Edited version of your written advice

Authorisation Number: 1051421433386

Date of advice: 18 October 2018

Ruling

Subject: Genuine redundancy

Question

Is the redundancy payment you received meet the Genuine Redundancy criteria as per subsection 83-175(1) of the Income Tax Assessment Act 1997?

Answer

Yes

This ruling applies for the following period:

Income year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You were born on XX/XX/19XX.

You have worked for your employer for a period of approximately XX years.

You commenced your employment with your employer on XX/XX/20XX and your employment was terminated on XX/XX/20XX.

You were employed by your employer on a series of rolling fixed term contracts and during your XX year period of employment, you had XX rolling fixed term contracts.

The most recent fixed contract that you had covered the period from XX/XX/20XX to XX/XX/20XX.

On XX/XX/20XX, you were notified by your employer via letter that a new contract would not be entered into following the expiration of your current contract.

The letter received from your employer (mentioned above) stated that your role would be abolished with some of the duties of your role to be rolled into a new position “at scale 9”.

However, on XX/XX/20XX your employer agreed in her performance appraisal that you will get a 1-year contract for the coming year which would end on XX/XX/20XX. Your employer has offered you a payment in respect of your current contract ending.

In an email you sent to us on XX/XX/20XX, you provided us with a copy of the Legal Status (Local Staff) Regulations 2005. This includes information about the terms and conditions under which redundancy payments are made to employees.

You received a payment from your ex-employer on XX/XX/20XX.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 83-170

Income Tax Assessment Act 1997 Subsection 83-170(2)

Income Tax Assessment Act 1997 Subsection 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)

Reasons for decision

● A payment will qualify as a genuine redundancy payment if all the requirements under section 83-175 of the ITAA 1997 are satisfied.

● According to subsection 83-175(1) of the ITAA 1997, a genuine redundancy payment defined as:

“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 have been reasonably be expected to be received by the employee in consequence of the voluntary termination of their employment at the time of the dismissal.”

● The Commissioner has issued Taxation Ruling TR 2009/2 Income Tax: genuine redundancy payments (TR 2009/2), which provides 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 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 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.

Component 1: Payment ‘in consequence of’ termination

● The phrase ‘in consequence of’ is not defined in the ITAA 1997 but however paragraph 6 of Taxation Ruling TR 2003/13 Income tax: employment termination payments (ETP): payments made in consequence of the termination of any employment: meaning of the phrase ‘in consequence of’ (TR 2003/13) states the level of connection required between the termination and the payment is as follows:

6. “The phrase requires a causal connection between the termination and the payment, although the termination need not be the dominant cause of the payment.”

● The Commissioner’s view on the phrase ‘in consequence of’ is also supported in the following decision made by the Court in relation to the Reseck v Federal Commissioner of Taxation (1975) 133 CLR 45 (“Reseck case”):

‘Within the ordinary meaning of the words, a sum is paid in consequence of the termination of employment when the payment follows as an effect or result of the termination… It is not in my opinion necessary that the termination of the services should be the dominant cause of the payment…

● Application of the decision made in the Reseck case and the principle regarding the level of connection required stated in paragraph 6 of TR 2003/13, we can say that the redundancy payment which you received satisfies this component. This is because as this payment was made following the termination of your employment, a sufficient nexus exists between the payment being made and your employment being terminated.

Component 2: ‘Dismissal’ from employment

● The Commissioner’s view about when genuine redundancy payments arise is stated in paragraph 16 of TR 2009/2 is set out as follows:

16, “a genuine redundancy payment can only arise where there is no suitable job available for the employee with the employer, meaning that he or she must therefore be dismissed.

● In terms of a genuine redundancy payment only arising from the dismissal of the employee as a result of no suitable job or position being available with the employer, paragraph 18 of TR 2009/2 sets out the Commissioner’s view of a ‘dismissal’ as follows:

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.”

● In your situation, your employer issued you with a letter stating their intention to terminate your employment on the basis your personal and positional profile did not align with the new position created at scale 9.

● The application of the principles stated in paragraphs 16 and 18 of TR 2009/2 to your situation would mean that you would satisfy this component. This is because in your situation, that your employer initiated the termination of your employment without your consent and there were no other positions available which matched your personal and position profile.

Component 3: Dismissal caused by ‘redundancy’

● Paragraphs 25 and 26 of TR 2009/2 sets out the Commissioner’s view on when an employee’s position is made ‘redundant’ as follows:

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.

26. In some circumstances, an employer may reallocate the duties and functions attached to a particular position to another position within the employer's organisational structure. In such cases, the former position is redundant. However, if the employee who had been working in that position is still employed by the employer following the reallocation of duties and functions, there will not be a dismissal.

● In scenarios where there are multiple reasons behind an employee’s dismissal, the redundancy of an employee’s position must be the prevailing or most influential cause of dismissal. This is because according to paragraph 28 of TR 2009/2, a dismissal is not caused by redundancy where personal acts or default are the prevailing or most influential cause for the termination.

● Application of the principles stated in TR 2009/2 paragraphs 25, 26 and 28 to your situation would mean that you would satisfy this component. This is because your employer stated in a letter addressed to you that your employment had been terminated primarily because your position had been made obsolete with some of the functions in your previous role being moved to position which you weren’t deemed suitable for.

