Edited version of private advice

Authorisation Number: 1012677284536

Ruling

Subject: Genuine redundancy

Questions

1. Is any part of the employment termination payment a tax-free part of a genuine redundancy payment under section 83-175 of the Income Tax Assessment Act 1997 (ITAA 1997)?

2. Is the payment of unused annual leave received on termination of employment subject to concessional rates of tax?

Answers

1. No.

2. No.

This ruling applies for the following period

Year ending 30 June 2010

The scheme commences on

1 July 2011

Relevant facts and circumstances

1. You commenced employment with the Employer in the 200X income year.

2. You were employed as the General Manager by the Employer before you were terminated.

3. Your employment was terminated in the relevant income year.

4. You were terminated before you reached 65 years of age.

5. On 1 December 20XX, you received an annual leave entitlement and a payment in lieu of notice from the Employer:

6. None of the payments received were for payment in lieu of superannuation.

7. At the time of termination there was no arrangement between you and the Employer or between the Employer and another person, to employ you after your termination.

8. You stated that you had been told by the Employer that you were terminated because your job had been made redundant.

9. You stated that the title and position of General Manager would continue to exist.

10. You provided the job description for your role,

11. You provided the job advertisement for the role which you had vacated.

12. You stated that you still met the essential requirements in the new selection criteria.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 83-175

Income Tax Assessment Act 1997 subsection 83-170(2)

Income Tax Assessment Act 1997 subsection 83-170(3)

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 paragraph 83-175(2)(b)

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

Income Tax Assessment Act 1997 subparagraph 83-175(2)(a)(i)

Income Tax Assessment Act 1997 subparagraph 83-175(2)(a)(ii)

Reasons for decision

Summary

The payment of X you received from your employer does not include a genuine redundancy payment as it is considered that the most influential cause of your employment termination was not redundancy.

The lump sum termination payment is an employment termination payment (ETP) and the ETP cap of $160,000 for the relevant income year will be applied. The amount of payment in lieu of notice will be taxed at 31.5% up to the cap amount of $160,000. The remainder will be taxed at marginal rates. As your employment termination was not considered to be the result of a genuine redundancy your unused annual leave will be subject to your marginal rates of tax.

Detailed reasoning

Genuine redundancy payment

1. A payment made to an employee is a genuine redundancy payment (GRP) if it satisfies all of the criteria set out in section 83-175 of the ITAA 1997. This section states:

i. 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.

ii. 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.

iii. 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.

iv. A payment is not a genuine redundancy payment if it is a payment mentioned in section 82-135 (apart from paragraph 82-135(e)).

Dismissal and redundancy

2. Under subsection 83-175(1) of the ITAA, a GRP is a payment resulting from a dismissal and a redundancy.

3. The terms 'dismissal' and 'redundancy' are not defined in ITAA 1997. Therefore, it is necessary to consider the ordinary meaning of the terms and the meaning the courts have ascribed to each word.

4. Taxation Ruling 2009/2 (TR 2009/2) Income tax: genuine redundancy payments provides guidance on the factors to be considered when interpreting section 83-175.

5. Paragraph 11 of TR 2009/2 outlines the four necessary components to meet the requirements of subsection 83-175(1). These components are:

• the payment being tested must be received in consequence of an employee's termination

• that termination must involve the employee being dismissed from employment

• that dismissal must be caused by the redundancy of the employee's position, and

• the redundancy payment must be made genuinely because of a redundancy.

6. Each of the requirements will be discussed individually in the following paragraphs.

Component one - the payment is in consequence of the termination of employment

7. Paragraph 13 of TR 2009/2 states that we must consider that payments must be made 'in consequence' of the termination of your employment before it can be a GRP.

8. Paragraph 31 of Taxation Ruling 2003/13 (TR 2003/13) Income tax: eligible termination payments (ETP): payments made in consequence of the termination of any employment: meaning of the phrase 'in consequence of' provides that when a payment is made to settle a claim brought by the taxpayer for a wrongful dismissal the payment will have sufficient causal connection with the taxpayer's termination.

9. You have provided a copy of a letter (employment separation certificate) from the Employer which states that your employment was terminated in the relevant income year.

10. You received the payment in question from your employer after the date of termination of your employment.

11. You are considered to have met the condition that the payment was made in consequence of the termination of your employment.

