Edited version of your private ruling

Authorisation Number: 1012566643236

Ruling

Subject Employment termination payment and unused leave payment

Questions

1. Is a portion of an employment termination payment exempt from tax if part of the period of employment was related to service overseas?

2. Is an employer required to withhold an amount from unused leave payments on termination of employment?

3. If the answer to question 1 is 'yes', can the tax already withheld from an employment termination payment made be adjusted?

Answers

1. No.

2. Yes.

3. Answer not required.

This ruling applies for the following period

Income year ended 30 June 2014

The scheme commences on

Not applicable

Relevant facts and circumstances

1. A company in Australia (the Applicant) is going through a period of downsizing. As a result of the closure of a number of work sites, the Applicant will be reducing their workforce, resulting in a number of redundancies.

2. Employees affected by the downsizing include those who have worked overseas assignments in the past. The Applicant has provided several examples of employees affected at this point in time (the Affected Employees). Their employment either have already been, or will be terminated. Each of them received, or will receive a termination payment from the Applicant.

3. The Applicant has obtained an advice (the advice) from a professional entity. In the advice, the following was stated under the heading 'Facts':

…

· [name of employee] was considered a non-resident of Australia for tax purposes during periods of foreign service.

…

· The Australian component qualifies as a genuine redundancy payment.

· The foreign component of the severance payment is to be paid as a consequence of the employee's termination of employment in the various foreign countries and relates only to the period of employment where services were performed in the foreign countries in accordance with Subdivision 83-D (foreign termination payments) of the Income Tax Assessment Act 1997.

· The company proposes to pay the employee two separate payments representing the amounts due in respect of the termination of employment in the foreign countries and in respect of the termination of employment in Australia for services performed in Australia.

…

4. Among other things, the advice stated that:

Based on the above facts, we have prepared the Termination Payment calculations [page reference] attached. As the two payments reflect periods of Australian and foreign service, we confirm two separate payments in respect of the Australian and foreign sourced components can be made in accordance with Appendix A.

Please note that where the termination payments will be made to [name of employee] as a resident of Australia for tax purposes, all of the unused long service leave should be subject to Australian taxation.

5. Under the Applicant's expatriation policy, an expatriate remains an employee of their home country entity (i.e. the employment contract with their home country entity remains in place during the assignment). In other words, during their overseas assignments, all the Affected Employees continued to be employed by the Applicant. Their remuneration during the period of their assignment is, however, made by the host country, not by the Applicant.

6. With respect to the proposed separate payments to be made to a specified employee (one in respect of their Australian service and the other their foreign service), the Applicant is working through the possibility of potentially re-charging the payment of their overseas-service portion to the Applicant's regional headquarters in another place overseas, subject to internal agreement.

7. With respect to all the other Affected Employees, the Applicant has advised that they do not intend to re-charge to the related overseas entity any overseas-service portion of any termination payment made or to be made because the overseas assignments involved occurred some time ago.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 6-5(2).

Income Tax Assessment Act 1997 Section 6-10.

Income Tax Assessment Act 1997 Subsection 82-10(2).

Income Tax Assessment Act 1997 Subsection 82-10(3).

Income Tax Assessment Act 1997 Subsection 82-10(4).

Income Tax Assessment Act 1997 Section 82-130.

Income Tax Assessment Act 1997 Subsection 82-130(1).

Income Tax Assessment Act 1997 Subparagraph 82-130(1)(a)(i).

Income Tax Assessment Act 1997 Paragraph 82-130(1)(b).

Income Tax Assessment Act 1997 Subsection 82-130(2).

Income Tax Assessment Act 1997 Section 82-135.

Income Tax Assessment Act 1997 Section 82-160.

Income Tax Assessment Act 1997 Section 83-70.

Income Tax Assessment Act 1997 Section 83-75.

Income Tax Assessment Act 1997 Section 83-80.

Income Tax Assessment Act 1997 Section 83-175.

Income Tax Assessment Act 1997 Section 83-235.

