Edited version of your written advice

Authorisation Number: 1051327334924

Ruling

Subject: Employment termination payment - genuine redundancy payment

Question

Is the payment awarded to you under the Deed of Settlement and Release a genuine redundancy payment under section 83-175 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

This ruling applies for the following period:

Income year ended 30 June 2018

The scheme commences on

1 July 2017

Relevant facts and circumstances

You commenced employment with Company P.

You were injured at work and you lodged a workers compensation claim which was accepted by Company P.

You returned to work initially performing modified duties and later returned to your pre- injury workplace duties.

You subsequently accepted another role.

Your role was made redundant following an organisation restructure and you were paid a redundancy payment.

You and Company P executed a Deed of Settlement and Release Agreement which confirmed your redundancy payment and the terms and conditions under which the payment was being made.

You instigated unfair dismissal proceedings against Company P seeking reinstatement to your previous position. However, the proceedings were withdrawn.

You wrote to Company P requesting the provision of suitable duties in accordance with the workplace legislation.

Company P advised you that suitable duties would not be provided to you as you had accepted an alternative role, the role was made redundant and you no longer suffered an incapacity to work as a consequence of the injury.

You initiated further legal action against Company P alleging several matters including:

● Company P failed to consult you in respect to the redundancy;

● Company P targeted you and you were made redundant because of your injury; and

● Company P discriminated against you because of an injury.

You entered into consent orders with Company P in respect to the above proceedings.

You entered into a Deed of Settlement and Release (the Deed) with Company P and agreed to accept a settlement sum of $XX,XXX (the settlement sum) from Company P. This payment extinguished Company P from any further obligation.

Relevant legislative provisions

Income Tax Assessment Act 1997, section 82-130

Income Tax Assessment Act 1997, section 82-135

Income Tax Assessment Act 1997, section 83-170

Income Tax Assessment Act 1997, section 83-175

Reasons for decision

Summary

The payment you received from Company P is a genuine redundancy payment (GRP) as defined in section 83-175 of the ITAA 1997.

Detailed reasoning

Employment termination payment (ETP)

A payment made to an employee is an ETP if it satisfies all the conditions set out in section 82-130 of the Income Tax Assessment Act 1997 (ITAA 1997). This section states:

A payment is an employment termination payment if:

● it is received by you:

● in consequence of the termination of your employment; or

● after another person's death, in consequence of the termination of the other person's employment; and

● it is received no later than 12 months after that termination (but see subsection (4)); and

● it is not a payment mentioned in section 82-135.

To determine if a payment constitutes an ETP, all the conditions in section 82-130 of the ITAA 1997 must be satisfied.

Failure to satisfy any of the conditions under subsection 82-130(1) of the ITAA 1997 will result in the payment not being considered an ETP.

Taxation Ruling IT 2424 Income tax: compensation payments in respect of unlawful acts of discrimination (TR 2424) considers payments received for unlawful or wrongful dismissal as made ‘in consequence of the termination of any employment of the taxpayer”.

Payments excluded from section 82-130 ITAA 1997

Section 82-135 of the ITAA 1997 provides a list of certain payments that are not ETPs. A genuine redundancy payment (GRP) is excluded as an ETP under paragraph 82-135(e) of the ITAA 1997.

Genuine redundancy payment (GRP)

A payment made to an employee is a GRP if it satisfies all the criteria in section 83-175 of the ITAA 1997.

In accordance with subsection 83-175(1) of the ITAA 1997, a GRP 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.

Some or all of a genuine redundancy payment may be non-assessable non-exempt income and accordingly tax free under section 83-170 ITAA 1997.

Taxation Ruling TR 2009/2 Income tax: genuine redundancy payments (TR 2009/2) outlines the requirements that must be satisfied before any payment made to a person whose employment is terminated qualifies for treatment as a GRP under section 83-175 of the ITAA 1997.

In discussing what constitutes a GRP for the purposes of 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.

Payment ‘in consequence of’ termination

The phrase ‘in consequence of’ is not defined in the ITAA 1997. 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:

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.

Dismissal’ and ‘redundancy

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.

Subsection 83-175(1) of the ITAA 1997 also requires that the payment received in consequence of redundancy exceed the amount that the employee would have received had they voluntarily resigned from their employment.

Further conditions for a genuine redundancy payment

In addition to the basic requirement for a genuine redundancy payment found in subsection 83-175(1) of the ITAA 1997, the further conditions for genuine redundancy payment treatment in subsections 83-175(2) and (3) of the ITAA 1997 require that:

● the employee is dismissed before the earlier of 65 or a specified age;

● the termination is not at the end of a fixed period of employment;

● the amount paid is not greater than the amount that could reasonably be expected had the parties been dealing at arm's length, (in the event that the employer and employee are in fact not dealing at arm's length in relation to the dismissal);

● there is no arrangement entered into between the employer and the employee or the employer and another entity to employ the dismissed employee after the termination; and

● the payment is not in lieu of superannuation benefits.

Multiple payments for one dismissal due to redundancy

Paragraph 73 of TR 2009/2 recognises that there may be cases where more than one payment is received by an employee as a consequence of their dismissal due to a redundancy.

The Commissioner considers that the provisions of Part 2-40 of the ITAA 1997 operate to unify any such payments as a single sum attributable to a redundancy when working out the tax treatment of the payments.

Application to your case

You were made redundant and received a redundancy payment. You pursued legal action against Company P. You entered into the Deed under which you would receive a further $XX,XXX on the condition that you discontinue any further legal action in relation to the termination of your employment.

Section 82-135(e) of the ITAA 1997 expressly excludes a GRP as an ETP.

Based on the information provided, it is viewed that the amount of $XX,XXX is considered to be a GRP under section 83-175 of the ITAA 1997 because:

● at the time of the termination you were less than 65 years of age;

● your employment was not for a fixed period;

● it is accepted that the dealings between Company P and you were at arm’s length;

● there was no agreement to employ you after the termination;

● the payment was not in lieu of superannuation benefits.

Therefore, the $XXX,XXX payment is non-assessable non-exempt income under section 83-170 of the ITAA 1997 and is tax free.

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