Issue
Is there a bona fide redundancy payment where an agreement to employ the taxpayer after termination of employment exists?
Decision
No. The lump sum payment is not a bona fide redundancy payment under subsection 27F(1) of the Income Tax Assessment Act 1936 (ITAA 1936).
Facts
The taxpayer's employer pays the taxpayer a lump sum in consequence of termination of employment. Prior to termination of employment the taxpayer establishes a consulting company and is appointed as a director of the company. An agreement is then entered into between the consulting company and the taxpayer's employer. The agreement provides that the taxpayer will be employed by the consulting company to supply the taxpayer's services as a contractor to the employer.
Reasons for Decision
Under subsection 27F(1) of the ITAA 1936, five conditions must be satisfied before a payment can be regarded as a bona fide redundancy payment. The conditions require an eligible termination payment (ETP) to be made on termination of employment by reason of bona fide redundancy. The payment must not be from an eligible superannuation fund and the termination must occur before the taxpayer's 65th birthday or before the taxpayer's employment would necessarily have had to terminate. In addition, if the taxpayer and employer are not at arm's length, the ETP must not be greater than the amount that could reasonably be expected to have been paid had the parties been at arms length.
The final condition at paragraph 27F(1)(d) of the ITAA 1936 provides that there must not be, at the termination time, any agreement between the taxpayer and the employer, or between the employer and another, to employ the taxpayer after the termination time. In this case, there was an agreement at the termination time between the employer and a third party. The consulting company had agreed with the employer to employ the taxpayer after the termination of the taxpayer's employment. Although all the other conditions under subsection 27F(1) of the ITAA 1936 have been satisfied, the payment is not considered a bona fide redundancy payment because of the agreement for re-employment with the consulting company.