Income Tax Assessment Act 1997 Paragraph 83-235(a).

Income Tax Assessment Act 1997 Paragraph 83-235(d).

Income Tax Assessment Act 1997 Section 83-240.

Income Tax Assessment Act 1997 Paragraph 83-240(1)(a).

Income Tax Assessment Act 1997 Paragraph 83-240(1)(b).

Income Tax Assessment Act 1997 Paragraph 83-240(1)(e).

Income Tax Assessment Act 1997 Subsection 995-1(1).

Taxation Administration Act 1953 Schedule 1 Section 12-85

Taxation Administration Act 1953 Schedule 1 Section 12-90

Further issues for you to consider

8. We have limited our ruling to the questions raised in your application. There may be related issues that you should consider, including:

§ Genuine redundancy payment.

You may apply for another ruling on this or any other matter.

Anti-avoidance rules

9. This private-ruling decision is confined to the questions raised.

Reasons for decision

Summary

Please note: for footnote references, see end of document.

10. For a payment to qualify as a foreign termination payment and therefore exempt from tax, it has to be, among other things, a payment that:

(a) is received by an individual in consequence of the termination of their employment in a foreign country; and

(b) relates only to a period of employment during which the individual either was not an Australian resident or was an Australian resident, not both.

11. During their overseas assignment the Affected Employees are still employed by the Applicant. When their employment is terminated by the Applicant in Australia, it cannot therefore be said that their employment is terminated in a foreign country.

12. The payment made, or to be made, by the Applicant to each of the Affected Employees in consequence of the termination of their employment with the Applicant relates to the entire period of their employment with the Applicant, not just to either a period of employment when they were not an Australian resident or to a period of employment when they are/were an Australian resident.

13. As the requirements under the relevant legislation have not been met, the payment made, or to be made, to each of the Affected Employees was not, or will not be, a foreign termination payment but was, or will be, an employment termination payment.

14. A split of a period of employment into an Australian portion and a foreign portion in respect of which separate termination payments are to be made does not turn the latter portion into a foreign termination payment.

15. An employer is required to withhold an amount from unused leave payments on termination of employment.

Detailed reasoning

Question 1

Employment termination payment

16. A payment received by an individual on termination of their employment may qualify as an employment termination payment if it satisfies the requirements stated in subsection 82-130(1) of the Income Tax Assessment Act 1997 (the ITAA 1997).

17. The term 'employment termination payment' is defined in subsection 995-1(1) of the ITAA 1997 as follows:

employment termination payment has the meaning given by section 82-130.

18. Subsection 82-130(1) of the ITAA 1997 states:

A payment is an employment termination payment if:

(a) it is received by you:

(i) in consequence of the termination of your employment; or

(ii) after another persons death, in consequence of the termination of the other persons employment; and

(b) it is received no later than 12 months after the termination (but see subsection (4)); and

(c) it is not a payment mentioned in section 82-135.

19. Where an employment termination payment is made during the life of an individual, the employment termination payment is known as a 'life benefit termination payment' under subsection 82-130(2) of the ITAA 1997.

Payment made in consequence of the termination of employment

20. For a payment received by an individual to qualify as an employment termination payment, the first condition to be met is that the payment is made in consequence of the termination of their employment of the taxpayer. The phrase 'in consequence of' is not defined in the ITAA 1997. In Taxation Ruling TR 2003/13, the Commissioner has discussed the meaning of the phrase. Although some provisions related to 'eligible termination payment' have been repealed, TR 2003/13 still has effect.

21. In paragraph 5 of TR 2003/13 the Commissioner states:

… a payment is made in respect of a taxpayer in consequence of the termination of the employment of the taxpayer if the payment 'follows as an effect or result of' the termination. In other words, but for the termination of employment, the payment would not have been made to the taxpayer.

22. As further stated by the Commissioner in paragraph 6 of TR 2003/13, there must be:

… a causal connection between the termination and the payment, although the termination need not be the dominant cause of the payment. The question of whether a payment is made in consequence of the termination of employment will be determined by the relevant facts and circumstances of each case.

