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Date of advice: 8 November 2016

Ruling

Subject: Genuine redundancy payments

Question

Is any part of the Ex Gratia payment received by a person (Your Client) from their former employer (the Employer) a genuine redundancy payment in accordance with section 83-175 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

This ruling applies for the following period:

Income year ended 30 June 201X

The scheme commences on:

1 July 201X

Relevant facts and circumstances

Your Client is under 65 years of age.

Your Client commenced employment with the Employer during the 201X-1X income year.

Your Client worked for the Employer on a project (the Project) on a long term contract.

Your Client's employment was governed by the Employment and General Terms and Conditions which provide that:

(a) employment may be terminated by either party giving the other party a prescribed notice, or

(b) by paying the other party an amount equal to the wages for ordinary hours that would have been earned for the period of notice not worked.

During the 201X-1X income year, the Employer formally notified Your Client that the Project contract will cease during the 201X-1X income year and, as a consequence, their position will no longer be required after that date.

Your Client's termination of employment and final payment were administered in accordance with the requirements under the Employer's Enterprise Agreement.

On the termination of their employment with the Employer, Your Client received from the Employer a payment comprising of the following:

Ex Gratia payment

Sick Leave Payout

Redundancy pay

RDO

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 82-135

Income Tax Assessment Act 1997 Section 83-170

Income Tax Assessment Act 1997 Section 83-175

Reasons for decision

Summary

The Ex Gratia payment received by Your Client from the Employer is a genuine redundancy payment for the purposes of section 83-175 of the ITAA 1997.

Detailed reasoning

Genuine redundancy payment

A payment is a genuine redundancy payment (GRP) if it satisfies all of the criteria set out in section 83-175 of the TAA 1997 which 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 employee's 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.

(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

The Commissioner of Taxation (the Commissioner) has issued Taxation Ruling TR 2009/2 Income tax: genuine redundancy payments (TR 2009/2), which outlines the requirements to be satisfied before any payment made to a person whose employment is terminated qualifies for treatment as a GRP under section 83-175 of the ITAA 1997.

In discussing what constitutes a GRP in accordance with subsection 83-175(1) of the ITAA 1997, paragraph 11 of TR 2009/2 states that there are four necessary components that 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

The phrase 'in consequence of' is not defined in the ITAA 1997. However, the courts have interpreted the phrase in a number of cases. Whilst the courts have divergent views on the meaning of this phrase, the Commissioner's view on the meaning and application of the 'in consequence of' test are set out in Taxation Ruling 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' (TR 2003/13).

While TR 2003/13 contains references to repealed provisions, some of which may have been rewritten, the ruling still has effect as both the former provision under the Income Tax Assessment Act 1936 and the current provision under the ITAA 1997 both use the term 'in consequence of' in the same manner.

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.

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.

In this case, Your Client's employment with the Employer was terminated and as a result of the termination they received the Ex Gratia payment from the Employer. If their employment was not terminated, Your Client would not have received the payment. Therefore, the Ex Gratia payment was received in consequence of the termination of Your Client's employment.

Dismissal and Redundancy

The Commissioner has issued Taxation Ruling TR 2009/2 (TR 2009/2), 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.

The Commissioner's view, as stated at paragraphs 18 and 25 of TR 2009/2, is that

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.

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...

At paragraph  28 of TR 2009/2, the Commissioner adds:

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.

Applying the above to Your Client's case, it is considered that their employment with the Employer was terminated by reason of genuine redundancy. This view is based on the following:

● Your Client did not resign voluntarily from employment but was dismissed by the Employer;

● Your Client was dismissed by the Employer because the position they occupied was no longer needed by the Employer; and

● there is nothing to indicate that dismissal was caused by any personal acts or default by Your Client.

However, while it is accepted that Your Client was dismissed from their employment because their position was genuinely redundant, subsection 83-175(1) of the ITAA 1997 also requires that the payment received in consequence of redundancy exceeds the amount that they would have received had they voluntarily resigned from their employment.

Based on the information provided, if Your Client had terminated their employment voluntarily at the time of dismissal, they would not have received the Ex Gratia payment. Therefore, the payment exceeds the amount that Your Client could have reasonably expected to receive in consequence of an alternate mode of employment termination.

Further conditions for a genuine redundancy payment

Subsections 83-175(2), (3) and (4) of the ITAA 1997, as stated above, set out further conditions that must be satisfied for a payment to be regarded as a GRP.

In this case it is considered that the further conditions were satisfied as:

● Your Client was dismissed before they turned 65;

● the dismissal was at arm's length;

● there was no arrangement between Your Client and the Employer, or between the Employer and another person, to employ Your Client after the dismissal;

● Ex Gratia payment was not paid in lieu of superannuation benefits; and

● the Ex Gratia payment is not a payment excluded under section 82-135 of the ITAA 1997 (apart from paragraph 82-135(e)).

As all the conditions under section 83-175 of the ITAA 1997 have been satisfied, the Ex Gratia payment received by Your Client from the Employer is a GRP.

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