Component 4: ‘Genuine’ redundancy

● Paragraphs 31 of TR 2009/2 sets out the Commissioner’s view on contrived (or artificial) cases of redundancy and the determination of whether a redundancy is ‘genuine’ or not as follows:

31. Contrived cases of redundancy will not meet the conditions in section 83-175. Whether a redundancy is 'genuine' is determined on an objective basis.

● Application of paragraph 31 of TR 2009/2 to your situation would mean that you satisfy this condition on the basis of that this redundancy payment was made to you as your employment with your employer has been terminated due to your role being made redundant.

● Based on the satisfaction of the 4 components of a genuine redundancy payment prescribed in paragraph 11 of TR 2009/2, we can state that the termination of your employment was the result of genuine redundancy.

● However, while it is accepted that you were dismissed by your employer because their position was genuinely redundant, subsection 83-175(1) of the ITAA 1997 also requires that the payment received in consequence of redundancy exceeds the amount that you would have received had you voluntarily resigned from their employment at the time of your dismissal.

● In your situation, had you voluntarily terminated your employment as opposed to your position being made redundant, you would have not been entitled to your redundancy payment. This is because Article 8.3 sub-paragraph 1(b) of the Legal Status (local Staff) Regulations 2005 states that an employee is not entitled to a one-off redundancy payment if they had terminated their contract of employment for any reason other than their position being made redundant, for example, voluntary resignation.

● Hence we can state that your redundancy payment satisfies the definition of a genuine redundancy payment as per subsection 83-175(1) of the ITAA 1997. This is because the amount you received in consequence of your redundancy exceeded the amount that you could have reasonably expected to receive had your voluntarily resigned.

● Next we would need to consider the conditions stated in subsection 83-175(2) of the ITAA 1997 regarding genuine redundancy payments as follows:

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

i. the day he or she turned 65; or

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);

(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;

(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 the dismissal.

● In your situation, your current contract states that your employment with your employer will terminate on XX/XX/20XX once the contract expires. This is confirmed by the letter you received from your employer on XX/XX/20XX which states that your current contract will expire by operation of the law on XX/XX/20XX.

● The ATO accepts that some “rolling” fixed-term contracts may, as a matter of fact, establish an ongoing employment relationship as per paragraph 37 of TR 2009/2. This paragraph sets out the Commissioner’s view on this matter as follows:

37. “…The completion of a stipulated term in these circumstances does not necessarily disqualify a payment made at the end of the period from being a genuine redundancy payment. It is therefore possible that a genuine redundancy payment may be paid in these types of cases. However, where a contract is not renewed at the end of a contractually stipulated term, evidence is required to displace the express terms of the contract and establish an ongoing employment relationship…”

● The Commissioner’s view expressed above in relation to rolling fixed-term contracts is expensed in paragraph 287 of TR 2009/2 which states the following:

287. The question of whether an employment relationship continues to exist after what would otherwise be its expiration is a question of fact. If a set term is expressly stipulated in an employment contract, the Commissioner considers that this will govern the relationship, and through it the application of paragraph 83-175(2)(a), unless implied terms to the contrary can be established.

● Based on the principles stated in paragraphs 37 and 287 of TR 2009/2 we can say that the payment made by your employer to you at the end of your fixed-term contract can be considered as a genuine redundancy payment if an implied continuation of the employment relationship exists after the end of the period, that being after XX/month when the contract period was set to expire.

● In your individual performance review for XX/20XX, we can say that an implied continuation of the employment relationship between you and your employer would have existed after your current contract expired. This is evident in the comment made by your manager that you will receive a X-year contract for the coming year which will end on XX/XX/20XX.

● According to the calculations of the redundancy payment performed by your employer, which you provided us a copy of, we can say that subsections (3) and (4) of section 83-175 of the ITAA 1997 would not need to be considered. This is because your redundancy payment did not include any amounts in lieu of superannuation benefits nor amounts which relate to a payment type mentioned in section 82-135 of the ITAA 1997 (asides from paragraph 82-135(e)).

Tax-free amount

● Subsection 83-170(2) of the ITAA 1997 states that the extent of the genuine redundancy payment that doesn’t exceed the amount worked out in subsection 83-170(3) of the ITAA 1997 is non-assessable and non-exempt income.

● However, any amount in excess of the tax-free amount is taxed as an employment termination payment. The formula prescribed in subsection 83-170(3) of the ITAA 1997 for working out the tax free amount is:

● For the 20XX-XX income year:

Base amount means $10,399;

Service amount means $5,200; and

Years of service means the number of whole years in the period, or sum of periods, of employment to which the payment relates.

● As your employment began on XX/XX/20XX and ceased on XX/XX/20XX, you had been employed by your employer for approximately XX years. However, according to the redundancy payment calculations which you provided us with, as performed by your employer, you have worked for your employer for X years. Hence the ‘years of service’ to which the genuine redundancy payment relates is X whole years of service.

● Accordingly, the tax-free part of your genuine redundancy payment for the 20XX-XX income year under subsection 83-170(3) of the ITAA 1997 is:

● As the payment you received is below the tax-free amount of a genuine redundancy payment, the entire amount is tax-free as a genuine redundancy payment. Therefore, this payment is deemed to be non-assessable, non-exempt income.

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