Edited version of private advice

Authorisation Number: 1051560037980

Date of advice: 11 September 2019

Ruling

Subject: Employment termination payments

Question

Is any part of the proposed payment to the taxpayer from their employer due to termination of their employment considered to be genuine redundancy payment in accordance with section 83-175 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

This ruling applies for the following period:

Income year ending 30 June 2019

The scheme commences on:

1 July 2018

Relevant facts and circumstances

The Employer is a business that provides services to a Third party on a contract for provision of services and is renewed at the end of each contract period on the same terms and conditions.

The Taxpayer is an employee of the Employer.

The Taxpayer was employed by the Employer for a period of time

The Employer received a letter from the third party wanting to revise the terms and conditions of the contract. Including:

·         Increase the overall wages for the Employer with all profits going to the third party.

·         Keep the wages the same for the Employer, and the Employer and the third party share the profits.

·         Reviewing the past two years of tax returns, wages and revenue of the Employer and increasing the rent accordingly.

After careful consideration of the various options, the Employer decided it was not feasible to accept any of the options and decided to close the business at the end of the current contract.

The Taxpayer would not be entitled to any payments had they resigned voluntarily.

Relevant legislative provisions

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

Income Tax Assessment Act 1997 subsection 83-175(3)

Income Tax Assessment Act 1997 subsection 83-175(4)

Summary

The proposed redundancy payment expected to be received by the Taxpayer from the Employer is a genuine redundancy payment as defined in section 83-175 of the ITAA 1997.

Reasons for decision

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 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.

In this case, the Taxpayer's employment was terminated and as a result of the termination, the Taxpayer is to be paid a redundancy payment. But for the termination, the payment would not be made, therefore, we consider the payment was 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 evident that a termination has occurred because the Employer does not want the Taxpayer's position to be occupied by anyone.

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 they turn 65 or an earlier mandatory age (subparagraph 83-175(2)(a)(i));

·  the termination is not at the end of a fixed period of employment (subparagraph 83-175(2)(a)(ii));

·  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 was at arm's length (paragraph 83-175(2)(b));

·  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 (paragraph 83-175(2)(c); and

·  the payment is not in lieu of superannuation benefits (subsection 83-175(3)).

1.    In this case, at the time of termination the Taxpayer was under 65 years of age and the termination was not at the end of a fixed period of employment. Also, there was no arrangement between the Employer and the Taxpayer, or between the Employer and another entity, to employ the Taxpayer after the termination; and the payment is not in lieu of superannuation benefits.

2.    Lastly, the redundancy payment is not excluded from the definition of a genuine redundancy payment. As such, subsection 83-175(4) of the ITAA 1997 has been satisfied.

3.    As all the conditions under section 83-175 of the ITAA 1997 have been satisfied, it is considered that the redundancy payment to be received by the Taxpayer is a genuine redundancy payment.

Tax-free amount

4.    Section 83-170 of the ITAA 1997 provides that so much of the genuine redundancy payment that does not exceed the amount worked out using the prescribed formula is not assessable income and is not exempt income. The formula for working out the tax-free amount is:

Base amount + (Service amount x Years of service)

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).