CZRS and Commissioner of Taxation

[2015] AATA 40

[2015] AATA 40

Division	TAXATION APPEALS DIVISION
File Number	2014/1611
Re	CZRS
APPLICANT
And	Commissioner of Taxation
RESPONDENT

DECISION

Tribunal	Senior Member R W Dunne
Date	29 January 2015
Place	Adelaide

The Tribunal affirms the objection decision under review.

....................[Sgd]....................................................

Senior Member R W Dunne

CATCHWORDS

TAXATION – income tax – payment on termination of employment – whether genuine redundancy payment – whether employment termination payment – informal and formal performance management process – objection decision under review affirmed.

LEGISLATION

Income Tax Assessment Act 1997 (Cth) ss 83-175, 82-130, 82-135

CASES

Smith v Director-General of School Education (1993) 31 NSWLR 349 at 366

Advertiser Newspapers Pty Ltd v Industrial Relations Commission of South Australia [1999] SASC 300
R v The Industrial Commission of South Australia; ex parte Adelaide Milk Co-operative Ltd (1977) 16 SASR 6

Jones v Department of Energy and Minerals (1995) 60 IR 304

REASONS FOR DECISION

Senior Member R W Dunne

29 January 2015

INTRODUCTION

1. Pursuant to a confidentiality order made by the Tribunal, the applicant in this case is referred to as “CZRS”.  She was employed as a contracts specialist.  When she ceased working for her employer, she received a lump sum payment which was taxed as an employment termination payment.  When she lodged her 2013 taxation return she only included an amount of $1 in respect of the eligible termination payment.  The respondent issued a notice of assessment which detailed an adjustment to increase the eligible termination payment from $1 to the whole of the lump sum amount.  The applicant objected against the assessment and when the respondent decided to disallow the objection in full she applied to this Tribunal for a review of the objection decision.

2. At the hearing, the applicant was self-represented and the respondent was represented by Ms G Walker (of counsel).  I received into evidence the T documents[1] and the supplementary T documents[2] lodged pursuant to s 37 of the Administrative Appeals Tribunal Act 1975, together with the following exhibits:

   ·applicant’s further submission dated 30 July 2014, with Attachments GA1 to GA24;[3]

   ·a copy of an internet article extracted from “The West Australian” dated 24 May 2013;[4] and

   ·copies of emails between a manager of the employer (“Manager”) and the respondent dated 19 June 2014.[5]

   [1] Exhibit R1.

   [2] Exhibit R2.

   [3] Exhibit A1.

   [4] Exhibit A2.

   [5] Exhibit R3.

   ISSUES FOR THE TRIBUNAL

3. The following are the issues before me:

   (a)Is any part of the lump sum payment received by the applicant from her employer a genuine redundancy payment in accordance with s 83-175 of the Income Tax Assessment Act 1997 (“ITAA 1997”)?

   (b)Is any part of the lump sum payment received by the applicant from her employer excluded from being an employment termination payment under s 82-130 of the ITAA 1997?

   LEGISLATION

4. The following provisions of the ITAA 1997 are presently relevant:

   “83-175  What is a genuine redundancy payment? 

   (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 he or she turned 65; 

   (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. 

   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)). 

   Note:   Paragraph 82-135(e) provides that the part of a genuine redundancy payment or an early retirement scheme payment worked out under section 83-170 is not an employment termination payment.

   “82-130  What is an employment termination payment? 

   (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 that termination (but see subsection (4)); and 

   (c)it is not a payment mentioned in section 82-135. 

   Note 1:   If a payment would be an employment termination payment but for paragraph (b), see subsection (4) and section 83-295. 

   Note 2:   The holding of an office is treated as employment for this Part: see section 80-5. Also, the termination of employment is treated as including the termination of employment by retirement or by death: see section 80-10. 

