Edited version of private advice

Authorisation Number: 1051583902695

Date of advice: 11 October 2019

Ruling

Subject: Genuine redundancy payment

Question 1

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

Answer

Yes

Question 2

Is the payment assessable in the 20XX-XX income year?

Answer

Yes. Where the payment exceeds the tax-free limit worked out under section 83-170 of the ITAA 1997, the excess amount will be taxed as an employment termination payment (ETP) in the year it was received, in this case the 2018-19 income year.

This ruling applies for the following period:

1 July 20XX to 30 June 20XX

Relevant facts and circumstances

You ceased employment with the employer after the appointment of an insolvency practitioner.

You completed X.XX years of service.

In accordance with your employment agreement you were entitled to 26.5 weeks redundancy pay.

You lodged a Proof of Debt under the Corporations Act for an amount that contained annual leave, payment in lieu of notice and redundancy.

As the employer was placed into liquidation, you met the eligibility requirements to seek an advance payment from the Commonwealth pursuant to the Fair Entitlements Guarantee Act 2012 (FEG Act).

You were found to be eligible under the FEG Act for an advance payment of annual leave, payment in lieu of notice and redundancy

Under the FEG Act your redundancy pay entitlement is capped to a total payment of 20 weeks. The decision of entitlement sent to you advised as follows:

The claimant should contact the insolvency practitioner to discuss lodging a proof of debt as a creditor of the employer in relation to the portion of their redundancy pay entitlement not covered under [the FEG Act].

You were issued PAYG payment summaries for the 20XX-XX income year.

The employer, by its liquidators, commenced proceedings against its partners claiming amounts that were included on the Formal Proof of Debt lodged by you for outstanding liabilities in the 20XX-XX income year.

You entered into a Deed of Release with the employer's partners in the 20XX-XX income year.

A PAYG payment summary was issued for the year ending 30 June 20XX for the Dead of Release payment, which was treated as salary or wages with tax withheld

Relevant legislative provisions

Income Tax Assessment Act 1997 section 82-135

Income Tax Assessment Act 1997 section 83-170

Income Tax Assessment Act 1997 section 83-175

Other relevant documents

Taxation Ruling TR 2009/2: Income tax: genuine redundancy payments

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'

Case law

Dibb v Commissioner of Taxation [2003] FCA 673

Dibb v Commissioner of Taxation [2004] FCAFC 126

Le Grand v Commissioner of Taxation [2002] FCA 1258

McIntosh v FC of T [1979] FCA 65

Reseck v Commissioner of Taxation [1975] HCA 38

Reasons for decision

Detailed reasoning

Issue 1 - Is the payment a genuine redundancy payment?

A genuine redundancy payment is defined in section 83-175 of the ITAA 1997. You have met the requirements in 83-175(2) and (3) of the ITAA 1997.

Under subsection 83-175(1) of the ITAA 1997 a genuine redundancy is one 'received by an employee who is dismissed from employment because the employee's position is genuinely redundant.'

Paragraph 11 of Taxation Ruling TR 2009/2: Income tax: genuine redundancy payments (TR 2009/2), outlines the requirements to be satisfied under subsection 83-175(1) of the ITAA 1997. There are four necessary components within this requirement:

·         The payment being tested must be received in consequence ofan 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.

It is accepted that you were dismissed from employment, as all employment with the employer was severed at the employer's initiative, without the consent of the employee, when it ceased to operate. It is further accepted that the dismissal was caused by the redundancy of your position, as the company was no longer operating.

As outlined below it is the Commissioner's view that the payment was made 'in consequence of termination' and meets the requirements of paragraph 11 in TR 2009/2.

In consequence of termination

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' sets out the Commissioner's views on when a payment is made in consequence of termination of employment, which takes its view from the leading cases on the meaning of employment termination payment.[1] Whilst the ruling explores the meaning of that phrase in relation to ETPs, the same principles apply in determining the meaning of the phrase in the context of genuine redundancy payments.[2]

Paragraph 5 of TR 2003/13 states the Commissioner's view that a payment is received by a taxpayer in consequence of the termination of the taxpayer's employment 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 received by the taxpayer.

The phrase requires a causal connection between the termination and the payment, although the termination need not be the dominant cause for the payment. The question of whether a payment is received in consequence of the termination of employment will be determined by the relevant facts and circumstances of each case.

Le Grand has been seen as reconciling the various views outlined in the earlier cases of Reseck and McIntosh. Goldberg J said at [33]:

I do not consider that the issue can simply be determined by seeking to identify the "occasion" for the payment. The thrust of the judgments in Reseck and McIntosh is rather to the effect that a payment is made "in consequence" of a particular circumstance when the payment follows on from, and is an effect or result, in a causal sense, of that circumstance. The passages in the judgments to which I referred earlier make this clear. They also make it clear that there need not be identified only one circumstance which gives rise to a payment before it can be said that the payment is made "in consequence" of that circumstance. The passages to which I have referred make it clear that it can be said that a payment may be made in consequence of a number of circumstances and that, for present purposes, it is not necessary that the termination of the employment be the dominant cause of the payment so long as the payment follows, in the causal sense referred to in those judgments, as an effect or result of the termination.

