Edited version of your written advice

Authorisation Number: 1051197111766

Date of advice: 28 February 2017

Ruling

Subject: Genuine redundancy payment

Question 1

Is a severance payment received by a person (the Client) from their former employer (the Employer) on the termination of the Client's employment a genuine redundancy payment as defined in section 83-175 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 2

Is the payment paid by the Employer to the Client in settlement of disputes between the Client and the Employer in connection with, or arising out of, the Client's employment with the Employer a genuine redundancy payment in accordance with section 83-175 of the ITAA 1997?

Answers

Yes.

This ruling applies for the following period

Income year ended 30 June 20CC

Income year ended 30 June 20DD

Income year ended 30 June 20EE

The scheme commenced on

1 July 20BB

Relevant facts and circumstances

The Client was continuously employed by the Employer for almost 20 years.

The Client's employment with the Employer was subject to 20 consecutive fixed term appointments.

Each of the Client's contracts was renewed automatically without further negotiation between the Client and the Employer.

Before their final fixed term appointment expired, the Client was advised that, due to changes in the Employer's requirements and organisational structure, their position will be closed and there will be no further contracts in their position.

The Employer's decision to terminate the Client's employment was due to changes in the Employer's requirements and organisational structure.

The Client's employment ceased in the 20AA-BB income year upon the expiry of their final fixed term contract.

At the time of the termination of the Client's employment, the terms of their employment were contained in an enterprise agreement (the Agreement).

Following the termination of their employment, the Employer paid the Client a severance payment (the Severance Payment) as required under the Agreement.

In the 20DD-EE income year the Client commenced legal action in the Federal Court of Australia against the Employer (the Proceedings) in relation to their employment with the Employer.

In the 20DD-EE income year the Employer and the Client agreed to settle any and all disputes between them in connection with or arising out of, directly or indirectly, the Client's employment, the employment contracts, the termination and/or the Proceedings. The terms of their settlement were set out in the Deed of Settlement and Release (the Deed).

In accordance with the terms of the Deed:

● An amount (the Settlement Sum) was to be paid to the Client by way of damages in respect of the allegations which were the subject of the Proceedings.

● In consideration of the payment of the Settlement Sum each party fully and unconditionally releases and discharges the other party from any and all claims in connection with, in respect of, or arising out of, directly or indirectly, the employment, the fixed term contracts, the termination and or Proceedings.

The Client's employment contracts were not directly related to specific projects. They worked on several projects at the same time and the duration of projects ranged from few weeks up to seven years.

There were no breaks in the Client's employment with the Employer from the commencement date to the termination date. The Employer was the Client's sole employer during the relevant period.

At the end of a particular contract period, no new contract had been issued, however the Client's employment continued without a break until a new contract was issued.

During their employment with the Employer, the Client accrued sick leave, annual leave, long service leave and carried these forward from one fixed term appointment to the next.

Each fixed term appointment was recognised as service with the Employer.

The Client was entitled to incremental advancement in the same way as a staff member on a continuing appointment.

The Employer made superannuation guarantee contributions on behalf of the Client.

The Employer was the Client's sole employer during the relevant period.

At the time of the termination of their Employment with the Employer, the Client had an expectation that their employment would continue for another term.

The termination of the Client's employment was at arm's length.

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

The Client is under 65 years.

Relevant legislative provisions

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)

Reasons for decision

Summary

Severance Payment received by the Client on the termination of their employment with the Employer is a genuine redundancy payment for the purposes of section 83-175 of the ITAA 1997.

Settlement Sum received by the Client in settlement of the Proceedings is a genuine redundancy payment for the purposes of section 83-175 of the ITAA 1997.

Detailed Reasoning

Genuine redundancy payments

In accordance with subsection 83-175(1) of the ITAA 1997, a genuine redundancy payment is so much of a payment that:

● is 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 their employment at the time of the dismissal.

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

With regard to the first requirement set out in subsection 83-175(1) of the ITAA 1997, at paragraph 11 of TR 2009/2, the Commissioner of Taxation (the Commissioner) considers that there are four necessary components within this requirement:

● the payment 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.

Payment 'in consequence of' termination

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.

In paragraph 6 of TR 2003/13, the Commissioner adds:

The phrase requires 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, the Client's employment was terminated at the specified expiry date of a fixed term appointment and, as required by the Agreement, the Employer paid the Severance Payment to the Client. If the Client's employment was not terminated, the Client would not have received the payment. Therefore, we consider that the Severance Payment was paid to the Client in consequence of the termination of their employment.

Similarly, while the Settlement Sum was paid to the Client to settle the Proceedings, the Proceedings were commenced by the Client as a result of the termination of their employment. That is, there was a sequence of related events following the termination of the Client's employment which ultimately led to the payment of the Settlement Sum. If not for the decision to terminate the Client's employment, there would have been no Proceedings, the settlement of which led to the payment. Therefore, we consider that the Settlement Sum was also paid to the Client in consequence of the termination of the Client's employment.

