Edited version of private ruling

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Ruling

Subject: Genuine Redundancy Payment

Question

Is the payment you received on termination of your employment tax-free as a genuine redundancy payment?

Answer

No.

This ruling applies for the following period:

Year ending 30 June 2010

The scheme commences on:

1 July 2009

Relevant facts and circumstances

You were employed by the employer.

You were informed that your services could no longer be effectively utilised within the employer.

A formal notification of this confirmed that, pursuant to your employment agreement (the Agreement), you can no longer be gainfully employed by the employer.

The clause of the Agreement under which your employment was terminated specifies that it is only to be used where the employer still wants the duties of the position held to be performed. A different clause covers situations where the position is not required or where the position is being moved to a different location.

A subsequent clause of the Agreement specifies how payments are to be calculated, depending on which clause under which employment is terminated.

You were offered voluntary redundancy, which you accepted.

Subsequently your employment with the employer was terminated.

You were paid a redundancy payment which was classified, and taxed, as an employment termination payment with no tax-free redundancy component.

The employer confirmed that the clause of the agreement that applied to your redundancy was the one where your position was still required.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 83-175

Income Tax Assessment Act 1997 subsection 83-175(1)

Income Tax Assessment Act 1997 subsection 83-175(2)

Income Tax Assessment Act 1997 subsection 83-175(3)

Income Tax Assessment Act 1997 subsection 83-175(4)

Public Service Act 1999 section 29

Public Service Act 1999 subsection 29(1)

Public Service Act 1999 paragraph 29(1)(a)

Summary

The payment that you received on termination of your employment is not a genuine redundancy payment as your position has not been made genuinely redundant.

Detailed reasoning

Genuine redundancy payment

A payment made to an employee, after 30 June 2007, is a genuine redundancy payment (GRP) if it satisfies all the criteria set out in section 83-175 of the ITAA 1997.

Section 83-175 of the ITAA 1997 states:

(1) A genuine redundancy payment is so much of a payment received by an employee who is dismissed from employment because the employee's position is genuinely redundant as exceeds the amount that could reasonably be expected to be received by the employee in consequence of the voluntary termination of his or her employment at the time of the dismissal.

(2) A genuine redundancy payment must satisfy the following conditions:

(a) the employee is dismissed before the earlier of the following:

(i) the day he or she turned 65;

(ii) if the employee's employment would have terminated when he or she reached a particular age or completed a particular period of service - the day he or she would reach the age or complete the period of service (as the case may be);

(b) if the dismissal was not at arm's length - the payment does not exceed the amount that could reasonably be expected to be made if the dismissal were at arm's length;

(c) at the time of the dismissal, there was no arrangement between the employee and the employer, or between the employer and another person, to employ the employee after dismissal.

(3) However, a genuine redundancy payment does not include any part of a payment that was received by the employee in lieu of superannuation benefits to which the employee may have become entitled at the time the payment was received or at a later time.

Payments not covered

(4) A payment is not a genuine redundancy payment if it is a payment mentioned in section 82-135 (apart from paragraph 82-135(e)).

The Commissioner has issued Taxation Ruling TR 2009/2 Income tax: genuine redundancy payments (TR 2009/2), which outlines the requirements to be satisfied before any payment made to a person whose employment is terminated qualifies for treatment as a GRP under section 83-175 of the ITAA 1997.

In discussing what constitutes a GRP in accordance with subsection 83-175(1) of the ITAA 1997, paragraph 11 of TR 2009/2 states:

There are four necessary components within this requirement:

1. The payment being tested must be received in consequence of an employee's termination.

2. That termination must involve an employee being dismissed from employment.

3. That dismissal must be caused by the redundancy of the employee's position.

4. The redundancy payment must be made genuinely because of a redundancy.

For the payment to be considered a GRP all the criteria set out in section 83-175 of the ITAA 1997 must be satisfied.

Payment in consequence of termination

The payment was made to you because your employment was terminated. Consequently, it is considered that this criterion has been met.

'Dismissal' and 'Redundancy'

Under subsection 83-175(1) of the ITAA 1997, a genuine redundancy payment is a payment resulting from:

(i) a dismissal; and

(ii) a redundancy.

The Explanatory Memorandum to the Income Tax Assessment Amendment Act (No.3) 1984 which inserted former section 27F into the ITAA 1936 states at page 91:

The terms "dismissal" and "redundancy" are not defined in the legislation and, therefore, should be given their ordinary meanings. "Dismissal" carries with it the concept of the involuntary (on the taxpayer's part) termination of employment. "Redundancy" carries the concept that the requirements of the employer for employees to carry out work of a particular kind, or for employees to carry out work of a particular kind in the place where they were so employed, have ceased or diminished or are expected to cease or diminish. Redundancy, however, would not extend to the dismissal of an employee for personal or disciplinary reasons or for reasons that the employee was inefficient.

Consequently, it is necessary to consider the ordinary meaning of the terms 'dismissal' and 'redundancy' and the meaning the judicial authorities have ascribed to them.

Paragraphs 18 and 20 of TR 2009/2 discuss what constitutes dismissal:

18. Dismissal is a particular mode of employment termination. It requires a decision to terminate employment at the employer's initiative without the consent of the employee. This stands in contrast to employment that is terminated at the initiative of the employee, for example in the case of resignation.

20. A dismissal can still occur even where an employee has indicated that they would be interested in having their employment terminated, provided that the final decision to terminate employment remains solely with the employer. Such a case may arise where expressions of interest in receiving a redundancy package are sought from employees as part of a structured process undertaken by the employer as a means of promoting industrial harmony.

From the facts provided, it is considered that although you accepted the voluntary redundancy, your dismissal was ultimately up to the employer. Consequently, it is considered that the requirement of dismissal from employment has been met.

Paragraph 25 of TR 2009/2 provides the following in relation to the meaning of 'redundancy':

25. An employee's position is redundant when an employer determines that it is superfluous to the employer's needs and the employer does not want the position to be occupied by anyone. Accordingly, it is fundamentally the employer's decision that a position is redundant. On occasion the decision may be unavoidable due to the circumstances surrounding the employer's operations.

The Administrative Appeals Tribunal (AAT) in AAT Case 12,997 (1998) 39 ATR 1073; (1998) 98 ATC 183, considered a payment received by a taxpayer was to be treated as a bona fide redundancy payment not solely due to the taxpayer having been constructively dismissed but, also due to his job having been abolished.

It is evident from the Explanatory Memorandum, Taxation Ruling and the decision by the AAT that the position a person held must no longer exist for a redundancy to be genuine. It is not enough just for the person to be excess if the position that they held is not excess to the employer's needs.

To determine if redundancy is genuine we need to look at the employment contract under which your employment was terminated.

You were advised that your services could no longer be effectively utilised by the employer, and that under the provisions of the Agreement you can no longer be gainfully employed.

In a further letter this was confirmed by the employer.

It is evident from the wording used in clause of the Agreement under which your employment was terminated that the position you occupied was not made redundant, only that your services could no longer be utilised. Therefore, redundancy under this clause would not be considered to be genuine. On the other hand, if your position had been made redundant (including being abolished in your current workplace and moved to another capital city), your termination would, instead, have been subject to another clause.

Your employment was specifically terminated under the provisions of a clause of the Agreement which was only to be used where the position occupied was still required by the employer. Consequently, it is considered that the requirement that the position be made redundant has not been met.

As a result, the redundancy payment was not made genuinely because of a redundancy.

Conclusion

As all the requirements that termination be as a result of genuine redundancy have not been satisfied, the payment that you received on termination of employment is not a genuine redundancy payment.

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