23. The phrase 'in consequence of termination of employment' has also been interpreted by the courts in several cases.

24. Of note are the decisions made by the High Court in Reseck v. Federal Commissioner of Taxation¹ (Reseck) and the Full Federal Court in McIntosh v Federal Commissioner of Taxation² (McIntosh).

25. Both Courts' views were that for a payment to be made in consequence of the termination of employment it had to follow on as a result or effect of the termination of employment. Additionally, while it is not necessary to show that termination of employment is the sole or dominant cause, a temporal sequence alone would not be sufficient.

26. Therefore if the payment follows as an effect or a result from the termination of employment, the payment will be made 'in consequence of' the termination of employment for the purposes of subparagraph 82-130(1)(a)(i) of the ITAA 1997. Hence the payment will be an employment termination payment unless the payment is specifically excluded under section 82-135.

27. The employment of each of the Affected Employees either has been or will be terminated. Each of them has received, or will receive, a payment from the Applicant. It is evident that the payment was, or will be, made in consequence of the termination of their employment. The termination of employment and the payment are all intertwined and connected. If not for the termination of employment, the payment would not have been paid.

28. The payment is, therefore, considered to have been, or to be, received by each of the Affected Employees in consequence of the termination of their employment.

Payment received no later than 12 months after termination

29. The second condition for the payment to be an employment termination payment is stated in paragraph 82-130(1)(b) of the ITAA 1997. The payment must be received within 12 months of the employee's termination of employment, unless they are covered by a determination exempting them from the 12 month requirement.

30. The facts of this case indicate that an employment termination payment was, or will be, made to each of the Affected Employees at or around the time of the termination of their employment. Therefore, the requirement under paragraph 82-130(1)(b) of the ITAA 1997 has been or will be met.

Not a payment mentioned in section 82-135 of the ITAA 1997

31. Section 82-135 of the ITAA 1997 provides that certain payments are not employment termination payments. Relevant to each of the Affected Employees, these include

· unused annual leave or long service leave payments;

· foreign termination payments covered under Subdivision 83-D of the ITAA 1997; and

· the tax-free part of a genuine redundancy payment or an early retirement scheme payment.

32. The facts of this case indicate that the payment made, or to be made, to each of the Affected Employees has included, or will include, a payment for unused annual leave and/or unused long service leave. Under section 82-135 of the ITAA 1997 such a payment is not an employment termination payment. What remains to be considered, therefore, is whether there was, or will be, any amount that should be excluded from being an employment termination payment because the amount is, or will be:

(a) a foreign termination payment under Subdivision 83-D; or

(b) the tax-free part of a genuine redundancy payment.

Foreign termination payment

33. Subdivision 83-D of the ITAA 1997 deals with termination payments that arise out of foreign employment. These payments are not employment termination payments and are generally tax-free.

34. Section 83-235 of the ITAA 1997 applies to termination payments received by an individual where the individual was a foreign resident during the period of foreign employment to which the payment relates. The section states that:

A payment received by you is not assessable income and is not exempt income if:

(a) it was received in consequence of the termination of your employment in a foreign country; and

(b) it is not a superannuation benefit; and

(c) it is not a payment of a pension or an annuity (whether or not the payment is a superannuation benefit); and

(d) it relates only to a period of employment when you were not an Australian resident. (emphasis added)

35. Section 83-240 of the ITAA 1997 applies to termination payments received by an individual where the individual was an Australian resident during the period of foreign employment to which the payment relates. The section states that:

(1) A payment received by you is not assessable income and is not *exempt income if:

(a) it was received in consequence of:

(i) the termination of your employment in a foreign country; or

(ii) the termination of your engagement on qualifying service on an approved project (within the meaning of section 23AF of the Income Tax Assessment Act 1936), in relation to a foreign country; and

(b) it relates only to the period of that employment or engagement; and

(c) it is not a *superannuation benefit; and

(d) it is not a payment of a pension or an *annuity (whether or not the payment is a superannuation benefit); and

(e) you were an Australian resident during the period of the employment or engagement; and

(f) the payment is not exempt from income tax under the law of the foreign country; and

(g) for a period of employment - your foreign earnings from the employment are exempt from income tax under section 23AG of the Income Tax Assessment Act 1936 ; and

(h) for a period of engagement - your *eligible foreign remuneration from the service is exempt from income tax under section 23AF of that Act.

