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Ruling

Subject: Genuine redundancy payment

Question

Is any part of the separation payment made under a deed of release a tax-free part of a genuine redundancy payment?

Answer

No.

This ruling applies for the following periods:

2012-13 income year.

The scheme commences on:

1 July 2012

Relevant facts and circumstances

Early in the 2003-04 income year, you commenced employment with the Employer.

During the 20011-12 income year you were party to a hearing regarding weekly compensation benefits. At this hearing you were offered a 'redundancy package' to finalise separation and conclude all legal proceedings.

Several days later you signed a Deed of Release (the Deed) between the Employer and yourself. In the Deed it was agreed by both parties that your employment was terminated on the date of the hearing by way of this separation agreement. It was further agreed that this separation was 'to the effect of redundancy'.

The Deed states that a lump sum separation payment will be paid to you.

The separation payment includes an accrued leave component, including annual leave and pro-rata long service leave.

You state that the employment position held with the Employer still exists and was never abolished.

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.

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 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 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.

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, it is clearly evident from the contents of the Deed that the payment 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

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

In this case, during the 2011-12 income year you signed the Deed between the employer and you. In the Deed it was agreed by both parties that your employment was terminated by way of separation agreement 'to the effect of redundancy'.

It is accepted that you were 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. (bold emphasis added)

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, you do not contend that your former position with the employer has been abolished. Further no documentary evidence has been provided to indicate otherwise.

The term 'redundancy' is not defined in the Deed. The Macquarie Dictionary Online defines ' redundancy' as follows:

1. the state of being redundant.

2. a redundant thing, part, or amount; a superfluity.

3. the payment made to a redundant employee.

The term 'redundant' is further defined in the Macquarie Dictionary Online as:

1. being in excess; exceeding what is usual or natural: a redundant part.

…

3. denoting or relating to an employee who is or becomes superfluous to the needs of the employer.

…

However, as already noted above, the income tax legislation concerns itself with the redundancy of the position and not the redundancy of the person occupying the position.

It is noted that the term 'termination' is defined in the Deed as follows:

Termination means the separation (to the effect of redundancy) of the Employee from the Company on the date that separation (to the effect of redundancy) became effective.

Similarly, elsewhere throughout the Deed, wherever the words 'termination' or 'separation' appear they are followed by the statement:

· (to the effect of redundancy)

It is not clear what purpose is being served by the inclusion of those words. However, the facts show that whilst your services were no longer required, the position you formerly occupied was still required, as evidenced by the fact that the position has not been abolished.

Therefore it can only be concluded that your 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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