Edited version of private advice

Authorisation Number: 1051527985601

Date of advice: 14 June 2019

Ruling

Subject: Employment termination payments; genuine redundancy

Question

Does the termination of your employment with the Employer constitute a genuine redundancy under section 83-175 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No

Question

Is the lump sum payment received by you a genuine redundancy payment under section 83-175 of the ITAA 1997?

Answer

No

This ruling applies for the following periods

Year ended 30 June 2018

The scheme commenced on

1 July 2014

Relevant facts

You commenced employment with an entity (the Employer) in the 2011-2012 income year as a Director.

In the 2017-2018 income year the Employer announced a corporate restructure whereby the existing Director positions would be dissolved and new General Manager roles would be created, with lower remuneration packages.

All Directors were advised to apply for new positions in the new structure.

You refused to reapply for these roles and made this clear to the Employer.

The Employer served you with a Termination Deed (the Deed) to end your employment.

You signed the Deed and your employment was terminated effective immediately.

Your received the termination payment within 12 months of termination.

Relevant legislative provisions

Income Tax Assessment Act 1997 subsection82-130.

Income Tax Assessment Act 1997 subsection 83-175.

Reasons for decision

Summary

No part of the termination payment you received can be regarded a genuine redundancy payment as it is considered that the prevailing, or most influential cause of the termination of your employment was not redundancy.

The payment is an employment termination payment under section 82-130 of the ITAA 1997 and is to be included in your income tax assessment for the 2018-19 income year.

Detailed Reasoning

Employment termination payments

A payment made to an employee is an employment termination payment if the payment satisfies all the requirements under section 82-130 of the ITAA 1997 and is not specifically excluded under section 82-135.

Subsection 82-130(1) of the ITAA 1997 states that:

A payment is an employment termination payment if:

(a) it is received by you:

(i) in consequence of the termination of your employment; or

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

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

(c) it is not a payment mentioned in section 82-135.

Subsection 82-130(2) of the ITAA 1997 states:

A lifebenefit termination payment is an employment termination payment to which subparagraph (1)(a)(i) applies.

Failure to satisfy any of the three conditions in section 82-130(1) of the ITAA 1997 will result in the payment not being considered an employment termination payment.

As noted in the facts, you received a gross employment termination payment on the termination of your employment.

Paragraph 82-130(1)(a) of the ITAA 1997 requires that a termination payment be made in consequence of the termination of employment of the taxpayer. While the phrase 'in consequence of' is not defined in the ITAA 1997, the Commissioner considers that a payment will be made 'in consequence of' the termination of employment for the purposes of subparagraph 82-130(1)(a)(i), if the payment follows as an effect or as a result of the termination of employment.

In this case, the payment was made following on as a result of the termination of your employment. This payment would not have been made had there been no termination of employment. The termination of employment and these payments are thus intertwined and connected. Therefore, the payment has been made 'in consequence' of your termination, satisfying paragraph 82-130(1)(a) of the ITAA 1997.

Paragraph 82-130(1)(b) of the ITAA 1997 requires that a termination payment be received no later than 12 months after the termination of employment. As you terminated your employment in income year 2017-2018, and received the payment in the income year 2017-2018, this is within 12 months of the termination of your employment. Accordingly, paragraph 82-130(1)(b) of the ITAA 1997 has been satisfied.

Paragraph 82-130(1)(c) of the ITAA 1997 specifically excludes payments mentioned in section 82-135 from being employment termination payments. Section 82-135 specifically excludes certain payments from being employment termination payments. Applicable to this case is paragraph 82-135(e) which excludes the tax free part of a genuine redundancy payment or an early retirement scheme payment worked out under section 83-170 of the ITAA 1997. Accordingly, it is necessary to determine the extent (if any) to which the payment:

a)    qualifies as a genuine redundancy payment; and

b)    is excluded as the tax-free part of a genuine redundancy payment.

Any part of the payment which does not qualify as a tax-free part of a genuine redundancy payment will constitute an employee termination payment and be taxed accordingly.