   …”

   “82-135  Payments that are not employment termination payments

   The following payments you receive are not employment termination payments: 

   (a)a superannuation benefit (see Divisions 301 to 307); 

   (b)a payment of a pension or an annuity (whether or not the payment is a superannuation benefit); and 

   …

   (d)an unused long service leave payment (see Subdivision 83-B); 

   (e)the part of a genuine redundancy payment or an early retirement scheme payment worked out under section 83-170 (see Subdivision 83-C); 

   …

   Note:   For paragraph (e)—the remaining part of a genuine redundancy payment or an early retirement scheme payment (apart from the amount mentioned in the paragraph) is an employment termination payment if section 82-130 applies to that part.”

   BACKGROUND

5. The material facts in these proceedings are not in dispute.  The applicant commenced working for her employer on 17 August 2010 on a part-time basis.  The terms of her employment were outlined in an offer of employment[6] and terms and conditions[7].  She resigned from her employment on 10 April 2013.  She entered into a Deed of Separation and Release with the employer in relation to the termination of employment[8].  The Deed was dated 16 April 2013. 

   [6] Exhibit R2, ST1 pages 4-16.

   [7] Exhibit R2, ST1 pages 17-20.

   [8] Exhibit R1, T6 pages 100-105.

6. On 15 April 2013, the employer paid the applicant an employment termination payment of $25,000.  On 30 June 2013, the employer issued a “PAYG payment summary – employment termination payment” form which advised the applicant that the $25,000 payment was taxed as an employment termination payment (the full amount being the taxable component of the employment termination payment) and $7,875 tax was withheld.  The employer also issued the applicant a “Terminated Employee Listing” report which described the employment termination payment as a “Golden Handshake”.

7. On 12 August 2013, the Manager issued a letter[9] in relation to the applicant’s employment and termination which read:

   “I confirm that, following the cessation of the applicant’s employment with the employer on 10 April 2013, the applicant’s work remit was redistributed among the remaining members of the Team and she was not replaced.  I also confirm that, since the applicant’s resignation, the employer has not maintained the position for which the applicant was employed and that, to the best of my knowledge, the employer has no immediate plans to restore it.”

   [9] Exhibit R3.

8. When the respondent sent an email to the Manager on 28 May 2014, in an email dated 19 June 2014[10], the Manager advised that:

   “(1) The termination payment did not meet components 3 and 4 of the criteria for redundancy payments outlined in your e-mail.

   (2) The termination payment was not made pursuant to clause 13 of the terms and conditions of the applicant’s employment.”

   [10] Exhibit R3.

   APPLICANT’S EVIDENCE

9. The applicant was referred to her background summary dated 30 July 2014.  When she was engaged by her employer as a contracts specialist, her role was newly created when she was hired.  There were other contracts specialists with the employer in various offices, including a contracts specialist in Perth who was responsible for matters in Western Australia.  In mid-2012, the employer’s managing director communicated to all staff his concerns regarding a decline in the employer’s financial outlook due to unfavourable external economic factors and emphasised the need for the employer (through its employees) to be “easier to work with” to attract work from new and existing clients.  The employer’s general counsel suggested that the applicant should enhance her role by taking a more holistic commercial approach, and she would need to increase her knowledge of the technical side of the employer’s work.

10. In a memorandum from the Manager on 5 December 2012[11] the applicant was requested to work more closely with the Perth contracts specialist.  In the memorandum, the Manager pointed out that the Perth contracts specialist was more senior to the applicant and that it was appropriate for him to provide input into and review her work generally.  The Manager outlined some broad objectives and processes to assist the applicant and the Perth contracts specialist in working together, and that her refusal to comply with this would be considered a refusal to respond to a reasonable direction from the employer.

    [11] Exhibit A1, Attachment GA 5.

