Edited version of your written advice

Authorisation Number: 1012805566318

Ruling

Subject: Genuine redundancy

Question

Is any part of the proposed payment from the employer to a former employee a tax free part of a genuine redundancy payment under section 83-175 of the Income Tax Assessment Act 1997?

Answer

Yes

This ruling applies for the following period:

Year ending 30 June 2015

The scheme commences on:

1 July 2014

Relevant facts and circumstances

The employee is under 65 years of age.

The employee commenced employment with the employer during the 2007-08 income year.

During the 2010-11 income year, as a result of a re-structure of the employer, the employee's position changed, which is a position with primarily project management duties. A separate position was created to undertake day-to-day operational matters.

During the 2014-15 income year, in a Management Review Committee Meeting, a decision was made that the specific position would "no longer continue" and that "the position will become redundant." Additionally, the Committee Meeting indicated that the specific employment position will be terminated in accordance with a specific clause of the employment contract.

That clause of the contract states that if the employer terminates the employment under this clause, the employer must pay the employee a specific sum equivalent to an amount outlined in Schedule 2 of the employment contract.

The employee would not have been entitled to receive this payment if they had voluntarily terminated their employment.

Soon after, the employee's employment was terminated.

The employer prepared a draft deed of settlement and release which proposes to pay to the employee a termination payment equivalent to an amount outlined in Schedule 2 of the employment contract.

The employer will make an additional, separate payment for the employee's entitlements to unused annual and long service leave.

The employer applied to the ATO for a private ruling to determine whether the proposed termination payment will be a genuine redundancy payment. In relation to the private ruling application, the employer provided the following documents:

• An extract of the minutes relating to the Management Review Committee's decision to restructure and make redundant the position specific position.

• A copy of the employee's employment contract

• A copy of the draft deed of settlement and release

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 83-170

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)

Reasons for decision

Summary

Based on the information provided, the proposed termination payment from the employer to the employee will be a genuine redundancy payment (GRP).

Detailed reasoning

Genuine redundancy

A payment made to an employee is a genuine redundancy payment if it satisfies all the conditions 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 employee's position is genuinely redundant and 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)).

The first requirement

In Taxation Ruling 2009/2: Income tax: genuine redundancy payments (TR 2009/2), the Commissioner provided clarification on the requirement outlined in subsection 83-175(1) of the ITAA 1997.

According to paragraph 11 of TR 2009/2:

There are four necessary components within this requirement:

• 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.

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

In the current case, the proposed payment will satisfy the first two components as the payment will be made in accordance with a specific clause of the employment contract, which outlines the payment that must be made if the employment contract was terminated by the employer.

The third component will also be satisfied as it is clear that the dismissal was caused by the redundancy of the employee's position. According to paragraph 25 of TR 2009/2:

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… [emphasis added]

In this case, the Management Review Committee Meeting specifically mentioned that "it will no longer continue" with the specific position and that "the position will become redundant."

The fourth component will also be satisfied since there is nothing in the facts to suggest that the redundancy is contrived, or is not genuinely made. In addition, the proposed payment is in excess of what the employee would have received under the employment contract if they had voluntarily resigned.

Other requirements

On the basis of the information provided, it is also considered the conditions of subsections 83-175(2) and 83-175(3) of the ITAA 1997 will be satisfied because:

• the employee is not older than specified age limit;

• the termination is not at the end of a fixed period of employment;

• the dismissal was at arm's length in accordance with a clause in the employment contract;

• there is no arrangement to employ the employee after the termination; and

• the payment is not in lieu of superannuation benefits.

The payment is a genuine redundancy payment

In light of the above, as all the conditions are satisfied in accordance with section 83-175 of the ITAA 1997, the proposed payment to the employee will be a GRP.

A portion of the GRP will thus be tax-free in accordance with the calculations outlined in section 83-170 of the ITAA 1997.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).