Edited version of your written advice

Authorisation Number: 1051248098943

Date of advice: 12 July 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 ending 30 June 2016

The scheme commenced on:

1 July 2015

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

The Taxpayer commenced employment with the Employer.

The Taxpayer was in their position until their termination.

The Taxpayer was diagnosed with an illness and had to take all of their sick leave and annual leave.

At the same time, the Employer was commencing a merger with another company, which was likely to cause changes to the Taxpayer’s position.

The Taxpayer was informed that the changes could increase both the level of work and stress and may involve relocation to another office, which would have led to additional travel time.

The Taxpayer expressed their interest in a redundancy due to their ongoing illness and anxiety relating to the changes.

The Taxpayer and the Employer held regular meetings to discuss the progress and possible changes to the Taxpayer’s position and redundancy was discussed but discounted as the position was to be officially reviewed.

The Employer provided confirmation that the Employer’s employment would be terminated by mutual agreement under a Deed of Settlement and Release (the Deed).

The Taxpayer signed to acknowledgment and indicate their agreement to the Deed.

Within 12 months, the Taxpayer received a severance payment in accordance with the Deed.

Prior to leaving, another officer took over the Taxpayer’s position at a temporary level, but the position had not been filled permanently and was under review.

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

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 83-170.

Income Tax Assessment Act 1997 Section 83-170(3)

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).

Reasons for decision

Summary

No part of the termination payment received by the Taxpayer is considered a genuine redundancy payment, as the Taxpayer’s position at the time of termination as not redundant.

Detailed reasoning

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 employees 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.

Taxation Ruling TR 2009/2 Income Tax: genuine redundancy payments (TR 2009/2) provides the Commissioner’s view and guidance on the factors to be considered in the interpretation of section 83-175 of the ITAA 1997.

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

● The payment being tested must be received in consequence of an employee’s 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 '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.

In this case, it was agreed under the Deed that the Taxpayer’s employment would be terminated and a severance payment would be made to the Taxpayer.

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.

At paragraph 20 of TR 2009/2, the Commissioner further states:

A dismissal can still occur even where an employee has indicated they would be interested in having their employment terminated, provided that the final decision to terminate employment remains solely with the employer.

In this case, the Taxpayer expressed their interest in a redundancy due to their ongoing health issues and anxiety related to the possible changes to their position.

The Taxpayer was advised that as a result of the merger between the Employer and another company, the Taxpayer may be required to relocate to another office, which would have increased the Taxpayer’s travel time.

The Taxpayer and the Employer mutually agreed that the Taxpayer’s employment would be terminated.

As such, a dismissal did not occur as the decision to terminate employment was not as the Employer’s initiative without the consent of the Taxpayer.

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 has stated that prior to their termination, another officer took over the Taxpayer’s position at a temporary level, but the position had not been filled permanently and was under review.

Consequently, the Taxpayer’s position would not be considered to be genuinely redundant at the time of termination, as it was subsequently taken over by another employee.

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.

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