The approach in Le Grand has been cited with approval in other cases, and is consistent with the Commissioner's approach in TR 2003/13.[3]

Further it is clear from the decision in Le Grand and the Federal Court in Dibb that when a payment is made to settle a claim brought by a taxpayer for wrongful dismissal (or claims of a similar nature arising from termination of employment) the payment will have a sufficient causal connection with the termination of the taxpayer's employment. The payment will be taken to have been made in consequence of the termination of employment because it would not have been made but for the termination.

In Dibb the Federal Court found that despite the delay due to the litigation, the payment made under the relevant deed to settle the proceedings was 'in consequence of termination'. Heery J stated at [22]-[23]:

The subject matter of the litigation in the Federal Court was clearly the termination, the allegedly wrongful way AVCO effected it and its financial and other consequences for the applicant. The various causes of action, whether breach of contract, conspiracy, breach of fiduciary duty or contravention of the Trade Practices Act were, as Goldberg J would say (Le Grand at ATC 4915 [36]; ALR [36]), ''interwoven and intertwined'' with the termination. The payment was a consequence of the settlement, which was a consequence of the Federal Court proceeding, which in turn was a consequence of the termination.

This aspect of the Federal Court's decision was upheld by the Full Federal Court on appeal.[4] In their joint judgment, Spender, Dowsett and Allsop JJ held at [16]:

We agree with the learned primary Judge's reasons. Although much happened between Mr Dibb's dismissal and the settlement of the Federal Court proceedings, those events and the passage of time all arose out of his complaints concerning his dismissal. Neither those events nor the passage of time altered the fact that payment of the lump sum settlement was "in consequence of the termination."

The fact that the payment made is made by parties other than the employer does not exclude the payment from being made in consequence of the employee's termination. While redundancy payments would ordinarily be made by the employer of the terminating employee, the character of a payment as a 'genuine redundancy payment' does not depend on whether an employer makes the payment.[5]

Is the payment made under the Deed of Release in consequence of termination?

The amount payable under the Deed of Release precisely equalled the outstanding amount of redundancy pay you were entitled to under the relevant employment agreement, which formed the basis of the proof of debt filed by you. The proof of debt was included in the proceedings initiated by the liquidator against the employer which led to the settlement.

But for the termination of your employment, due to redundancy, the payment under the Deed of Release would not have been made. The settlement and Deed of Release followed the action by the liquidator to recover your outstanding liabilities, which followed your redundancy when the employer ceased operating and went into liquidation.

For the above reasons, we consider that the payment made under the Deed of Release is a payment made in consequence of your termination due to redundancy. Therefore the payment meets the conditions in subsection 83-175(1) as the payment was made in consequence of the termination of your employment.

As you have met all the criteria in section 83-175 of the ITAA 1997 the payment is a genuine redundancy payment for the purposes of that section.

Issue 2 - Is the payment assessable in the 2018-19 income year?

Where the payment exceeds the tax-free limit worked out under section 83-170 of the ITAA 1997, the excess payment will be taxed as an ETP in the year it is received.[6] As such, any amount over the tax-free threshold from the payment you received in the 2018-2019 income year will be taxed in that year.

All payments made in consequence of the dismissal up to and including the time of the payment in question are assessed against a single voluntary termination element worked out at the time of the dismissal. In addition, only one tax-free amount can be claimed in respect of any and all redundancy payments made in consequence of a particular termination due to redundancy.

Paragraph 77 of TR 2009/2 provides that:

Where multiple redundancy payments are made over more than one income year, this cumulative approach does not require that the payments be brought to account in a single income year. To the extent that the payments are taxable, they are brought to account in the year that they are received.

The elements in working out the tax-free amount threshold are indexed annually. When assessing amounts in the year they are received, you use the threshold amount for the income year the particular amount is received.

Note that the payment made in lieu of notice which was paid in the 2015-16 income year is treated as a genuine redundancy payment and is used to determine your tax-free limit worked out under section 83-170 of the ITAA 1997.

[1] Reseck v Commissioner of Taxation [1975] HCA 38 (Reseck), McIntosh v FC of T [1979] FCA 65(McIntosh) and Le Grand v Commissioner of Taxation [2002] FCA 1258 (Le Grand)

[2] Paragraph 13 of TR 2009/2

[3] Paragraph 29 of TR 2003/13

[4] Dibb v Commissioner of Taxation [2004] FCAFC 126. Note the Full Federal Court did allow the taxpayer's appeal in part, holding that part of the payment was a genuine redundancy payment and not an ETP.

[5] Paragraph 225 of TR 2009/2. The view that the character of a payment related to employment is not altered by the fact it is paid by an entity other than the employer was also supported by the High Court in Blank v FC of T [2016] HCA 42.

[6] See paragraphs 77-78 of TR 2009/2.

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