Written by Sveta Shao in July, 2007

Small business owners can now sack themselves and pay themselves a redundancy payout after a winning case in the Victorian Administrative Appeals Tribunal.

A director her husband and their son were all directors of a family business. The Company is a main contractor for an entertainment company (“The Contractor”) to install and servicing of satellite dishes.

The Company engaged 40 to 50 sub-contractors and employed between six and nine workers including the directors. When the contractor ended the contract with the Company and any other work, the Company paid out its employees with lump-sum redundancies and at the same time the director also paid herself, her husband and her son redundancy payments of $18,530 each. This drew the attention of the ATO, which said the payments were not bona fide redundancy payments eligible to be taxed at lower rates.

The ATO argued that as a director decided to terminate her own employment and, as such, her dismissal was voluntary.

But the Victorian Administrative Appeals Tribunal did not agree. “It cannot be said the director freely consented in a broad sense to terminate her employment,” senior member said. “It was a cessation of employment against her wishes, forced on her by external issues which, as a director, led to the necessary decision to terminate all the employment with the Company. I am satisfied that such amount would not exceed the amount that could reasonably be expected to be paid to an arm’s-length employee with over five years service and with the management responsibility.”

“This is the first time the Tax Office has tested whether a director can sack themselves,” said the taxpayer’s lawyer. The Lawyer also said that the case showed people had to think about whether or not the amount was reasonable.

“A lot of small businesses think they can just pay themselves up to the redundancy threshold limit, which is currently $6738 plus $3392 for each completed year of service, without attracting the attention of the Tax Office.”

The ATO has until May 28 to appeal against the decision.