Edited version of your written advice

Authorisation Number: 1051230953877

Date of advice: 29 May 2017

Ruling

Subject: Genuine redundancy payments

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 period:

Income year ended 30 June 2016

The scheme commences on:

1 July 2015

Relevant facts and circumstances

The Taxpayer commenced employment with the Employer on a project (the Project).

The Taxpayer was employed under a contract of employment (the Contract), and an enterprise agreement which also applied (the Agreement).

The Contract states that the Taxpayer's employment on the Project would end upon completion of the task for which the Taxpayer was employed on the Project.

The Employer informed the Taxpayer that their position and employment would no longer be required, due to completion of certain parts of the scope of works on the Project.

The Taxpayer's employment with the Employer was terminated and the Taxpayer was not required to work out the notice period.

The Employer made a payment comprising of:

● Payment in lieu of notice (2 weeks);

● Sick leave;

● Rostered days off;

● Annual leave; and

● Other (including severance pay)

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

The Taxpayer was over their preservation age.

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 (TR 2009/2) 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' (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:

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.

Upon completion of certain parts of the scope of the works on the Project, the Employer notified the Taxpayer they would be terminated, effective immediately. The Taxpayer received a payment in lieu of notice and a severance payment, as per the Agreement.

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.

Under the Contract, the Taxpayer's employment would end once the task the Taxpayer was employed for on the Project was completed, rather than the completion of the entire Project. The Taxpayer was informed that their position and employment would no longer be required.

It is considered a dismissal did not occur as the Employer merely informed the Taxpayer that their employment was ending due to completion of certain parts of the scope of works on the Project, as agreed in the Contract.

As this component for a genuine redundancy payment has not been met, subsection 83-175(1) of the ITAA 1997 will not be satisfied.

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. Relevantly:

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

TR 2009/2 discusses period of service for project-based work at paragraph 38:

In some cases, particularly those involving multi-disciplinary project-based work, an employee's period of service may be determined by reference to the achievement of a particular outcome rather than a specified period of time. The employee's period of service in these circumstances concludes on the achievement of that outcome.

Further, redundancy regarding project-based contracts is discussed in Example 11 in paragraph 152:

In contrast, if the workers had all completed their allotted tasks in keeping with the mutual intentions of the parties, any payments accruing on their termination of employment would not be eligible to be genuine redundancy payments. In these circumstances, the employees are terminated at the expiry of a fixed period of employment.

Under the Contract, the Taxpayer would be employed until the completion of their tasks on the Project. The Employer informed the Taxpayer that they have completed their allotted task in relation to the Project, and their position would no longer be required.

In this case, the Taxpayer has been terminated at the expiry of a fixed period of employment and will not satisfy the further conditions for a genuine redundancy payment.

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).