Edited version of private advice

Authorisation Number: 1052309557171

Date of advice: 24 October 2024

Ruling

Subject: Genuine redundancy, voluntary termination

Question

Under the terms of the trust deed, will a payment made by the trustee to a participating employee that is over the age of 55 but under the pension age and who is dismissed due to genuine redundancy, exceed the amount that could reasonably be expected to be received had the termination been a voluntary termination, for the purpose of subsection 83-175(1) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 2025

Year ended 30 June 2026

Year ended 30 June 2027

Year ended 30 June 2028

Year ended 30 June 2029

The scheme commences on:

1 July 2024

Relevant facts and circumstances

The applicant is the trustee (the Trustee) of two worker entitlement funds, to which certain construction industry employers (Participating Employers) make payments on behalf of their employees, in satisfaction of their obligations under relevant awards and enterprise agreements.

An employee of a Participating Employer may become a Member of the Fund.

Participating Employers make minimum monthly contributions for each employee who is a Member of the Fund.

The Trustee keeps an account for each Member, which includes contributions made on the Member's behalf.

Under the trust deed (Trust Deed), a benefit is payable upon a claim being made by a Member, if the Member:

(a)    retires from the work force on or after attaining the pension age;

(b)    permanently leaves the construction industry; (defined as not being employed in the industry for a period of 12 months)

(c)    suffers financial hardship and provides the Trustee with satisfactory documentary evidence;

(d)    dies;

(e)    becomes totally and permanently disabled;

(f)     is made redundant; or

(g)    permanently leaves Australia.

The Trust Deed defines 'pension age' as having the meaning given to that term in section 23 of the Social Security Act 1991 (Cth).

The amount of the benefit in each of the above circumstances is the amount left in the Member's account.

A Member becomes redundant for the purposes of payment from the Fund where their employment is terminated in circumstances where the work the Member has been performing is no longer required to be done by anyone.

An amount in the Member's account can only be forfeited if the amount is very small or the Member cannot be located within a specific period of time.

All forfeited, and not otherwise dealt with benefits, are transferred to the reserve account of the Fund.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 83-170

Income Tax Assessment Act 1997 section 83-175

Reasons for decision

Detailed reasoning

Under subsection 83-175(1) of the ITAA 1997, a genuine redundancy payment is so much of a payment that could reasonably be expected to be received by an employee who is dismissed because their position is genuinely redundant, as exceeds the amount that could reasonably be expected to be received by the employee in consequence of a voluntary termination of their employment at the time of the dismissal.

In order therefore for subsection 83-175(1) to apply, it must be demonstrated that the payment is, or includes, an amount which exceeds what the Member could reasonably be expected to receive in consequence of the voluntary termination of their employment at the time of dismissal.

In Taxation Ruling TR 2009/2 Income tax: genuine redundancy payments (TR 2009/2), the Commissioner considers the application of subsection 83-175(1). Paragraph 59 of TR 2009/2 states that, apart from a hypothetical change in circumstances to a voluntary termination instead of a dismissal caused by redundancy, all other circumstances surrounding the termination are assumed to be the same.

What is a 'voluntary termination'?

The term 'voluntary termination' as utilised in subsection 83-175(1) is not defined in the ITAA 1997.

The Macquarie Dictionary defines 'voluntary' as:

adjective 1. done, made, brought about, undertaken, etc., of one's own accord or by free choice: a voluntary contribution.

and 'termination' as

noun 1. the act of terminating

with terminate being defined as

verb (t) 1. bring to an end; put an end to.

The terms 'dismissal' and 'redundancy' in the context of the subsection are discussed in TR 2009/2 at paragraphs 18 and 25, however, where it is stated:

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.

Having regard to the ordinary definitions of 'voluntary' and 'termination', and the above discussion in TR 2009/2, it could be said that 'voluntary termination' refers to a member ending their employment because of their own choice or on their own accord. Most notably this would include resignation and retirement.

Hypothetical comparison and meaning of the phrase 'could reasonably be expected to'

In applying subsection 83-175(1) of the ITAA 1997, the task before a decision-maker (as supported by the comments in TR 2009/2) involves a hypothetical comparison of the difference between:

a. the payment that the worker receives when dismissed from employment due to a genuine redundancy, and

b. the hypothetical payment that same worker could reasonably be expected to receive if instead they voluntarily terminated their employment at the time of dismissal and all other circumstances surrounding the termination are assumed to be the same.

