Superannuation: Bona Fide Redundancy (Lump Sum on Completion of Fixed Term Contract)

Whether the lump sum payment on completion of a fixed term contract is a bona fide redundancy amount under section 159S of the Income Tax Assessment Act 1936.

The lump sum payment on completion of a fixed term contract is not a bona fide redundancy amount under the Income Tax Assessment Act 1936 section 159S.

The employee held office as a full-time executive director of a company. That office was held under the terms of an employment contract which expired on its due date. At the time of entering into the contract both parties expected the contract would be renewed. However, on the expiry of the contract the employer (taxpayer) decided to abolish the position as part of a group restructure. Upon expiry the employer is liable to pay a termination payment, as well as lump sums in lieu of accrued annual leave and long service leave. Following discussions between the employer and the executive, the executive entered into a consultative arrangement with the employer which is said to be completely different from the executive's former duties.

Under the Income Tax Assessment Act 1936 subsection 27A(1), a payment made in respect of a taxpayer in consequence of the termination of any employment of the taxpayer is an eligible termination payment (ETP). It is considered that, in view of the completion of the contract and the abolition of the position formerly held by the executive, the completion of the contract constitutes a termination of the employment as a director. This view is supported by Taxation Ruling TR 96/13 and by the decision in Reseck v FCT (1975) 75 ATC 4213; (1975) 5 ATR 538.

An employee with a fixed termination date is treated differently from an employee with an open contract of employment. By virtue of the Income Tax Assessment Act 1936 subparagraph 27F(1)(b)(i) an ETP paid on completion of a particular period of service will not qualify as a bona fide redundancy payment.

In the case where there is an agreement for employment with limited tenure, the date upon which that employment terminates under the agreement will be the last retirement date for the purposes of the Income Tax Assessment Act 1936 section 159S. The payment therefore does not satisfy the definition of bona fide redundancy amount under the Income Tax Assessment Act 1936 section 159S.