11. After a meeting between the employer’s regional managers, the applicant was instructed to seek technical and operational input in her work from the Perth contracts specialist.  These new working arrangements presented problems for the applicant, largely because of the time difference between Perth and Adelaide.  The applicant said that this undermined her credibility and she found that her effectiveness and work output suffered.  As a result, the Perth contracts specialist alleged that his conduct was necessary because the applicant was incompetent, unproductive and uncooperative.  The applicant said she thought things were going off the rails and serious things that she wanted were not dealt with.  Eventually, the employer’s general counsel issued a memo to the applicant instructing her to report to the Perth contracts specialist on a permanent basis requiring her to demonstrate that she was doing so immediately, failing which she would risk termination.  She said the memo had been written by the Perth contracts specialist.

12. The applicant sought legal advice from her employment lawyer as to how to best manage her situation.  At a later meeting with her superiors, it was confirmed that if she did not demonstrate her competence to the satisfaction of her seniors, her employment would be terminated.  At that stage, her lawyer advised her to negotiate a settlement and resign.  Her employer offered to pay $25,000, which her lawyer indicated effectively served as an admission of wrongdoing due to its quantum.  She said it was equivalent to or greater than the amount that she would have received if her role had been validly retrenched.  In these circumstances, the applicant accepted it.  Her role disappeared from her employer’s office after she resigned, and the role still does not exist.

13. In cross-examination, Ms Walker referred the applicant to the Deed of Separation and Release and suggested to the applicant that the reason why the amount of the lump sum payment was paid was to avoid the risk of litigation arising as she was being represented by an employment lawyer.  The applicant said that her lawyer had suggested that the amount of the lump sum payment was about the same as the amount of a redundancy payment.

14. Next, Ms Walker referred the applicant to the terms and conditions of her employment.  The applicant acknowledged that clause 4.0 of the terms and conditions required her to perform the duties and exercise the powers and functions that were assigned to her by the employer, and to obey the lawful and reasonable orders, directions and instructions of the employer to the extent that they were within the scope of her duties and responsibilities.  The applicant agreed that these obligations were what the Manager referred to in his memorandum dated 5 December 2012.  Ms Walker then referred the applicant to the redundancy provisions contained in clause 13.0 of the terms and conditions.  She agreed that she had been employed with the employer for less than three years and that, by reference to clause 13.0, the lump sum payment she received was greater than the six week’s pay that she was receiving at the time.  She also agreed that she was not terminated in accordance with clause 13.0 and that no-one at the employer had said anything about redundancy when she resigned.

    THE APPLICANT’S SUBMISSIONS

15. The following submissions, in brief terms, were made by the applicant:

    (a)In the temporal gap between the applicant’s resignation and 12 August 2013, she was unaware of what was going on.  She received no direction from management and no guidelines or measurables as part of the performance management process.

    (b)The applicant’s cessation of employment was not a dismissal.  The performance management process with her employer was initiated by her and then she resigned. 

    (c)The applicant wanted to keep her job and this was why the performance management process was initiated by her.  However, doing this had the opposite effect.  She was unable to ascertain what managements’ expectations were of her performance.  A formal performance process was the best way to resolve the situation.

    (d)Previous redundancies had occurred in relation to the employer’s staff and the applicant’s dismissal was part of that downsizing process. 

    (e)If the applicant’s cessation was not a redundancy, it must have been for poor performance.  However, management was unable to tell her what her poor performance was and how she was expected to perform.  In the end, her performance was not an issue. 

    SUBMISSIONS FOR THE RESPONDENT

16. The following submissions, in brief terms, where made by Ms Walker for the respondent:

    (a)The applicant’s cessation of employment was not a redundancy and the payment she received was not a genuine redundancy payment.  At the time of the termination, it was not a redundancy and the applicant’s termination took place as part of a performance management process. 

    (b)Whether a redundancy occurred would depend at the time of the applicant’s resignation or cessation of employment.

    (c)Apart from her notice of objection, nowhere in the documents at the hearing is there a reference to redundancy by the applicant. The reference was either to informal or formal performance management. 