The comparison in subsection 83-175(1) of the ITAA 1997 must therefore be between an actual event (the genuine redundancy), and a hypothetical event (the voluntary termination).

A key element of the hypothetical comparison of the amounts is the phrase 'could reasonably be expected to'; that is, what amount the worker 'could reasonably be expected to' receive in a hypothetical voluntary termination.

The phrase is not defined in the ITAA 1997, but appears in the Freedom of Information Act 1982 (Cth)[1] and various State-based right-to-information Acts.[2] It is an objective test to be approached from the viewpoint of a reasonable decision-maker[3] and has been the subject of considerable judicial scrutiny.

In Attorney-General's Department v Cockcroft[4], Bowen CJ and Beaumont J considered the phrase 'could reasonably be expected to' which appeared in the former subparagraph 43(1)(c)(ii) of the Freedom of Information Act 1982 (Cth), stating:

In our opinion, in the present context, the words 'could reasonably be expected to prejudice the future supply of information' were intended to receive their ordinary meaning. That is to say, they require a judgment to be made by the decision-maker as to whether it is reasonable, as distinct from something that is irrational, absurd or ridiculous... It is undesirable to attempt any paraphrase of these words. In particular, it is undesirable to consider the operation of the provision in terms of probabilities or possibilities or the like. To construe s43(1)(c)(ii) as depending in its application upon the occurrence of certain events in terms of any specific degree of likelihood or probability is, in our view, to place an unwarranted gloss upon the relatively plain words of the Act. It is preferable to confine the inquiry to whether the expectation claimed was reasonably based.

Accordingly, the words are to be given their ordinary meaning and the relevant expectation must be reasonably based and not irrational, absurd or ridiculous. Therefore, a decision-maker must discriminate between the expectation of an occurrence that is merely a possibility (i.e. speculative, conjectural or hypothetical) with expectations that are reasonably based, i.e. where real and substantial grounds exist for their occurrence.[5] At the same time, however, it is not necessary for the decision-maker to be satisfied on the balance of probabilities that the expectation will crystallise.[6] As explained in Neary and State Rail Authority[7]:

... There must be more than a mere risk. While the key word used in the relevant provision - 'expect' - carries a firmer connotation than words such as 'anticipates', it is not necessary that the level of risk be such that it be assessed as more probable than not. Nor is it necessary for the administrator to apply a balance of probabilities calculus similar to that used to set the burden of proof in litigation. All relevant factors...should be taken into account. The extent and nature of the effect will be relevant, and often decisive. It is necessary to assess what is reasonable in the circumstances.

Application of the law

Under the terms of the amended Trust Deed, in the event of a genuine redundancy, a Member is eligible to be paid the balance of their account, regardless of age.

In determining the amount that could reasonably be expected to be received by a Member, aged over 55 but under the pension age, as a result of a hypothetical voluntary termination, the Commissioner accepts that it is open to such a Member to resign or retire, both of which represent voluntary terminations of employment.

Under the amended Trust Deed, a Member who retires is only eligible to be paid the balance of their account where that retirement takes place on or after the attainment of pension age.

Where a Member retires under pension age, there is no entitlement to a payment. This means that, where a Member retires over the age of 55 but under the pension age, they are not entitled to a payment.

The Trust Deed makes no provision for any payment being made upon resignation.

The amount payable to a Member due to resignation, or to retirement under pension age, is nil.

Therefore, the amount that 'could reasonably be expected to' be received by an employee aged over 55, but under the pension age, in consequence of a hypothetical voluntary termination, is nil.

As such, the genuine redundancy payment would exceed the amount that could reasonably be expected to be received on voluntary termination at the time of the dismissal.

[1] See sections 33, 37 and 47.

[2] See, for example, Schedule 4 of the Right To Information Act 2009 (Qld) and sections 12 and 14 of the Government Information (Public Access) Act 2009 (NSW).

[3] Neary v State Rail Authority [1999] NSWADT 107 at paragraph 35.

[4] [1986] FCA 35 at paragraph 29 of the reasons of Bowen CJ and Beaumont J.

[5] Murphy and Treasury Department (1995) 2 QAR 744 at paragraph 44, citing Re B and Brisbane North Regional Heath Authority (1994) 1 QAR 279 at paragraph 160.

[6] Cockcroft at paragraph 12 of Sheppard J's reasons

[7] [1999] NSWADT 107 at paragraph 35

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