Edited version of your written advice

Authorisation Number: 1051291096791

Date of advice: 12 October 2017

Ruling

Subject: Genuine redundancy

Question

Is any part of the lump sum employment termination payment received by the Taxpayer from the Employer a genuine redundancy payment (GRP) for the purposes of 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 2017

The scheme commences on:

1 July 2016

Relevant facts and circumstances

The Taxpayer commenced employment in the 2014-2015 income year.

The Employer carried on a business.

The Taxpayer was employed under an Agreement.

The Employee accrued a redundancy payment of two hours pay at their ordinary hourly rate of pay for each completed week of service.

The Agreement states that the redundancy payment will be paid to the Employee at the time of termination of employment.

The Agreement states that the Company will provide notice of termination of employment (or payment in lieu of such notice) to all Employees.

The Taxpayers employment was terminated as a result of their position becoming redundant.

The Taxpayer received a termination payment.

No part of the payment was in lieu of superannuation.

At the time of the Taxpayers dismissal there was no arrangement between the Taxpayer and the Employer, or between the Employer and another person, to employ the Taxpayer after the dismissal.

The Taxpayers was under 65 years old.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 83-175

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

Summary

The eligible termination payment received by the Taxpayer from the Employer is not a GRP as defined in section 83-175 of the ITAA 1997.

Detailed reasoning

Genuine redundancy

Under subsection 83-175(1) of the ITAA 1997, a genuine redundancy payment is one received by an employee who is dismissed from employment because their position is genuinely redundant and exceeds the amount that could reasonably be expected to be received by them in consequence of the voluntary termination of their employment at the time of 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.

The satisfaction of this requirement establishes the essential character of the payment. However, there are further conditions that must also be satisfied before a payment can be treated as a genuine redundancy payment.

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.

As further stated by the Commissioner in paragraph 6 of TR 2003/13, there must be:

… 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 Taxpayer’s employment was terminated and, as a result of the termination; the Taxpayer was paid a redundancy payment. But for the termination, the payment would not be made therefore; we consider the payment is paid to the Taxpayer in consequence of the termination of their employment with the Employer.

'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.

From the facts presented, it is considered that a termination has occurred by reason of genuine redundancy because the Taxpayer did not resign voluntarily from employment and the Employer does not require anyone to occupy the position.

However, while it is accepted they were dismissed from employment because the position was genuinely redundant, subsection 83-175(1) of the ITAA 1997 also requires that the payment received in consequence of redundancy must exceed the amount that would have been received had the Taxpayer voluntarily resigned from employment.

In this case the amounts received were in relation to entitlements accrued during the course of employment. Any payment where the amount accrues during the period of employment but is only payable on termination of employment, regardless of the reason for termination of employment, is not considered to be a GRP for the purposes of section 83-175 of the ITAA 1997.

Accordingly the termination payment was not a GRP as defined in section 83-175 of the ITAA 1997 because the amount accrued during the period of employment and did not exceed such an amount that could reasonably be expected to be received in consequence of a voluntary termination of employment.

ATO view documents

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'

Taxation Ruling TR 2009/2 Income tax: genuine redundancy payments

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