Sack yourself? Pay the tax

A new draft tax office ruling that prohibits company directors who also act as employees from receiving tax-free redundancy payments will hit SMEs in the midst of restructuring.

A new draft tax office ruling that prohibits company directors who also act as employees from receiving tax-free redundancy payments will hit SMEs in the midst of restructuring.

Under the proposed new ruling, directors who act as employees – dual-capacity employees – will only qualify for tax-free redundancy payments if they did not approve their own termination.

As the threat of further redundancies loom, chartered accountant and business advisory firm PKF warn company directors can no longer assume that potential redundancy payments to themselves will be tax-free. And PKF has called on the tax office to make the recommendations clearer and fairer for business.

Lance Cunningham, director of taxation for PKF Australia, says the tax office believes the clause has been abused in the past and is responding by significantly tightening the guidelines.

But he is concerned that the current draft ruling determines that employees in a directors role are highly unlikely to experience genuine involuntary redundancies given the likelihood that they would have been involved in business decisions to make their position redundant.

“If this ruling is finalised without amendment, it would restrict or even remove the availability of these tax concessions in situations involving dual capacity employees (company directors who are also employees) who have experienced involuntary redundancies,” says Cunningham.

The draft ruling states that a dual capacity employee will only qualify for the tax-free redundancy payment if they do not consent to or approve the decision to terminate their own employment.

The ruling does allow one exception to this rule where the termination decision is dictated by legal or economic factors, leaving the employer’s decision-makers with no real or practical choice other than to terminate their own employment, in which case a dual capacity employee may qualify for a tax-free redundancy.

Sharon Burke, PKF partner, says the decision is typical of the tax commission’s view. “It’s not outside how the commission treats those closely held transactions.

“If you gave the example of a director who’d run their own business for 15 years, wants to close their businesses, they could pay themselves out about $60,000 tax-free.

“[The commissioner’s] view is that if you are a director you are involved in the decision making process – and thus if you make employees redundant you can’t make yourself redundant.”

However Cunningham says if the ruling is finalised, dual capacity employees will have more hoops to go through to access concessional treatment on genuine redundancy payments.