'Dismissal' and 'redundancy'

The terms 'dismissal' and 'redundancy' are not defined in the ITAA 1997 therefore, consistent with basic principles of statutory interpretation, their meaning must be determined according to the ordinary meaning of the words, having regard to the context in which they appear.

The Commissioner's view, as stated in 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. On occasion the decision may be unavoidable due to the circumstances surrounding the employer's operations.

In this case, the Client did not resign voluntarily rather, the Employer decided to terminate the Client's employment because the Client's position was closed due to changes in the Employer's requirements and organisational structure. Therefore, it is considered that the Client's was dismissed by the Employer and that dismissal was caused by redundancy of the Client's position.

In addition, there is nothing to indicate that redundancy was in any way contrived therefore; we consider that the Client was dismissed from their employment as a result of genuine redundancy.

However, while it is accepted that the 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 genuine redundancy exceeds the amount that they would have received had they voluntarily resigned from their employment.

The Severance Payment was payable by the Employer in the event the Employer decided to terminate the Client's employment; if the Client had resigned voluntarily at the time of dismissal, they would not have received the Severance Payment. Therefore, this payment exceeds the amount that the Client could have reasonably expected to receive in consequence of an alternate mode of employment termination.

The Settlement Sum also exceeds the amount that the Client would have received but for the settlement of the Proceedings.

Further conditions for a genuine redundancy payment

In addition to the basic requirement for a genuine redundancy payment found in subsection 83-175(1) of the ITAA 1997, the further conditions for genuine redundancy payment treatment in subsections 83-175(2) and (3) of the ITAA 1997 require that:

● the employee is dismissed before they turn 65 or an earlier mandatory age;

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

● if the dismissal is not at arm's length - the actual amount that was paid is not greater than the amount that could reasonably be expected to be paid had the parties been dealing at arm's length;

● there was no arrangement entered into between the employer and the employee or the employer and another entity to employ the dismissed employee after the termination; and

● the payment is not in lieu of superannuation benefits.

At the time the payments were made to the Client, they were under 65 years, therefore the age base requirement has been met in this case.

In regard to the termination at the end of a fixed period of employment, paragraphs 36 and 37 of TR 2009/2 state:

36. Under subparagraph 83-175(2)(a)(ii), a payment made at the end of a fixed period of employment cannot normally be a genuine redundancy payment.

37. However, some rolling fixed-term contracts may, as a matter of fact, establish an ongoing employment relationship. The reference to rolling contracts contemplates the situation where fixed-term contracts are renewed on one or more occasions following the expiry of the contracted term. However, where a contract is not renewed at the end of a contractually stipulated term, evidence is required to displace the express terms of the contract and establish an ongoing employment relationship. This is likely to be the exception rather than the rule.

Additionally, in paragraph 287 of TR 2009/2 the Commissioner states:

287. The question of whether an employment relationship continues to exist after what would otherwise be its expiration is a question of fact. If a set term is expressly stipulated in an employment contract, the Commissioner considers that this will govern the relationship unless implied terms to the contrary can be established.

In the present case, the fixed term of employment was stipulated in a contract and the Client's employment terminated at the end date of the specified term.

However, evidence indicates that the express terms of the contract should, in this case, be displaced and that an ongoing employment relationship did, in fact, exist between the Client and the Employer. This view is based on the following:

● the Client's fixed-term appointment was renewed 20 times;

● after the initial fixed term appointment, each subsequent fixed term appointment was renewed automatically without any further negotiations between the parties;

● there were no breaks in the Client's employment with the Employer from the commencement date to the termination date;

● the Employer was the Client's sole employer during the relevant employment period;

● each fixed term appointment was recognised as service with the Employer;

● the Client was entitled to incremental advancement in the same way as a staff member on a continuing appointment;

● during their employment with the Employer, the Client accrued sick leave, annual leave, long service leave and carried these forward from one fixed term appointment to the next;

● the Employer made superannuation guarantee contributions on behalf of the Client;

● the Employer paid a severance payment to the Client on the termination of their employment; and

● at the time of the termination of their Employment with the Employer, the Client had an expectation that their employment with the Employer would continue for another term.

Therefore, it is considered that the termination of the Client's employment, in this case, did not occur at the end of a fixed period of employment.

In addition, the parties were dealing with each other at arm's length in relation to dismissal; the payment was not in lieu of superannuation benefits; and there was no arrangement to employ the Client after the termination.

Therefore, both the Severance Payment received by the Client on the termination of their employment; and the Settlement Sum received subsequently in settlement of the Proceedings are genuine redundancy payments for the purposes of section 83-175 of the ITAA 1997.

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