Edited version of private advice

Authorisation Number: 1051823200969

Date of advice: 8 April 2021

Ruling

Subject: Employment termination payments

Question

Is the termination payment (the Payment) made to a person (the Taxpayer) by a Company (the Employer) a genuine redundancy payment in accordance with section 83-175 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No

This ruling applies for the following period:

Income year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

In the 20XX-XX income year, the Taxpayer commenced employment with the Employer.

In the 20XX-XX income year the Taxpayer was advised by the Employer that, due to a downtown of work, their employment would be terminated.

The Taxpayer was employed under an enterprise agreement(the Agreement).

The Payment was made by an approved Construction Industry Redundancy Fund (the Redundancy Fund).

In the 20XX-XX income year, the Taxpayer received a payment from the Redundancy Fund.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 83-175.

Reasons for decision

Summary

The Payment is not a genuine redundancy payment (GRP) as defined in section 83-175 of the ITAA 1997 as it does not exceed the amount that that Taxpayer would have received had they voluntarily resigned from their employment.

Detailed reasoning

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

The Commissioner of Taxation has issued Taxation Ruling TR 2009/1 Income tax: genuine redundancy payments (TR 2009/2), which outlines the requirements to 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. 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.

It is clear from the facts that the Taxpayer received the payment in consequence of the termination of their employment.

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 the 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.

In this instance the Taxpayer did not voluntarily resign from their employment. Rather, their employment was terminated by the Employer because the position that the Taxpayer occupied was no longer needed and the Employer did not want the position to be occupied by anyone else.

However, while it is accepted that the Taxpayer was dismissed from employment 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 the Taxpayer would have received had they voluntarily resigned from employment.

Clause 27.3 of the Agreement states that when an employee's employment is terminated, they will receive all entitlements under the Agreement. This would include a payment from the Redundancy Fund. Consequently, the Payment does not exceed the amount that the Taxpayer would have received had they voluntarily resigned from their employment.

In this instance, the amount calculated by the Employer was only what the Taxpayer would reasonably be expected on voluntary termination, no additional amount for example payment in lieu or any other additional payment in relation to the termination was paid, as a result the payment is not a genuine redundancy payment.

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