    (d)In the Deed of Separation and Release, it is clear that the parties acknowledged that the lump sum payment has been (or will be) taxed as an employment termination payment.  There is nothing in the Deed that refers to redundancy or retrenchment and in no way refers to clause 13.0 of the applicant’s terms and conditions of employment.

    (e)On all the material available, the applicant was not being dismissed by her employer.  She resigned in the context of a difficult situation where she was being performance managed.

    (f)Performance management is an integral part of an employment situation.  Dismissal is caused by the redundancy of a position.  It is the position in question that must be made redundant.

    CONSIDERATION

    Is any part of the lump sum payment received by the applicant a genuine redundancy payment?

17. Under subsection 83-175(1) of the 1TAA 1997, 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:

    (a)The payment being tested must be received in consequence of the employee’s termination.

    (b)That termination must involve the 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. 

18. The respondent’s contention (with which I agree) is that the amount received by the applicant on the termination of her employment is not a genuine redundancy payment as specified in s 83-175 and therefor constitutes assessable income.  For a payment to qualify as a genuine redundancy payment, the employee must be dismissed from employment.  It is not sufficient that the person loses a particular position with the employer, but continues on in some other capacity.  Dismissal is not synonymous with termination, but involves an action to terminate employment taken by the employer irrespective of the wishes of the employee (see Smith v Director-General of School Education,[12] and Advertiser Newspapers Pty Ltd v Industrial Relations Commission of South Australia.[13]  In order for the termination to constitute a “dismissal from employment”, there must be a decision to terminate employment at the employer’s initiative, without the consent of the employee.  This is to be contrasted with employment that is terminated at the initiative of the employee, for example, in the case of resignation.  A termination is not precluded from being a “dismissal” as a result of an employee indicating interest in having his or her employment terminated.  Rather, the determinative consideration is whether the final decision to terminate is that of the employer. 

    [12] (1993) 31 NSWLR 349 at 366.

    [13] [1999] SASC 300.

19. On the evidence, the applicant and/or her representative initiated discussions relating to her employment with the employer ending and an offer was made by or on behalf of the applicant to the employer to resign her position.  The respondent contends that her termination was ultimately the applicant’s decision and was therefore not a dismissal.  Moreover, the respondent contends that there is insufficient evidence to prove that the applicant was constructively dismissed.  In my view, these contentions are correct. 

20. The respondent further contends (with which contention I also agree) that the applicant’s position was not made redundant at the time of her termination.  At the time of her termination, it was not a redundancy and the termination took place within a performance management process.  In this regard, I note that nowhere in the documents at the hearing is there a reference to redundancy by the applicant.  The reference is either to informal or formal performance management.

21. I note that in subsection 83-175(1) of the ITAA 1997, the thing that must be redundant for the provision to apply is the employee’s position see R v The Industrial Commission of South Australia; ex parte Adelaide Milk Co-operative Ltd per Bray CJ[14] and Jones v Department of Energy and Minerals per Ryan J[15].  As can be seen, the approach in these cases focuses on the underlying reality or substance of the position, that is, the existence of the functions, duties and responsibilities attached to the position.  It does not focus on whether the position, in terms of a name or position number, has been abolished.  A position is redundant when the functions, duties and responsibilities formally attached to it are determined by the employer to be superfluous to the current needs and purposes of the organisation.  In this regard, on 12 August 2013, the employer’s Manager said:[16]

    “… I confirm that, following the cessation of the employee’s employment with the employer on 10 April 2013, the employee’s work remit was redistributed among the remaining members of the Team and she was not replaced.  I also confirm that, since the employee’s resignation, the employer has not maintained the position for which the employee was employed and that, to the best of my knowledge, the employer has no immediate plans to restore it.”

    [14] (1977) 16 SASR 6

    [15] (1995) 60 IR 304.

    [16] Exhibit R1, T5 page 70.