(2) For the purposes of subparagraph (1)(a)(ii), treat the termination of engagement on qualifying service on an approved project as including:

(a) retirement from the engagement; and

(b) cessation of the engagement because of the person's death.

36. Both section 83-235 and section 83-240 of the ITAA 1997 require that for a payment to be tax-free as a foreign termination payment it must be received in consequence of the termination of the taxpayer's employment in a foreign country.

37. As discussed previously, an employment termination payment was, or will be, made to each of the Affected Employees in consequence of the termination of their employment. However, at the time of the termination of employment, that employment was, or still is, in Australia. Therefore, neither the requirement under paragraph 83-235(a) of the ITAA 1997, nor the requirement under paragraph 83-240(1)(a), have been or will be satisfied.

38. Further, paragraph 83-235(d) of the ITAA 1997 requires that the payment 'relates only to a period of employment when you were not an Australian resident'. Similarly, paragraph 83-240(1)(b) requires that the payment 'relates only to the period of that employment or engagement'.

39. In each of the Affected Employees' cases, their period of employment with the Applicant comprises both service in Australia and overseas assignments. It is, however, not disputed that in spite of their overseas assignments, each of them always remains an employee of the Applicant throughout their period of employment. It therefore follows that it is the Applicant, as their employer, who has terminated, or will terminate, their employment in Australia, rather than the related entity in a foreign country for which the Applicant has assigned them to work.

40. In the Administrative Appeals Tribunal (AAT) case Re Taxpayer and Federal Commissioner of Taxation³, the taxpayer was a resident of the United Kingdom (UK) and employed by W Co, a UK company. Under an arrangement with O Co, a related company in Australia, the taxpayer was seconded from October 1997 to work for O Co. The taxpayer remained an employee of W Co until 31 March 2001. From 1 April 2001 onward the taxpayer was employed by O Co until 29 November 2002, when the taxpayer's employment was terminated.

41. The taxpayer received from O Co $145,141.83 and $203,198.56 as an eligible termination payment. The aggregate of these two amounts was based on 11 months' remuneration in lieu of notice, and these two amounts broadly reflected the time the taxpayer had worked in the UK and Australia respectively. However, for tax purposes O Co treated these two amounts as a composite eligible termination payment and did not treat any part of the aggregate as exempt or relating to the taxpayer's foreign service.

42. The taxpayer contended that $203,198.56 of the composite eligible termination payment was exempt under former section 27CD of the Income Tax Assessment Act 1936 (ITAA 1936) as an 'exempt non-resident foreign termination payment' (ENRFTP). The taxpayer further contended that the amount in question had been calculated by reference to the taxpayer's service in the UK from 1990 to 1997. The Commissioner submitted that the taxpayer received in effect one payment, not two distinct amounts, and that the payment related to the taxpayer's employment in Australia.

43. The AAT dismissed the taxpayer's appeal on the grounds that:

(a) O Co did not treat any element of the payment as an ENRFTP; and

(b) while the taxpayer might have been entitled to a sum equivalent to the component which the taxpayer claimed was an ENRFTP, the taxpayer had not established that this was how O Co had made the payment or payments, nor had the taxpayer demonstrated that any particular amount was paid in respect of the service in the UK.

