Incentive Payments as Redundancy Payments

Abstract

Does a payment paid to a contractor as an incentive to complete the contract early constitute a redundancy payment under section 68 of the Income Tax Act 1976? Thorburn v. Commissioner of Inland Revenue (1983) 6 NZTC 61,618 (HC) held that it did constitute a redundancy payment, since one of the motivating factors for both employee and employer was the cessation of employment at the end of the contract.

On appeal, the Court of Appeal [1985] 2 NZLR 483; (1984) 6 NZTC 61,856 overturned the High Court decision. Woodhouse P found that the primary reason for the payment was for efficient performance, not for termination of employment.

As at 2009, the relevant legislation is section CE 10 of the Income Tax Act 2007. This provides a similar, although not identical, test to the 1976 Act. Specifically, the amount must be paid for loss of a vocation or position, or leaving a position, or loss of status. If paid for one of these reasons, it will be treated as income and taxed at the applicable personal rate.

Keywords: Redundancy payment, income, tax, retirement, incentive payment

JEL Classification: K34