Edited version of your written advice

Authorisation Number: 1051216170467

Date of advice: 28 April 2017

Ruling

Subject: Genuine redundancy payment

Question

Is any part of the termination payment the Taxpayer received from the Employer upon termination of employment 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:

Income year ending 30 June 2017

The scheme commences on:

1 July 2016

Relevant facts and circumstances

The Taxpayer commenced employment with the Employer.

The Taxpayer was promoted to a new position for a fixed period of 5 years.

The Taxpayer’s contract was renewed for a further 4 years.

Relevantly, the Contract of Employment (the Contract) contained the following clauses:

● Termination by either the Taxpayer or Employer.

● The Contract may be terminated before the termination date by way of any of the following:

− The Taxpayer giving 4 weeks’ written notice to the Employer.

− The Employer giving 38 weeks’ written notice to the Taxpayer, or alternatively, by termination payment.

− On termination of the Contract, where written notice has not been given, the Taxpayer will be paid a monetary amount equivalent to 38 weeks’ remuneration, or the remuneration which the Taxpayer would have received if the Taxpayer had been employed to the Termination date.

The Employer informed the Taxpayer that their position will no longer exist prior to the 4 year contract renewal period ending.

The Employer offered the Taxpayer a temporary position in an acting role for an initial period of 3 months. Subject to review, this period could be extended depending on operational requirements and projects.

The Employer confirmed the Taxpayer accepted the temporary position, including the duty of handover and support to their replacement in the position, once they were appointed.

The Employer provided confirmation of all entitlements owing to the Taxpayer. The Employer made a payment comprising of:

● ETP 38 weeks

● Annual leave, and

● Long service leave.

None of the payments received were payment in lieu of superannuation benefits.

The Taxpayer’s employment with the Employer was terminated.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 82-10

Income Tax Assessment Act 1997 subsection 82-10(3)

Income Tax Assessment Act 1997 section 82-130

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)

Superannuation Industry (Supervision) Regulations 1994 subregulation 6.01(2)

Reasons for decision

Summary

No part of the termination payment received by the Taxpayer is considered a genuine redundancy payment.

Detailed reasoning

Genuine redundancy

A payment will be considered a genuine redundancy payment if all the requirements under section 83-175 of the ITAA 1997 are satisfied.

In accordance with subsection 83-175(1) of the ITAA 1997, 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 their employment at the time of dismissal.

The Commissioner has issued Taxation Ruling TR 2009/2 Income tax: genuine redundancy payments which provides guidance on the interpretation of section 83-175 of the ITAA 1997.

Paragraph 11 of TR 2009/2 specifies four necessary components within the requirements under subsection 83-175(1) of the ITAA 1997:

(a) the payment being tested must be received in consequence of an employee's termination.

(b) that termination must involve the employee being dismissed from employment.

(c) that dismissal must be caused by the redundancy of the employee's position.

(d) the redundancy payment must be made genuinely because of a redundancy.

Payment ‘in consequence of’ an employee’s 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'.

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:

5. ... 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 this case, the Taxpayer’s employment was terminated under a clause of the Contract. As such, the Taxpayer received a termination payment of 38 weeks’ remuneration.

Therefore, it is considered that the payment made to the Taxpayer is in consequence of the termination of their employment.

Dismissal from employment

The Commissioner's view, as stated in paragraph 18 of TR 2009/2, is that ‘dismissal’ means 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.

In this case, the Taxpayer agreed to a 4 year contract extension of the new role. The Taxpayer was informed that this role would no longer exist.

Subsequently, the Taxpayer was offered a temporary position for 3 months in an acting executive role, after which termination would occur.

As such, it is considered that the decision to terminate employment was not at the Taxpayer’s initiative and that a dismissal from employment occurred.

Position genuinely redundant

Paragraph 25 of TR 2009/2 states:

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.

The Taxpayer did not receive an extension in the temporary role and was terminated from employment.

The Taxpayer was required to performed handover and support to their replacement in the temporary role, once they were appointed.

Consequently, the Taxpayer’s position in the temporary role at the time of termination would not be genuinely redundant.

Therefore, as not all of the requirements under subsection 83-175(1) have been satisfied, no part of the payment will be a genuine redundancy payment.

Further conditions for a genuine redundancy payment

Before a payment that meets the basic redundancy requirement in subsection 83-175(1) qualifies as a genuine redundancy payment, all other conditions in subsections 83-175(2), (3) and (4) of the ITAA 1997 must be met. These conditions include:

● the payment must be made before a person turns 65 or an earlier mandatory age;

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

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

● at the time of dismissal, there was no arrangement between the employee and the employer, or between the employer and another person, to employ the employee after the dismissal; and

● the payment was not in lieu of superannuation benefits.

Relevantly, the Taxpayer’s termination related to the temporary position, which was for a fixed term of 3 months.

The termination relates to the end of a fixed period of employment, and so does not satisfy the further conditions for a genuine redundancy payment.

Other relevant comments

The payment received from the Taxpayer is an employment termination payment (ETP) as defined in section 82-130 of the ITAA 1997.

An ETP may be made up of two components: the ‘tax-free component’ and the ‘taxable component’.

In accordance with section 82-10 of the ITAA 1997, the tax–free component of an ETP is not assessable income and is not exempt income. That is, it is tax-free.

The taxable component of the ETP is assessable, however a tax offset, which depends on a person’s age, applies.

If a person is under their ‘preservation age’, subsection 82-10(3) of the ITAA 1997 applies to ensure that the rate of tax payable on the taxable component does not exceed 30%.

Preservation age is defined in regulation 6.01(2) of the Superannuation Industry (Supervision) Regulations 1994 and, for a person born from 1 July 1963 to 30 June 1964, is 59 years.

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