Edited version of your private ruling

Authorisation Number: 1012531140882

Ruling

Subject: Employment termination payment - genuine redundancy

Question

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

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

Your Client had their employment with the Employer terminated during the 2012-13 financial year.

At the time of your client's employment being terminated, they were employed in an upper management role.

A Deed of Release was executed between your client and the employer in relation to his employment being terminated (the Deed).

In accordance with the Deed your client received a sum of money which was expressed as a payment equal to 6 months in lieu of notice.

The employer initially characterised the Termination Payment as a Bona Fide Redundancy Payment but subsequently amended the PAYG Payment Summary - Employment Termination Payment Form to an ETP type O - being an ETP not described by R.

Your client is aware that an existing employee has been promoted on an interim basis to take over your client's duties in addition to continuing to perform their existing duties.

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 your client by the Employer is a genuine redundancy payment. This is because the duties, functions and responsibilities of your client's previous position have only been reallocated by the Employer on an interim basis and it is not considered that your client's previous position has been made redundant.

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

Detailed reasoning

Genuine redundancy payment

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 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 was received in consequence of the termination of your client's employment pursuant to the Deed of Release being executed. 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

Paragraph 18 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.

Dismissal carries with it the concept that the termination of a person's employment is involuntary and instigated by the employer. Dismissal however, can include the notion of constructive dismissal where an employee may be placed in a situation where he or she has little option but to tender his or her resignation. It should be noted that constructive dismissal, as with other forms of dismissal, does not in its own right indicate that a genuine redundancy has taken place.

In this case, your client entered into a Deed of Release with the employer in consequence to the termination of their employment.

There is no information in the facts provided to indicate that your client's termination was voluntary in nature and the Deed indicates that it was fundamentally the employer's decision to terminate the employment rather than a situation of voluntary termination. As the final decision to terminate employment was made by the employer, your client has been dismissed from employment and the second requirement of a genuine redundancy has been met.

Dismissal caused by genuine 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 the redundancy of the employee's position, and not for some other reason. Redundancy must be the prevailing cause of the termination of employment by way of dismissal.

At paragraph 24, 25 and 26 of TR 2009/2, the Commissioner makes the following comments regarding dismissal and 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 of the employer's operations.

26. In some circumstances, an employer may reallocate the duties and functions attached to a particular position to another position within the employer's organisational structure. In such cases, the former position is redundant. However, if the employee who had been working in that position is still employed by the employer following the reallocation of duties and functions, there will not be a dismissal.

The Commissioner expands on the ordinary meaning of 'redundancy' at paragraphs 261 to 263 of TR 2009/2:

261. In R v. Industrial Commission (SA ); Ex parte Adelaide Milk Co-operative Ltd , Bray CJ stated that:

... a job becomes redundant when an employer no longer desires to have it performed by anyone.

262. Ryan J in Jones v. Department of Energy and Minerals expanded on Bray CJ's description in the following terms:

However, it should be noted that Bray CJ's description of what can constitute redundancy is not expressed to be exclusive. His Honour's description was cast in terms of a 'job' in the sense of a collection of functions, duties and responsibilities entrusted, as part of the scheme of the employer's organization, to a particular employee. However, it is within the employer's prerogative to rearrange the organizational structure by breaking up the collection of functions, duties and responsibilities attached to a single position and distributing them among the holders of other positions, including newly-created positions. It is inappropriate now to attempt an exhaustive description of the methods by which a reorganization of that kind may be achieved. One illustration of it occurs when the duties of a single, full-time, employee are redistributed to several part-time employees. What is critical for the purpose of identifying a redundancy is whether the holder of the former position has, after the re-organization, any duties left to discharge. If there is no longer any function or duty to be performed by that person, his other position becomes redundant in the sense in which the word was used in the Adelaide Milk Co-operative case.

263. Accordingly, this approach focuses on the underlying reality or substance of the position, that is, the existence of the functions, duties and responsibilities attached to a position. It does not focus on whether the position, in terms of a name or position number, has been abolished. A position is redundant when the functions, duties and responsibilities formerly attached to the position are determined by the employer to be superfluous to the current needs and purposes of the organisation.

Further guidance on the meaning of 'redundancy' can be found in the Full Federal court decision in Dibb v Federal Commissioner of Taxation [2004] FCAC 126; 2004 ATC 4555; (2004) 207 ALR 151; (2004) 55 ATR 786, where Justices Spender, Dowsett and Allsop, stated:

Even if the employee's job, defined by reference to its duties, has disappeared, he or she may be able to perform some other available job to the satisfaction of the employer. In that case, no question of redundancy arises. It is only if the employer considers that there is no available job for which the employee is suited, and that he or she must therefore be dismissed, that the question of redundancy arises. If, in good faith, the employer:

· has re-allocated duties;

· considers that the employee is not suitable to perform any available job, defined by reference to those re-allocated duties, existing after the re-allocation; and

· for that reason, dismisses the employee;

then, for the purposes of s27F, the employee is dismissed by reason of his or her bona fide redundancy. In the above discussion we have used the word "available" as meaning "vacant", and the word "suitable" as meaning "within the employee's capacity".

As mentioned above, a redundancy occurs when a role is no longer required and not occupied by anyone with particular importance placed on the duties and responsibilities of that role.

In the present case, it is clear that the functions, duties and responsibilities of your client's previous position with the employer have not ceased nor are they superfluous to the employer's needs as the employer has reallocated these duties to another employee, albeit, on a substantially lower level or remuneration from that of which your client received. As these duties and responsibilities have only been reallocated on an interim basis, it is not considered that your client's former position with the employer has been made redundant.

Therefore, it is considered that your client has not satisfied the third 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 of constitutes a genuine redundancy payment within the meaning of subsection 83-175(1) of the ITAA 1997.

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

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