44. In the AAT case Re Taxpayer and Federal Commissioner of Taxation⁴, the taxpayer was seconded by the employer to work in its Tokyo branch. During the secondment the taxpayer was made redundant. Under a deed of settlement the employer made a payment to the taxpayer for the loss of employment in Tokyo and Australia. The Commissioner refused to apportion the redundancy payment between the taxpayer's service in Tokyo and that in Australia. Senior Member Hunt stated⁵ that:

37. I agree with the opinion of Senior Member Ettinger⁶ that, for a taxpayer's termination or redundancy payment to be an ENRFTP, the taxpayer must satisfy all four sub-sections of section 27A(1), paragraphs (a)(i) to (iv) of the Act. For the reasons given above, I am satisfied the taxpayer came within sub-sections (i) to (ii) and possibly (iii) of section 27A(1)(a) but does not satisfy paragraph (iv) because his termination/redundancy pay was calculated by taking into account the whole period of his service of in and outside Australia.

Might the redundancy payment be split?

38. The Commissioner submits that the proper construction of the definition of an ENRFTP does not permit the dissection of a lump sum payment into components, parts of which meet the statutory meaning and parts of which do not. I agree with the Commissioner's contention although I previously observed in A Taxpayer and Commissioner of Taxation 2006 ATC 228; [2006] AATA 980 that it was possible to accept there had been a separate payment when two cheques had been drawn by the employer and paid to the taxpayer rather than one. In that case, the taxpayer presented clear reasons why two payments were made rather than one. Two separate payments may be a contrivance to avoid what is really lump sum but this may not always be the reason for separate payments. However, separate payments by DAL have not arisen in the taxpayer's case as he received the amount of $497,069 in one payment.

39. I agree with the Commissioner's submission that the definition of an ENRFTP requires that "the payment" relates solely to a period of the employment during which the taxpayer was a non-resident of Australia. It is the characterisation of that whole payment, not its constituent parts, with which the definition is concerned. Therefore, although it is possible to attribute a portion of the redundancy payment to the taxpayer's service in Japan, the whole of the redundancy payment nonetheless does not meet the statutory description of an ENRFTP for exemption from tax.

45. Senior Member Hunt then concluded⁷ that:

I find that the whole of the payment by DAL to the taxpayer was an eligible termination payment which does not meet paragraph (iv) of the definition of an exempt non-resident foreign termination payment and is therefore assessable as an eligible termination payment under the special provisions contained in Part III Div 2 Subdiv AA of the ITAA 1936.

46. The taxpayer appealed to the Federal Court against the AAT's decision under Branson v. Federal Commissioner of Taxation⁸. The appeal was dismissed.

47. As part of the Federal Government's Simplified Superannuation reforms, eligible termination payments ceased to exist from 1 July 2007, being replaced by employment termination payments and superannuation lump sums. Clause 4.3 of the Explanatory Memorandum to the Tax Laws Amendment (Simplified Superannuation) Bill 2006 states that:

Schedule 2 also contains a number of provisions to move associated payments from the Income Tax Assessment Act 1936 (ITAA 1936) in the Income Tax Assessment Act 1997 (ITAA 1997). These provisions retain the same effect as under existing law but have been rewritten to reflect the current drafting style and to deliver legislative simplification.

48. The cases quoted above, which were in respect of ENRFTP under former subsection 27A(1) of the ITAA 1936, would therefore apply to foreign termination payments under Division 82 of the ITAA 1997.

49. It should also be noted at this point that, unlike entitlements such as sick leave, annual leave and long service leave, which accrue over the period of employment, an employment termination payment is made because an employment has been terminated. Although an employment termination payment may be calculated by reference to a period (or periods) of employment, it does not accrue over that period (or those periods) of employment.

50. Based on the above, no portion of any employment termination payment received, or to be received, by any of the Affected Employees can be treated as a foreign termination payment and be exempt from tax under either section 83-235 or section 83-240 of the ITAA 1997.

51. According to the advice received by the Applicant from the professional entity, there is a 'foreign component' of the severance payment to be made to a specified employee in consequence of the termination of their employment in the various foreign countries. As such, the component relates only to the period of employment where services were performed in the foreign country. The professional entity has also advised that such component may be re-charged to the foreign entities. The Commissioner does not agree with such advice.

