Edited version of private advice

Authorisation Number: 1052094851602

Date of advice: 4 April 2023

Ruling

Subject: Employment termination payments

Question

Is any part of the termination payment received on the termination of a person's (the Taxpayer) employment a tax-free part of a genuine redundancy payment under section 83-170 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

This ruling applies for the following period:

Income year ended 30 June 20YY

The scheme commenced on:

1 July 20YY

Relevant facts and circumstances

The Taxpayer was employed as an ongoing employee by an entity (the Employer).

During the 20YY income year, due to an absence of work, the Taxpayer's employment was terminated by the Employer.

The Taxpayer was employed under an Enterprise Agreement (the Agreement).

The Taxpayer received a lump sum termination payment which consisted of the following:

The Taxpayer is less than 65 years of age.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 83-10

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)

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

Reasons for decision

Question

Summary

The termination of the Taxpayer's former employment constitutes a genuine redundancy under section 83-175 of ITAA 1997.

Payment 1 is a genuine redundancy payment and is therefore tax-free in accordance with section 83-170 of the ITAA 1997.

Detailed Reasoning

A payment made to an employee is a genuine redundancy payment 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 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 their employment at the time of dismissal.

As can be seen above, subsection 83-175(1) contains two elements to be satisfied for a payment to be considered a genuine redundancy payment:

•                     The payment is received by an employee who is dismissed because their position is genuinely redundant; and

•                     The payment exceeds the amount that could reasonably be expected to be received by the employee if their employment was terminated voluntarily at that time

The Commissioner of Taxation has issued Taxation Ruling TR 2009/2 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 genuine redundancy payment under 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.

•                     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.

In paragraph 5 of TR 2003/13 the Commissioner states:

5.... 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.

In this instance, the Taxpayer's employment was terminated due to an absence of work. Had the Taxpayer's employment not been terminated, they would not have received Payment 1. This payment was therefore made in consequence of the termination.

Note: Some other payments, such as unused annual leave and unused long service leave, may also be made in consequence of termination. Any such payments that receive a more specific tax treatment are excluded from being genuine redundancy payments by subsection 83-175 (4).

Dismissal

The Commissioner's view, as stated in paragraph 18 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...

Consent in this context refers to the employee freely choosing to agree to, or approve, the act or decision to terminate employment in circumstances where the employee has the capacity to make such a choice.

Consent may be either expressly stated by the employee or implied by their behaviour or conduct.

It is clear from the facts that the termination of employment was at the behest of the employer. The Taxpayer did not initiate the termination of employment. The Employer made a unilateral decision to terminate the employment. The Taxpayer was therefore dismissed.

Redundancy

The Commissioner's view, as stated in paragraph 25 of TR 2009/2 is that:

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...

Based on the information provided, it seems clear that the Taxpayer's position with the Employer would cease to exist, at least in the short-term, as the reason for termination was that there was not sufficient work to support the existence of that position.

Genuine Redundancy

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

In addition to the basic requirements for a genuine redundancy payment found in subsection 83-175(1) of the ITAA 1997, subsections 83-175(2) and (3) of the ITAA 1997 set out further criteria that must be satisfied before a payment can be treated as a genuine redundancy payment as follows:

•                     the employee is dismissed before the earlier of 65 or a specified age (being the pension age) - the Taxpayer was under 65 at the time of dismissal

•                     the termination is not at the end of a fixed period of employment - the Taxpayer was engaged as an ongoing permanent employee

•                     the amount paid is not greater than the amount that could reasonably be expected had the parties been dealing at arm's length, (in the event that the employer and employee are in fact not dealing at arm's length in relation to the dismissal) - there is no suggestion that the parties were not dealing with each other on anything but arm's length terms. In any case, the amount paid was clearly stipulated in the Agreement, based on completed years of service and the Taxpayer's age at the time

•                     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 - there is no evidence to suggest this was the case

•                     the payment is not in lieu of superannuation benefits - there is no evidence to suggest this was the case.

Based on the information provided, it is considered that all the above conditions are satisfied.

However, while it is accepted that the Taxpayer was dismissed from their 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 exceed the amount that they would have received had the employment been terminated voluntarily.

The payment received by the Taxpayer included Payments 2 and 5 for the last pay period, both of which would have been received whether the Taxpayer's employment was terminated or not.

The payment also included Payments 3 and 4. Both of these amounts were only received because of the termination of employment. However, both would have been received in the case of voluntary termination of employment.

Payment 1 would not have been made if the Taxpayer terminated employment voluntarily. The only reason such a payment was made, is because the employment was terminated by the Employer.

Consequently, Payment 1 exceeded the amount that the Taxpayer would have received had they voluntarily resigned from their employment.

As it was paid in relation to a genuine redundancy, it is a genuine redundancy payment.

Tax treatment of a genuine redundancy payment

Subsection 83-170(2) of the ITAA 1997 provides that so much of the genuine redundancy payment that does not exceed the amount worked out using the formula prescribed in subsection 83-170(3) is non-assessable, non-exempt income.

Any amount in excess of the tax-free amount is taxed as an employment termination payment. The formula for working out the tax-free amount is:

Base amount + (Service amount × Years of service)

For the 20YY-YY income year:

Base amount is $X

Service amount is $X

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

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