1. It is clear that the documents provided by the applicant identify the commencement of the formal performance management process.  The documents indicate the following:

   (a)The applicant requested the employer to formalise the performance management process.  On 25 February 2013, the first formal performance management meeting was arranged.[17]

   (b)On 27 February 2013, the first formal performance management meeting occurred.[18]

   (c)On 5 April 2013, the applicant provided her employment lawyer with details of the second performance management meeting.  On that same day, the applicant’s employment lawyer said:[19]

   “I agree with your take on things.

   I think it is time for you to take control of the situation and put an offer to them to resign.”

   It is clear from these documents that the applicant had reached the stage where a compromise was appropriate and an offer to resign by her was necessary to resolve the situation.

   [17] Exhibit A1, Attachment GA 20.

   [18] Exhibit A1, Attachment GA 22.

   [19] Exhibit A1, Attachment GA 24.

2. It is noted that, following the cessation of the applicant’s employment with the employer, her work remit was redistributed among the remaining members of her team and she was not replaced.  After her resignation, her employer has not maintained the position for which she was employed and her employer has no immediate plans to restore it.  There is no reference to the applicant’s employment ceasing because of the redundancy of her position.

3. The Deed of Separation and Release was entered into by the parties.  I note that the Deed refers to the lump sum payment, to be taxed as an employment termination payment.  There is no reference to the payment of a genuine redundancy payment.  It is clear from the circumstances surrounding the conclusion of the Deed that the applicant was not being dismissed by the employer and she resigned in the course of the performance management process.  Consistent with this arrangement, the respondent issued the 2013 notice of assessment to the applicant increasing the amount of the income involved to the full amount of the lump sum payment. 

4. In the Terminated Employee Listing that the applicant received from her employer the lump sum payment was referred to as an employment termination payment and described as a “golden handshake”.  There is no reference in that document to redundancy.  The first time redundancy was referred to in the documents before the Tribunal was in the applicant’s notice of objection[20] where the applicant asserted that her employer had filled in the PAYG summary incorrectly by putting all of the lump sum payment in the taxable component.

   [20] Exhibit R1, T5 page 61.

5. On 19 June 2014 the Manager effectively advised the respondent:

   (a)that the lump sum payment was not caused by the redundancy of the applicant’s position;

   (b)       that the lump sum payment was not made genuinely because of a redundancy;

   (c)that the lump sum payment was not made pursuant to clause 13.0 of the applicant’s terms and conditions of employment.

6. It is noted that the employer’s terms and conditions of employment[21] specifically make provision for redundancy in clause 13.0.  There was no reference to this clause in any of the documents of the applicant that were considered during the hearing.

   Is any part of the lump sum payment received by the applicant from her employer excluded from being an employment termination payment under s 82-130 of the ITAA 1997?

   [21] Exhibit R2, ST1 page 10.

7. The respondent has contended that no part of the lump sum payment received by the applicant on the termination of her employment with the employer is excluded from being an employment termination payment under s 82-130(1) of the ITAA 1997.  I agree with this contention.  I am also satisfied that no part of the lump sum payment falls within the provisions of s 82-135 of the ITAA 1997. 

   CONCLUSION

8. For the reasons outlined above, I am satisfied that the lump sum payment received by the applicant from the employer is an employment termination payment under s 82-130(1) of the ITAA 1997.  As the lump sum payment received by the applicant was not a genuine redundancy payment according to the definition in s 83-175, the applicant is liable to income tax on the full amount received.

   DECISION

9. The Tribunal affirms the objection decision under review.

I certify that the preceding 30 (thirty) paragraphs are a true copy of the reasons for the decision herein of Senior Member R W Dunne

..........................[Sgd]..............................................

Administrative Assistant

Dated 29 January 2015

Date(s) of hearing	20 November 2014
Applicant	In person
Counsel for the Respondent	Ms G Walker
Advocate for the Respondent	Mr P Zollo
Solicitors for the Respondent	ATO Review and Dispute Resolution