Edited version of your written advice

Authorisation Number: 1051244290738

Date of advice: 30 June 2017

Ruling

Subject: Genuine redundancy payment

Question

Is any part of the severance payment, received by you, a genuine redundancy payment as defined in 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

In 2015 you commenced employment with the Employer.

The terms and conditions of your employment were set out in a contract of employment (the Contract) made between you and the Employer.

Relevantly, the Contract includes the following terms:

● The term of your appointment.

● You may resign by giving the Employer a notice period of three months. The Employer may choose to retain your services for the three month period, or make a payment in lieu of notice for the part of the notice period for which you are not retained.

● You will be paid a severance payment of three months’ salary, inclusive of any payment in lieu of notice, if the Employer terminates the contract before the end date, unless termination occurs during probation or involves fraud and performance related issues.

A restructure took effect in late 2016 which resulted in discussions regarding your employment.

On a date in early 2017, you and the Employer agreed to resolve all issues concerning your employment and the Contract under a Deed of Release (the Deed).

The Deed includes the following terms:

● Your employment will be terminated in accordance with the Contract.

● Your final day of employment will be the Revised Contract End Date, a date in the second quarter of 2017.

● Employment is defined as work performed by you for the Employer under the Contract until the Revised Contract End Date.

● The Payment made by the Employer is defined as an amount for salary, annual leave, and severance payment.

● The General Manager has agreed to pay the severance payment to you on condition the Deed is agreed by both you and the Employer.

● Provided the Deed is signed, the Employer will make the Payment to you by a specified date in 2017.

● You agree to release the Employer from claims concerning the employment, the Contract, any conditions or collateral agreements relating to the Contract, and events surrounding the employment and formation of the Contract.

● You acknowledge that the Payment is in full and final satisfaction of every, any, and all entitlements arising from the Employment.

● You have been provided the opportunity to obtain independent legal and financial advice in relation to the terms in the Deed.

The Employer confirmed that the severance payment was taxed correctly as an Employment Termination Payment (ETP), and not as a redundancy payment.

Your employment with the Employer ceased on the Revised Contract End Date as a result of the expiration of the Contract.

Your date of birth has been provided.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 83-175

Income Tax Assessment Act 1997 Subsection 83-175(1)

Reasons for decision

Summary

Your employment was terminated on a date mutually agreed to with the Employer and not because you were dismissed at the initiative of the Employer without your consent. Further, the termination date was at the expiration of a fixed-term contract.

The severance payment amount you received was not in excess of an amount that you could have reasonably expected to receive in consequence of a voluntary termination.

Therefore, the severance payment you received is not a genuine redundancy payment.

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.

Meaning of genuine redundancy

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, 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.

● 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:

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, you commenced employment with the Employer under a fixed term contract (the Contract) in 2015. The Employer underwent a restructure in late 2016 and as a result, discussions were held regarding your employment.

In early 2017 a Deed of Release (the Deed) was mutually agreed between you and the Employer to resolve all issues concerning your employment and the Contract. The Deed revised the Contract’s end date to an earlier date, the date of your termination of employment. The Employer agreed to make a severance payment on condition the Deed was agreed.

Based on the above, the severance payment was paid in consequence of the termination of your employment with the Employer because if not for the agreement to terminate employment under the Deed, the payment would not have been made.

'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…

…

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 …

Under a fixed-term contract the decision to terminate employment could not be said to be at the employer’s initiative because the employee and the employer would have agreed that the employment would end on a contractually specified date. Thus, a 'dismissal’ would not normally occur when an employee’s employment ends at the expiration of a fixed-term contract.

This view is confirmed in paragraph 284 of TR 2009/2, where the Commissioner states:

284. It would normally be the case that someone employed on a contract for a set period could not be dismissed at the end of that period. Their employment would simply terminate because an arrangement stipulated that the employment would cease at that time.

In the present case, the term of your employment is expressly stipulated in the Contract. Subsequently, the Deed was entered into by you and the Employer to bring forward the end date of your employment period. The Deed revised the Contract’s end date to a date mutually agreed between you and the Employer.

There is no evidence to indicate that the express terms of the Contract and the Deed should be displaced and that the employment was not, in fact, for the specified term as agreed between you and the Employer. Therefore, it is considered that you were not dismissed from your employment for the purposes of subsection 83-175(1) of the ITAA 1997. Your employment with the Employer had ended at the expiration of a fixed term contract.

Therefore, it cannot be said the termination of employment was caused by the redundancy of your position. Accordingly, this requirement has not been satisfied.

Exceeds what you would have received in consequence of voluntary termination of employment

Subsection 83-175(1) of the ITAA 1997 requires the payment exceed the amount that you could reasonably be expected to receive in consequence voluntarily terminating your employment.

Paragraphs 61 and 62 of TR 2009/2 state:

61. It would generally be expected that a greater amount would be paid on redundancy than voluntary termination. This recognises the purpose of redundancy payments, being primarily to compensate for loss of non-transferable entitlements (for example accrued sick leave and accrued long service leave prior to 10 year’s service) and the peculiar hardship associated with being made redundant.

62. Contractual or other entitlements payable by an employee on voluntary termination are generally a sound guide as to what might reasonably be expected. ...

You received a severance payment which was calculated at three months’ pay. This was in accordance with the Deed.

Under the Contract, you had a three month notice period for terminating employment. The Employer may choose to retain your services for the notice period, or make a payment in lieu of notice for the notice period if you are not retained. Nothing in the Contract would prevent the Employer paying out all or part of three months’ notice given by you on voluntary termination.

Therefore, in absence of the Deed, an amount representing three months’ pay could reasonably be expected to be received if you voluntarily terminated employment.

Consequently, the severance payment is not considered in excess of an amount that could reasonably be expected to be received in consequence of a voluntary termination.

As you do not satisfy all the requirements of subsection 83-175(1) of the ITAA 1997, the severance payment is not a genuine redundancy payment.

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