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Ruling

Subject: Genuine redundancy

Question

Is any part of the employment termination payment a tax-free part of a genuine redundancy payment?

Answer

No

This ruling applies for the following periods:

Year ending 30 June 2013

The scheme commences on:

1 July 2012

Relevant facts and circumstances

You commenced work for a company (the employer) over 10 years ago.

During the 2011-12 income year, the Employer sought 'expressions of interest' for voluntary redundancies.

You expressed interest to take part in the Voluntary Redundancy Program offered by the Employer.

You emailed your Employer seeking clarification on whether any part of the proposed redundancy payment was tax free.

The Employer confirmed that there is no tax free component to the redundancy payment on offer as 'this is a truly voluntary redundancy and you need to agree/consent to the package'.

The Employer provided you with a Voluntary Redundancy Program Acceptance Form which presented to you the option to either accept the offer or decline the offer and continue to remain employed with the Employer.

You accepted the offer and signed the Voluntary Redundancy Acceptance Form provided to you by the Employer.

The Employer confirmed your acceptance of the voluntary redundancy offer. They also confirmed your last day of work. The Employer stated that your final termination pay was dependent upon you signing the enclosed separation agreement and will include the redundancy payment into your nominated back account by a certain date.

You notified the Employer by email that you had signed the Separation Agreement.

You later notified the Employer that you had spoken with an officer of the Australian Taxation Office (ATO) regarding genuine redundancies.

The Employer responded to your email, stating that they had received professional advice from an external party confirming that their tax calculation for your redundancy pay was correct and that no part of the payment made to you constituted a genuine redundancy payment.

You are under 65 years old.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 82-135.

Income Tax Assessment Act 1997 Paragraph 82-135(e).

Income Tax Assessment Act 1997 Section 83-170.

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).

Reasons for decision

Summary

No part of the payment made to you by the Employer is a genuine redundancy payment. This is because you had voluntarily terminated your employment rather than your employment being terminated by your employer. Consequently, the termination of your employment is not a dismissal.

Therefore, the total payment is to be included in your assessable income as an employment termination payment for the 2012-13 income year.

Detailed reasoning

A payment made to an employee is a genuine redundancy payment if it satisfies all criteria set out in section 83-175 of the Income Tax Assessment Act 1997 (ITAA 1997). This section states:

(1) A genuine redundancy payment is so much of a payment received by an employee who is dismissed from employment because the employees 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 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 employees 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 arms length the payment does not exceed the amount that could reasonably be expected to be made if the dismissal were at arms 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)).

Section 82-135 of the ITAA 1997 lists payments that are not employment termination payments. Paragraph 82-135(e) provides that the part of a genuine redundancy payment worked out under section 83-170 is not an employment termination payment.

Dismissal and redundancy

A genuine redundancy payment is defined under subsection 83-175(1) of the ITAA 1997 as a payment resulting from both:

(a) a dismissal; and

(b) a genuine redundancy.

The terms 'dismissal' and 'redundancy' are not defined in the ITAA 1997. Therefore, it is necessary to consider the ordinary meaning of the terms and the meaning the courts have ascribed to each word.

The Explanatory Memorandum to the Income Tax Assessment Amendment Act (No.3) 1984, which inserted former section 27F of the Income Tax Assessment Act 1936 (ITAA 1936), the predecessor to section 83-175 of the ITAA 1997, 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.

The Commissioner has issued Taxation Ruling TR 2009/2, titled Income Tax: genuine redundancy payments. The Ruling provides guidance on the factors to be considered in the interpretation of section 83-175 of the ITAA 1997.

Paragraph 11 of TR 2009/2 states:

There are four components within the basis genuine redundancy requirement:

· The payment must be received in consequence of a termination.

· The termination must involve an employee being dismissed from employment.

· The dismissal must be caused by the redundancy of the employee's position.

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

Each of the requirements will be discussed individually.

The payment is in consequence of the termination of employment

In this case, the payment in question was received in consequence of the termination of your employment. Therefore, the requirement in subsection 83-175(1) of the ITAA 1997 that the payment is in consequence of your termination of employment is satisfied.

Dismissal from employment

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, your employment was terminated during the 2012-13 income year due to your acceptance of a Voluntary Redundancy Package offered by the Employer as indicated in a letter from the Employer. However, unlike the situation under paragraph 20 of TR2009/2, the termination of your employment does not constitute a dismissal because the final decision to terminate your employment rested with yourself. Had you not consented to the voluntary redundancy separation with your employer your employment would have continued.

Therefore, the decision to terminate your employment did not remain solely with your employer. This is evidenced through an email where you notified your employer that you had consented to the separation with your employer and signed the Voluntary Redundancy Program Acceptance Form accordingly.

Furthermore, although the Employer sought expressions of interest, it was merely to identify the staff to whom the voluntary redundancy package offer was to be made. The employer did not terminate your employment, it was terminated at your request as indicated on the copy of the Voluntary Redundancy Program Acceptance Form which you had signed. Accordingly, it was you, and not your employer who initiated the termination process.

Consequently, the termination of your employment is not a dismissal for the purposes of subsection 83-175(1) of the ITAA 1997, because your employment is being terminated upon your instigation. This is further evidenced by a letter from the Employer where it clearly states your ongoing employment will not be disadvantaged if you choose not to accept the offer. Further, the Acceptance Form accompanying the letter provided you an opportunity to decline the offer to participate in the Voluntary Redundancy Program.

Therefore, it is considered that you have not satisfied the second criterion under subsection 83-175(1) of the ITAA 1997 in this instance. Since the first requirement under section 83-175 has not been satisfied, the other conditions do not need to be considered.

Conclusion

Not all criteria stipulated in subsection 83-175(1) of the ITAA 1997 have been satisfied.

Consequently it is considered that no part of the payment in question constitutes a genuine redundancy payment within the meaning of subsection 83-175(1) of the ITAA 1997.

Therefore, the total payment in question is to be included in your assessable income as an employment termination payment for the 2012-13 income year.

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