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Ruling

Subject: Genuine redundancy payment

Question

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

Answer

No.

This ruling applies for the following period:

2012-13 income year

The scheme commences on:

1 July 2012

Relevant facts and circumstances

You were employed by an employer (the employer).

The employer is a contractor on a project (the Project) for a Company (the Company).

You commenced employment with the employer during the X income year.

You terminated employment with the employer during the Y income year.

You advised that you were told when you started the Project that it would run for a few years. Your contract is an open ended contract as your job was continuous until the Company decided it no longer required the services of your employer.

You advised that you have had only verbal notices (a few weeks prior to the termination of employment) that the Project for the employer will end on a specific date during the Y income year. All employees of the employer finished on that day.

A payment advice from your employer advised that you were paid a gross amount during the Y income year comprising the following:

Leave Payment

Annual leave

Leave loading

Lump sum payment

ETP - Taxable

An amount of tax was withheld from the payment.

There was no agreement between yourself and the employer or any other person in regards to future employment

You are under 65 years of age.

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 Paragraph 83-175(2)(a)

Income Tax Assessment Act 1997 Paragraph 83-175(2)(b)

Income Tax Assessment Act 1997 Paragraph 83-175(2)(c)

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

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

Reasons for decision

Summary

The employment termination payment (the Payment) received by you is not a genuine redundancy payment as all the legislative conditions have not been satisfied.

The Payment is an employment termination payment.

Detailed reasoning

Genuine redundancy payment

You received an employment termination payment during the Y income year.

To determine if any part of the payment you received the employer constitutes a genuine redundancy payment (GRP), all the conditions in section 83-175 of the Income Tax Assessment Act 1997 (ITAA 1997) will need to be satisfied.

A GRP is defined in subsection 83-175(1) of the ITAA 1997 as:

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.

Subsection 83-175(2) of the ITAA 1997 states that for a payment to qualify as a GRP all of the following conditions must be met:

(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 the 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, titled Income Tax: genuine redundancy payments (TR 2009/2). 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:

11. There are four necessary components within the basis genuine redundancy requirement:

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

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

· That 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

The payment you received is considered to be an employment termination payment therefore, the first requirement that the payment must be received in consequence of a termination is met.

Dismissal from employment

Paragraph 18 of TR 2009/2 discusses what constitutes a 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.

A payment is classified as a genuine redundancy payment only upon meeting all of the requirements set under section 83-175 of the ITAA 1997 and dismissal only forms part of those requirements.

On the basis of the facts as presented in this case, it is considered you were dismissed from employment at the initiative of the employer. The employer terminated your employment during the Y income year. Therefore, this second requirement of subsection 83-175(1) of the ITAA 1997 has been satisfied.

Genuine redundancy

Dismissal caused by redundancy

As stated by the Commissioner in paragraph 23 of TR 2009/2, section 83-175 of the ITAA 1997 requires that the dismissal be caused only by redundancy of the employee's position, and not for some other reason. It follows, therefore, that redundancy must be the reason for termination of employment by way of dismissal.

Paragraphs 24 and 25 of TR 2009/2 provide the following in relation to the meaning of redundancy:

24. As is the case in determining if there is a dismissal, the reason for a dismissal is to be established in light of the facts and circumstances of each case. The redundancy of the relevant position must be the prevailing or most influential reason for the dismissal if there is more than one contributing cause.

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.

It is evident from the above that if the prevailing or most influential cause of the termination of a person's employment was not redundancy of the position they occupied, the dismissal would not constitute a redundancy.

However, paragraphs 38 to 39 of TR 2009/2 provide the following in relation to project-based work:

38. In some cases, particularly those involving multi-disciplinary project-based work, an employee's period of service may be determined by reference to the achievement of a particular outcome rather than a specified period of time. The employee's period of service in these circumstances concludes on the achievement of that outcome.

39. In some industries, 'rolling' outcome or project-based contracts are offered. Based on the same principles discussed at paragraph 37 of this Ruling, an ongoing employment relationship may, as a matter of fact, be established in these cases. A genuine redundancy payment may be paid in exceptional cases where the evidence supports the existence of an ongoing employment relationship, despite employment being terminated on the achievement of an outcome or the completion of a project.

The Commissioner expands on the issue of determining the cause of dismissal at paragraphs 268 to 269 of TR 2009/2:

268. There are various reasons why an employee may be dismissed from employment. Redundancy may be only one of these reasons.

269. In circumstances where more than one reason can be identified for the dismissal, the Commissioner considers that redundancy must be the primary cause of the dismissal. This suggests an analysis of what is the prevailing or most influential cause of the dismissal. This question is to be answered in light of the facts and circumstances of each case.

From the facts of the case, your employer is a contractor on a project (the Project) with a company (the Company). You were employed by the employer. You were aware that your contract with the employer was open ended as the period of employment was reliant on your employer continuing to provide services to the Project.

As you were aware that the period of employment was only for the duration of your employer's services for the Project and a specific period of time, it is considered that the prevailing, or most influential, cause of the termination of your employment was not redundancy.

As it is considered that the dismissal was not caused by the redundancy of your position, the third requirement of a genuine redundancy has not been satisfied. As one of the requirements have not been satisfied, consideration of the other requirements under section 83-175 of the ITAA 1997 is therefore not necessary.

Conclusion

The Payment does not include a genuine redundancy payment as it is considered that the prevailing, or most influential, cause of the termination of your employment was not redundancy.

The Payment is an employment termination payment.

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