52. In the specified employee's case, indeed in all the other Affected Employees' cases as well, the employment was entered into, maintained and eventually terminated by the Applicant in Australia. The period of employment is a continuous, uninterrupted period that embraces both the employee's Australian and overseas service for the Applicant. It cannot be severed into two components, in order to take advantage of the tax exemption under Subdivision 83-D of the ITAA 1997, as if, on each and every occasion of the employee being assigned by the Applicant to work for a related entity overseas:

(a) the employee's existing contract of employment with the Applicant were set aside or terminated;

(b) a separate and distinct contract of employment between the employee and the related entity overseas were put in place instead for the duration of the assignment;

(c) on completion of the overseas assignment, the contract of employment between the employee and the related overseas entity were terminated, followed by the employee receiving a payment in consequence of the termination of that employment; and

(d) the employee's previous contract of employment with the Applicant, already terminated, were then re-instated.

53. Had this sequence of events actually happened each and every time an employee was assigned to work overseas, there might have been scope for Subdivision 83-D of the ITAA 1997 to apply to the payment so received by the employee. However, the facts of this case simply do not indicate that this has ever been the intention of the Applicant and/or their related entities overseas.

54. Even if the 'foreign component' were re-charged to a related entity or entities overseas, it would still not change the fact that the employee's employment all along has been with the Applicant, not with the related entity or entities overseas.

55. As it has been established, based on the reasoning stated above, that a payment made, or to be made, to any of the Affected Employees is not a foreign termination payment, the payment is an employment termination payment unless it qualifies as a genuine redundancy payment under section 83-175 of the ITAA 1997.

56. Section 12-85 of Schedule 1 to the Taxation Administration Act 1953 (the TAA) states that:

An entity must withhold an amount from any of the following payments it makes to an individual:

(a) a superannuation lump sum;

(b) a payment that is an employment termination payment or would be one except that it is received more than 12 months after termination of employment.

57. It follows that the Applicant is legally obliged to withhold an amount as tax from any payment it makes to any of the Affected Employees if the payment is an employment termination payment.

Question 2

Withholding amount from unused leave payment

58. Section 12-90 of Schedule 1 to the TAA provides that an entity must withhold an amount from any of the following payments it makes to an individual:

(a) an unused annual leave payment;

(b) an unused long service leave payment.

59. The amount withheld should be in accordance with the withholding schedule made by the Commissioner (NAT 3351: Tax table for unused leave payments on termination of employment).

Question 3

Amendment of tax withheld on payments already made

60. The Applicant has asked whether, in the event of the Commissioner determining that part of an employment termination payment to be made by the Applicant can be treated as a foreign termination payment and be exempt from tax, the Applicant can amend the tax already withheld from employment termination payments that they have already made.

61. As the Commissioner has ruled that no part of any payment made or to be made by the Applicant to any of the Affected Employees qualifies as a foreign termination payment under Subdivision 83-D of the ITAA 1997, it is not necessary to amend the tax already withheld. The Commissioner does not therefore address this question.

Other relevant comments

62. In their application for a private ruling, the Applicant has not asked the Commissioner to rule on whether any part of any payment they made or will make to any of the Affected Employees will qualify as a genuine redundancy payment under section 83-175 of the ITAA 1997 for 'pay as you go' withholding purposes. This is an issue the Applicant has to consider. The following on genuine redundancy payment is provided for the Applicant's information and guidance.

Genuine redundancy payment

63. A payment made to an employee is a genuine redundancy payment if it satisfies all the criteria set out in section 83-175 of the ITAA 1997. That section replaces former section 27F of the Income Tax Assessment Act 1936 (ITAA 1936) where such payments were previously referred to as bona fide redundancy payments.

64. Section 83-175 of the ITAA 1997 states that:

(1) A genuine redundancy payment is 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 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)).