Genuine Redundancy Payment

A payment made to an employee is a genuine redundancy payment if it satisfies all the conditions set out in section 83-175 of the ITAA 1997.This section 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 and 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:

(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);

(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 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 terms 'dismissal' and 'redundancy' are not defined in the ITAA 1997. Therefore, it is necessary to consider the ordinary meaning of the terms and the meaning the courts have ascribed to each word.

The Explanatory Memorandum to the Income Tax Assessment Amendment Act (No.3) 1984,which inserted former section 27F (now section 83-175 of the ITAA 1997) into the ITAA 1936 states, at page 91:

The terms dismissal and redundancy are not defined in the legislation and, therefore, should be given their ordinary meanings. "Dismissal" carries with it the concept of the involuntary (on the taxpayer's part) termination of employment. "Redundancy" carries the concept that the requirements of the employer for employees to carry out work of a particular kind, or for employees to carry out work of a particular kind in the place where they were so employed, have ceased or diminished or are expected to cease or diminish. Redundancy, however, would not extend to the dismissal of an employee for personal or disciplinary reasons or for reasons that the employee was inefficient.

Further to the above, the Commissioner has issued Taxation Ruling TR 2009/2, Income Tax: genuine redundancy payments, which provides guidance on the factors to be considered in the interpretation of section 83-175 of the ITAA 1997. In discussing what constitutes a genuine redundancy payment 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; and

·         The redundancy payment must be made genuinely because of a redundancy.

Each of these requirements will be discussed individually.

The payment must be received in consequence of a termination.

As to whether or not a payment is made in consequence of termination, paragraph 13 of Taxation Ruling TR 2009/2 Income tax: genuine redundancy repayments requires consideration be given to the Commissioners view 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'. Paragraph 5 of TR 2003/13 considers that 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'.

The Termination Agreement, which you signed and agreed to, provides that you will be paid a "Termination Payment" upon execution of the Agreement and completion of the handover meeting.

Accordingly the payment was received in consequence of the termination of employment and subsection 83-175(1) of the ITAA 1997 has been satisfied.

That termination must involve an employee being dismissed from employment.

Turning to the second condition, the termination of employment must have been made as a result of dismissal. Dismissal carries with it the concept that the termination of a person's employment is involuntary and instigated by the employer. Dismissal however, can include the notion of constructive dismissal where an employee may be placed in a situation where he or she has little option but to tender his or her resignation. It should be noted that constructive dismissal, as with other forms of dismissal, does not in its own right indicate that a genuine redundancy has taken place.

Paragraph 22 of TR 2009/2 states that constructive dismissal is a dismissal for the purposes of subsection 830175(1). Constructive dismissal is currently recognised to occur where the actions or behaviour of the employer in relation to the employment relationship effectively curtails the element of consent on the employee's behalf.

In your case, you entered into a Termination Agreement with the Employer in the income year 2017-2018. Recitals of the Termination Agreement indicate that you "offered to resign [your] position, and [the Employer] has accepted the resignation upon the terms of this deed'. As the final decision to terminate employment was made by you, you were not dismissed from employment and the second requirement has not been met, unless you can show that there was constructive dismissal by reason of redundancy of your position.

That dismissal must be caused by the redundancy of the employee's position.

As stated by the Commissioner in paragraph 28 of TR 2009/2, section 83 175 of the ITAA 1997 requires that the dismissal be caused only by the redundancy of the employee's position, and not for some other reason. Redundancy must be the prevailing cause of the termination of employment by way of dismissal.

Paragraphs 24 and 25 of Tax Ruling TR 2009/2 provide the following comments in relation to the meaning of redundancy:

24. As is the case in determining if there is a dismissal, the reason for a dismissal is to be established in light of the facts and circumstances of each case. The redundancy of the relevant position must be the prevailing or most influential reason for the dismissal if there is more than one contributing cause.

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.

The Commissioner expands on the issue of determining the cause of dismissal at paragraphs 270 to 273 of TR 2009/2:

270. The classic context for redundancy is the closure, downsizing or reorganisation of part or all of the employer's operations. Redundancy can readily be established as the prevailing or most influential cause of dismissal in the first two of these scenarios.

