Edited version of your written advice

Authorisation Number: 1012922876659

Date of advice: 7 December 2015

Ruling

Subject: Redundancy payments

Question 1

Is any part of the payment made to you on termination of employment exempt from tax as a genuine redundancy payment in accordance with section 83-175 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

This ruling applies for the following periods:

The income year ended 30 June 2015.

The scheme commences on:

1 July 2014.

Relevant facts and circumstances

You are aged over 65.

You were employed by a certain company for over X years.

You have been advised that your role is being made redundant and the work outsourced to offshore operations. Your last day of work is anticipated to be on a date in the relevant income year.

You anticipate receiving a payment as a result of the redundancy, however the payment amount has not yet been finalised.

You were over 65 years of age at the time you were made redundant.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 82-135

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

1. The payment is not a genuine redundancy payment. Your employment was terminated after the day you turned 65.

Detailed reasoning

Genuine redundancy payment

2. A payment made to an employee, after 30 June 2007, is a genuine redundancy payment if it satisfies all the criteria set out in section 83-175 of the 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 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)).

Subsection 83-175(1) of the ITAA 1997

3. Under subsection 83-175(1) of the ITAA 1997, four components must be satisfied:

• The payment 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 employee's position.

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

Payment is made in consequence of the termination of employment

4. In Taxation Ruling TR 2003/13 the Commissioner considered the meaning of the phrase 'in consequence of' as interpreted by the Courts.

5. 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.

6. 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.

7. In this case, the payment made to you is in consequence of the termination of your employment. The termination of your employment and the payment are all intertwined and connected. If not for the termination of your employment, the payment would not have been made.

Dismissal and Redundancy

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

9. Paragraph 18 of TR 2009/2 discusses what constitutes a 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.

10. A payment is classified as a genuine redundancy payment only upon meeting all of the requirements set under section 83-175 of the ITAA 1997 and dismissal only forms part of those requirements.

11. The Administrative Appeals Tribunal (AAT) in AAT Case 12,997 (1998) 39 ATR 1073; (1998) 98 ATC 183, considered a payment received by a taxpayer was to be treated as a bona fide redundancy payment not solely due to the taxpayer having been constructively dismissed but, also due to his job having been abolished.

12. Paragraphs 24, 25 and 28 of TR 2009/2 provide the following in relation to the meaning of 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 surrounding the employer's operations.

…

28. A dismissal is not caused by redundancy where personal acts or default are the prevailing or most influential cause for the termination. For example, a person may be dismissed due to unsatisfactory performance or behaviour.

13. In this case, your role was made redundant due to a company review of its current and future business processes. In particular, the work previously carried out by your team is being outsourced to offshore operations. It is considered that you have been dismissed from your employment because your role with your employer has been made genuinely redundant. Therefore, subsection 83-175(1) of the ITAA 1997 has been satisfied.

Further conditions for a genuine redundancy payment

14. Subsection 83-175(2) of the ITAA 1997 sets out three criteria that must be satisfied for a payment to be regarded as a genuine redundancy payment.

15. The first condition requires that the taxpayer is dismissed before the earlier of the day the taxpayer turns 65 or the day they reach a particular age or completed a particular period of service that would have terminated the taxpayer's employment

16. In this case, this condition has not been satisfied as you were dismissed from your role after you turned 65 years of age.

17. As subsection 83-175(2) of the ITAA 1997 requires that all three criteria must be satisfied and you have not met the first criterion, there is no need to consider the additional two criteria.

Conclusion

18. In this case, as not all of the requirements under section 83-175 of the ITAA 1997 have been satisfied, the payment is not a genuine redundancy payment.

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