Edited version of your written advice

Authorisation Number: 1051307342239

Date of advice: 17 November 2017

Ruling

Subject: Genuine Redundancy Payment

Question

Is any part of the final payment you received a genuine redundancy payment for the purposes of section 83-175 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

This ruling applies for the following periods:

Income year ended 30 June 2017

The scheme commences on:

1 July 2016.

Relevant facts and circumstances

You are under the age of 65

You commenced your employment with the Employer in the 2013-14 income year.

Your employment was governed by an Enterprise Agreement (the Agreement).

You were employed on a fixed term contract.

In the 2016-17 income year your employment with the Employer was terminated because your place of employment was closed.

You received an estimate of entitlements from the Employer.

You were issued with a ‘PAYG payment summary – individual non-business’.

You were issues with a ‘PAYG payment summary – employment termination payment’. This payment summary shows the gross payment classified as a code O amount.

Assumptions

No assumptions have been made.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 83-175

Reasons for decision

Summary

No part of the final payment received from the Employer is a genuine redundancy payment as not all the conditions have been satisfied.

Detailed reasoning

Genuine redundancy payments

Section 83-170 of the ITAA 1997 provides concessional treatment for a genuine redundancy payment in that the amount of the payment calculated in accordance with the formula in subsection 83-170(3) is tax-free.

To determine if any part of a payment made to an employee constitutes a genuine redundancy payment (GRP), all the conditions in section 83-175 of the ITAA 1997 will need to be satisfied.

Section 83-175 of the ITAA 1997 states:

(1) 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 as exceeds the amount that could reasonably be expected to be received by the employee in consequence of the voluntary termination of his or her employment at the time of dismissal.

(2) A genuine redundancy payment must satisfy the following conditions:

1. (a) the employee is dismissed before the earlier of the following:

(i) the day he or she turned 65;

(ii) if the employee’s employment would have terminated when he or she reached a particular age or completed a particular period of service the day he or she would reach the age or complete the period of service (as the case may be);

2. (b) if the dismissal was not at arm’s length the payment does not exceed the amount that could reasonably be expected to be made if the dismissal were at arm’s length;

3. (c) at the time of the dismissal, there was no arrangement between the employee and the employer, or between the employer and another person, to employ the employee after dismissal.

(3) However, a genuine redundancy payment does not include any part of a payment that was received by the employee in lieu of superannuation benefits to which the employee may have become entitled at the time the payment was received or at a later time.

Payments not covered

(4) A payment is not a genuine redundancy payment if it is a payment mentioned in section 82-135 (apart from paragraph 82-135(e)).

The Commissioner has issued Taxation Ruling TR 2009/2, Income Tax: genuine redundancy payments. The Ruling, which is an expression of the Commissioner's opinion about the way in which a relevant provision applies, or would apply, provides guidance on the factors to be considered in the interpretation of section 83-175 of the ITAA 1997.

In discussing what constitutes a GRP in accordance with subsection 83-175(1) of the ITAA 1997, paragraph 11 of TR 2009/2 states:

There are four necessary components within this requirement:

_ 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.

Exceeds the amount that could reasonably be expected in consequence of voluntary termination

Further to the above subsection 83-175(1) of the ITAA 1997 also includes a second condition, highlighted below, which shows:

A genuine redundancy payment is so much of a payment received by an employee …[which] exceeds the amount that could reasonably be expected to be received by the employee in consequence of the voluntary termination of his or her employment at the time of dismissal.

Therefore, to satisfy subsection 83-17(1) of the ITAA 1997, it must also be demonstrated that the payment is, or includes, an amount which exceeds what the employee could reasonably be expected to receive in consequence of the voluntary termination of their employment.

The amount that exceeds what an employee could reasonably be expected to receive in consequence of the voluntary termination of his or her employment is discussed in TR 2009/2, particularly in the following paragraphs from that ruling:

57. Assuming that the genuine redundancy payment requirements in section 83-175 are satisfied in relation to a payment, subsection 83-175(1) identifies that part of the payment that is specifically attributable to the fact that employment has been terminated because of redundancy. Only this part of the payment can receive tax-free treatment.

58. Subsection 83-175(1) identifies the amount attributable to redundancy by deducting the amount that could reasonably be expected to be received by the employee if he or she had voluntarily terminated employment at the time of being dismissed. In this Ruling, this is referred to as the voluntary termination element of a redundancy payment.

59. Apart from this hypothetical change in circumstances to a voluntary termination instead of a dismissal caused by redundancy, all other circumstances surrounding the termination are assumed to be the same.

The payment made to you was the balance of the term of your contract and would have been expected to be received by you but for the closure of your employer.

According to your contract and the amount you were paid, you did not receive an amount that was greater than if you had voluntarily terminated your employment or the contract had ended. As such, the payment you received does not constitute a genuine redundancy payment.

In addition based on the information provided, namely the Agreement which outlines in clause 74, redundancy payments for Academic staff are only payable to those staff who are in continuing positions. The Agreement also outlines in clause 75, redundancy payments apply to Professional staff, other than casual and fixed term professional staff. As you were employed on a fixed-term employment contract the Commissioner considers your payment is not a genuine redundancy payment regardless of whether you were considered to be classed as Academic or Professional staff.

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

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