271. Where an employer dismisses an employee after a reorganisation of duties, functions and responsibilities, a more careful analysis is required. A restructure of an organisation does not necessarily import redundancy where employees are dismissed following the reallocation or restructure. In these circumstances, it is necessary to consider what impact the restructure had on the duties, functions and responsibilities formerly fulfilled by the dismissed employee. [Emphasis added]

272. In Re Marriott and Federal Commissioner of Taxation [[2004] AATA 806; (2004) 2004 ATC 2191; (2004) 56 ATR 1265] the employer did not see fit to dismiss the employee after a reallocation of duties, functions and responsibilities within the organisation. In this case, the employee was carrying out duties of a legal nature in the Tax Office. These duties changed upon the reorganisation, in that he was not continuing to directly negotiate settlements or train junior advocates. After carefully considering the evidence before him, Senior Member Lindsay found that there was not a dismissal (in particular there was not a constructive dismissal) and further commented that:

Whether an employee termination is by reason of redundancy will require an assessment of the changes to determine if they were beyond or beneath the employee's qualifications, skills or experience.

273. In this case it was considered that the prevailing or most influential cause of termination was the employees own desire not to undertake the duties, functions and responsibilities he was offered following the reorganisation.

Further guidance on the meaning of 'redundancy' can be found in the Full Federal court decision in Dibb v Federal Commissioner of Taxation [2004] FCAC 126; 2004 ATC 4555; (2004) 207 ALR 151; (2004) 55 ATR 786, where Justices Spender, Dowsett and Allsop, stated:

Even if the employee's job, defined by reference to its duties, has disappeared, he or she may be able to perform some other available job to the satisfaction of the employer. In that case, no question of redundancy arises. It is only if the employer considers that there is no available job for which the employee is suited, and that he or she must therefore be dismissed, that the question of redundancy arises. If, in good faith, the employer:

·         has re-allocated duties;

·         considers that the employee is not suitable to perform any available job, defined by reference to those re-allocated duties, existing after the re-allocation; and

·         for that reason, dismisses the employee;

then, for the purposes of s27F, the employee is dismissed by reason of his or her bona fide redundancy. In the above discussion we have used the word "available" as meaning "vacant", and the word "suitable" as meaning "within the employee's capacity".

It is evident from the above that if the prevailing or most influential cause of termination is not redundancy, notwithstanding that the position occupied by a dismissed employee may have been abolished, the dismissal would not constitute a redundancy. Furthermore, a genuine redundancy payment can only arise where there is no suitable job available for the employee with the employer and therefore the employee must be dismissed as the employee is superfluous to the employer's needs.

From the facts you provided, the Employer commenced a review of its corporate structure in the income year 2017-2018 with a focus the executive leadership team. Under this proposed restructure, you were offered the opportunity to apply for one of the new General Manager roles.

You were dissatisfied with the proposed new positions, believing that they were inconsistent with your qualifications and experience, involved a reduction of the Total Remuneration Payment, and overall were "markedly different" from your current position.

Based on the information provided, evidence has not been provided which indicates that the position was inappropriate in view of your skills and experience, nor that as a result of the proposed restructure, there was no job for which you were overqualified by your experience and expertise to perform. The duties and remuneration of the alternative position offered is comparable to those which had been previously occupied by you.

In comparison with the previous position, the alternative position offered to you was:

·                     Substantially the same responsibilities as the previous position;

·                     Same reporting line to the Chief Executive Officer.

The documentary evidence supplied indicates that the Employer made a decision that you would be able to perform the alternative proposed positions of General Manager to the satisfaction of the employer. While arguably different, the duties in the alternative positions were comparable to your previous position and furthermore not inappropriate in view of your skills and experience. Accordingly, although there was a dismissal, the facts show that the prevailing or most influential cause of termination was your own desire not to undertake the duties, functions and responsibilities that you were offered following the restructure. As your dismissal was not caused by genuine redundancy, the third requirement that the dismissal was caused by a genuine redundancy has not been satisfied.

As stated above, all conditions under section 83-175 of the ITAA 1997 must be satisfied for a payment to be a genuine redundancy payment. As you have not satisfied subsection 83-175(1) of the ITAA 1997, it is not necessary to examine whether the remaining requirements under section 83-175 of the ITAA 1997 have been satisfied.

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