997. As the proposed LBTP contains neither a pre-July 83 segment nor an invalidity segment within the meaning of section 82-150 of the ITAA 1997, the LBTP has no tax free component as defined in section 82-140 of the ITAA 1997. Rather the entire LBTP is a taxable component of an employment termination payment as defined in section 82-145 of the ITAA 1997. Accordingly, the entire amount should be included in your client's income tax return for the 2012-13 income year. For the 2012-13 income year the employment termination payment cap amount (the cap) for the LBTP is $175,000. Your client is over 55 years of age. Therefore, provided that your client does not receive any additional taxable components of LBTPs which will count towards and exceed the cap, the TVSP will be taxed at 16.5% plus Medicare levy. | Detailed Reasoning - Conclusion: The Payment does not include a genuine redundancy payment as it is considered that the prevailing, or most influential, cause of the termination of your client's employment was not redundancy. The Payment is a life benefit employment termination payment.

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