Component two - dismissal from employment

12. The second component requires that all employment with the employer be severed due to a dismissal from employment.

13. Paragraph 18 of TR 2009/2 provides that dismissal requires a decision to terminate employment at the employer's initiative without your consent. This stands in contrast to employment that is terminated at your initiative, such as in the case of resignation.

14. In your application and the documents provided, it was clear that a decision to terminate your employment was made at the employer's initiative without your consent.

15. You are considered to have met the condition that it was your employer's decision to terminate your employment and that there were no other positions available for you.

Component three - dismissal was caused by redundancy of the employee's position

16. Paragraph 23 and 24 of TR 2009/2 clarifies the requirement that the dismissal be caused by redundancy of your position, and not for some other reason. However, if there is more than one contributing cause for the dismissal, the redundancy of the relevant position must be the prevailing or most influential cause.

17. Paragraph 24 of TR 2009/2 outlines that in the case of determining if there is a dismissal the reason for a dismissal is to be established in the light of the facts and circumstances of each case.

18. Paragraph 32 of TR 2009/2 states that the fact that an employer and employee have an understanding that a payment on termination is caused by redundancy or that the employer treats the payment as a redundancy payment for tax purposes does not of itself establish genuine redundancy.

19. Paragraph 259 of TR 2009/2 discusses the concept of redundancy and refers to situations where something is superfluous and therefore unnecessary. Furthermore, the definition of a redundant position is provided in R v. Industrial Commission of South Australia; Ex parte Adelaide Milk Supply Co-operative Ltd (1977) 16 SASR 6 (Industrial Commission Case), when Bray CJ stated at paragraph 261, that:

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

20. Paragraph 263 of the Industrial Commission Case further explains 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.

21. In your case, it is considered that the existence of the functions, duties and responsibilities attached to the position of General Manager had not become superfluous or unnecessary. From the job advertisement, the position required someone with "extensive experience in manufacturing environments and display a history of successfully delivering consistent profit, quality and productivity improvements". These skills are similar to those which you agree you possess and were contained in your job description which you had provided.

22. Consequently, the Employer seems to have added more skills and duties required for the role. The skills and duties which they required previously had not become unnecessary. In other words, it is considered that the updated position required new skills in addition to the existing skills and duties. The position had not become redundant; it had become more demanding. It is therefore considered that the title and position of General Manager were not made redundant.

23. As an employee, you no longer met the requirements of the position, but the duties and skills of the position had not become redundant. You are therefore considered to have not met the condition that your position was made redundant.

24. There are further conditions under subsection 83-175(2) and 83-175(3), however as you have not met the four components necessary to meet the conditions of subsection 83-175(1), these requirements have not been considered.

25. It is considered that your circumstances do not satisfy the four components outlined in TR 2009/2 under subsection 83-175(1) because your position was not superfluous to your employer and that your position has not been made redundant. Therefore, it has been determined that the amount of $X does not meet the definition of a genuine redundancy payment.

26. It will now be considered whether the payment is an ETP.

Employment termination payment

27. A payment is an ETP if it satisfies all the requirements in section 82-130 of the ITAA 1997 and is not specifically excluded under section 82-135 of the ITAA 1997.

28. 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 person's death, in consequence of the termination of the other person's 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.

29. It is evident that the payment in lieu of notice was made to you 'in consequence of' the termination of your contract of employment. There is a nexus between the termination of your employment and the lump sum payment made to you during the relevant income year. The payment would not have been made had there been no termination of employment.

30. As already noted in the facts, your employment was terminated and the payment was made within 12 months from the termination date. Therefore this condition is satisfied for this particular payment.

31. Clearly, the payment in lieu of notice is not a payment mentioned in section 82-135 of the ITAA 1997.

32. As all the conditions from subsection 82-130(1) of the ITAA 1997 have been met, the payment you received from the Employer is considered to be an ETP.

Taxation of the amounts

33. The payment in lieu of notice is considered to be an ETP. This means that the ETP cap of $160,000 for the relevant income year will be applied. As you were below the preservation age of 65 years old, the amount will be taxed at 31.5% up to the cap amount of $160,000.

34. Any remaining amount (the payment in lieu of notice - $160,000) in addition to the unused annual leave will be taxed at your marginal rate.

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