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Ruling

Subject: Genuine redundancy payment

Question

Is any part of the employment termination payment paid by the Employer excluded from assessable income as the tax free part of a genuine redundancy payment?

Answer

No.

This ruling applies for the following periods:

2011-12 income year.

The scheme commences on:

1 July 2011

Relevant facts and circumstances

Your client was an employee with the Employer from the late 1980s.

In early 2011, your client's employment with the Employer was terminated for disciplinary reasons.

At the date of termination your client held a position with the Employer.

Your client appealed to the Board against the termination of employment.

In late 2011, the Board made a decision regarding your client's termination of employment. The Board stated:

It is the Board's decision that the finding of the [the Employer] be set aside. The Board further finds that it would be impracticable to reinstate the Applicant and orders that [the Employer] pay the Applicant compensation equivalent to the amount of remuneration he would have received during the period of 6 months prior to [their] dismissal.

A Payment Advice issued by the Employer shows a lump sum payment made after the Board's decision. You state this amount represents the compensation payment of six months remuneration.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 27F.

Income Tax Assessment Act 1997 Section 83-175.

Income Tax Assessment Act 1997 Subsection 83-175(1).

Income Tax Assessment Act 1997 Section 995-1.

Reasons for decision

Summary

No part of the payment is excluded from being an employment termination payment as the tax-free part of a genuine redundancy payment as not all the conditions have been satisfied.

The payment is a taxable component of an employment termination payment and is to be included in your client's assessable income for the 2011-12 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:

(a) a dismissal; and

(b) a genuine redundancy.

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:

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 lump sum payment was received in consequence of your client's termination of employment. Therefore, the requirement in subsection 83-175(1) of the ITAA 1997 that the payment is in consequence of your client's termination of employment is satisfied.

Dismissal from employment

Dismissal requires a termination of employment at the initiative of the employer without the consent of the employee.

In this case, your client was initially dismissed by the Employer before appealing this decision. In late 2011, the Board decided that despite setting aside the previous dismissal, your client would not be reinstated to his position with the Employer.

Therefore, it is accepted that your client was dismissed from employment by the employer. Consequently, the second requirement of a genuine redundancy has been met.

Dismissal caused by redundancy

Section 83-175 of the ITAA 1997 requires that the dismissal be caused by redundancy of the employee's position and not for some other reason. Redundancy must be the primary reason for termination of employment by way of dismissal.

At paragraphs 25 of TR 2009/2, the Commissioner makes the following comments regarding dismissal and redundancy:

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 of the employer's operations.

The Commissioner expands on the issue of determining the cause of dismissal at paragraphs 268 to 273 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.

270. The classic context for redundancy is the closure, downsizing or reorganisation of part or all of the employer's operations. Redundancy can readily be established as the prevailing or most influential cause of dismissal in the first two of these scenarios.

In this case, no documentary evidence has been provided to suggest that your client's position with the Employer had been abolished. Further, it is noted that in the decision by the Board, there was no mention of redundancy. To satisfy this requirement, redundancy must be the primary cause of the dismissal.

From this it can only be concluded that your client's employment was terminated for reasons other than redundancy.

As a result, the third requirement that there has been a dismissal because of redundancy cannot be satisfied.

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

Whether a redundancy is 'genuine' or contrived is determined on an objective basis.

In this case, from the facts provided, it is evident that there has not been a redundancy as discussed above. Therefore the requirement that the redundancy be genuine in order to classify the payment as a genuine redundancy payment does not need to be examined.

Conclusion

A payment made to an employee is a genuine redundancy payment if it satisfies all criteria set out in section 83-175 of the ITAA 1997. As subsection 82-175(1) has not been satisfied, the payment is not a genuine redundancy payment.

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