65. As stated in subsection 83-175(1) of the ITAA 1997 above, a genuine redundancy payment is a payment resulting from:

(a) a dismissal; and

(b) a redundancy.

66. The terms dismissal and redundancy are not defined in the ITAA 1997. Therefore, it is necessary to consider the common law or ordinary meaning of the terms and the meaning which the judicial authorities have ascribed to each word.

67. 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 that:

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.

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

69. Paragraph 11 of TR 2009/2 states that:

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 employees position.

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

Dismissal caused by redundancy

70. 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 reason for termination of employment by way of dismissal.

71. At paragraphs 24 to 27 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 employers needs and the employer does not want the position to be occupied by anyone. Accordingly, it is fundamentally the employers decision that a position is redundant. On occasion the decision may be unavoidable due to the circumstances of the employers operations.

26. In some circumstances, an employer may reallocate the duties and functions attached to a particular position to another position within the employers 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.

27. On the other hand, if an employer decides after a structural reorganisation to terminate an employee, the former position of the employee is effectively redundant as long as the reorganisation is the prevailing or most influential cause of the termination.

Redundancy payment must be made genuinely because of redundancy

72. Paragraph 277 of TR 2009/2 states that:

Whether a redundancy payment is genuine is to be determined on an objective basis. It is not sufficient that an employer and employee have an understanding that a payment is a redundancy payment or that the employer calls the payment a redundancy payment to give the employee a better taxation outcome. The nature of the termination of an employee does not depend on what was communicated to that employee in relation to the termination.

73. The need for an employee's position to be genuinely redundant establishes that contrived cases of redundancy will not meet the conditions in section 83-175 of the ITAA 1997.

Further conditions for a genuine redundancy payment

74. Finally, before a payment that meets the basic redundancy requirement in subsection 83 -175(1) of the ITAA 1997 qualifies as a genuine redundancy payment, all the other conditions in section 83-175 must also be met. These conditions include:

· The employee concerned is dismissed before the earlier of the following:

§ they turn 65 years of age;

§ they reach a particular age; or

§ they complete a particular period of service (see paragraph 83-175(2)(a))

· The payment must not exceed an arm's length amount in the event that the employer and employee are not dealing at arm's length (see paragraph 83-175(2)(b));

· There must be no arrangement between the employee and the employer, or between the employer and another person, to employ the employee after the dismissal (see paragraph 83-175(2)(c)); and

· The payment must not be in lieu of superannuation benefits (see subsection 83-175(3).

Tax-free treatment of genuine redundancy payment

75. Subsection 83-170(2) of the ITAA 1997 provides that so much of the genuine redundancy payment that does not exceed the amount worked out using the formula prescribed in subsection 83-170(3) is not assessable income and is not exempt income. Any amount in excess of the tax-free amount is taxed as an employment termination payment. The formula for working out the tax-free amount is:

Base amount + (Service amount × Years of service)

76. For the 2013-14 income year:

Base amount means $9,246;

Service amount means $4,624; and

Years of service means the number of whole years in the period, or sum of periods, of employment to which the payment relates.

¹ (1975) 49 ALJR 370; (1975) 6 ALR 642; (1975) 5 ATR 538; (1975) 75 ATC 4213; (1975) 133 CLR 45

² (1979) 25 ALR 557; (1979) 10 ATR 13; (1979) 45 FLR 279; (1979) 79 ATC 4325

³ [2006] AATA 980; (2006) 2006 ATC 228; (2006) 65 ATR 415

⁴ [2008] AATA 64; (2008) 2008 ATC 1-000 ; (2008) 69 ATR 329; [2010] ALMD 4696

⁵ at 2008 ATC 108

⁶ in Case 16/2000 [2000] AATA 1080; (2000) 46  ATR 1025; (2000) 2000 ATC 243

⁷ 2008 ATC 109 at paragraph 46

⁸ [2008] FCA 1874; (2008) 2008 ATC 20-080; (2008) 73 ATR 864

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