Edited version of private advice

Authorisation Number: 1052345055796

Date of advice: 17 January 2025

Ruling

Subject: Genuine redundancy

Question 1

Is any part of the redundancy payout amount in your final payment a tax-free genuine redundancy payment under section 83-170 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer 1

Yes, part of the payout amount, being $XXX, is a tax-free genuine redundancy payment.

This ruling applies for the following period:

Income year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

During the 20XX income year, you commenced employment with the employer.

On X X 20XX, you commenced employment in the position of X.

The contract under which you performed this role was for the period of X X 202X - X X 202X.

Due to a division realignment and leadership changes, your position no longer existed. You were provided with a formal notice about this.

The employer would work with you to identify potential other roles across the organisation, but there was no further employment offered.

You were provided with a formal notice to terminate your employment on X X 20XX

Your employment ceased on X X 20XX. You were aged X when employment ceased.

A final payout summary was provided to you on X X 20XX.

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)

Tax Administration Act 1997 subsection 359-5(1)

Tax Administration Act 1997 subsection 357-110(1)

Government Sector Employment Regulation 2014 section 41 and clause 39

Reasons for decision

Question 1

Is any part of the redundancy payout amount in your final payment a tax-free genuine redundancy payment under section 83-170 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer 1

Yes

Summary

1.            Part of the redundancy payout amount, being $XX, is a tax -free genuine redundancy payment (GRP) as in section 83-175 of ITAA 1997.

Detailed reasoning

Genuine redundancy payment

2.            A payment made to an employee is a genuine redundancy payment (GRP) if it satisfies all the criteria in section 83-175 of the ITAA 1997. This section states:

(1) 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 his or her employment at the time of dismissal.

(2) A genuine redundancy payment must satisfy the following conditions:

(a) the employee is dismissed before the earlier of the following:

(i) the day he or she turned 65;

(ii) if the employee's employment would have terminated when he or she reached a particular age or completed a particular period of service the day he or she would reach the age or complete the period of service (as the case may be);

(b) 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 were at arm's length;

(c) at the time of the dismissal, there was no arrangement between the employee and the employer, or between the employer and another person, to employ the employee after dismissal.

(3) However, a genuine redundancy payment does not include any part of a payment that was received by the employee in lieu of superannuation benefits to which the employee may have become entitled at the time the payment was received or at a later time.

3.            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

4.            For a genuine redundancy payment to exist, both elements need to be satisfied.

5.            The Commissioner of Taxation has issued Taxation Ruling TR 2009/2 Income Tax: genuine redundance payments, 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.

6.            In discussing what constitutes a GRP in accordance with sub-section 83-175 (1) of the ITAA 1997, paragraph 11 of the 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

Component 1: payment 'in consequence of' termination

7.            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 the 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 payment (ETP): payments made in consequence of the termination of any employment: meaning of the phrase 'in consequence of' (TR 2003/13).

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

•                     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.

9.            In this instance, your employment was terminated because of division realignment and leadership changes, causing your position no longer existed. While the employer stated that they would work with you to identify potential other roles across the organisation, there was no further employment offered. Had your employment not been terminated, you would not have received the redundancy payment.

10.         Component 1 is satisfied - the payment you received on X X 2024 was in consequence of your termination.

Component 2: 'dismissal' and 'redundancy'

11.         The Commissioner's view is that a genuine redundancy can only arise where there is no suitable job available for the employee with the employer, meaning that he or she must therefore be dismissed.

12.         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.

13.         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.

14.         Determining whether an employee has consented to their termination requires an assessment of the fact and circumstances of each case. Consent may be wither expressly stated by the employee or implied by their behaviour or conduct.

15.         Where an employee is given notice from their employer that they will be terminated at a specified time in the future due to genuine redundancy, that employee will be dismissed because of redundancy for the purposes of section 83-175.

16.         It is clear from the facts that you were given notice from the employer about termination as part of the division realignment and leadership change process.

17.         As mentioned previously, your position no longer existed. Despite the employer would work with you to identify potential other roles across the organisation, there was no further employment offered.

18.         Component 2 is satisfied - you were dismissed from employment.

Component 3: dismissal caused by 'redundancy'

19.         Section 83-175 further requires that the dismissal be caused by redundancy of the employer's position, and not for some other reason.

20.         The reason for a dismissal is to be established in light of the facts and circumstances of each case. The redundancy of the relevant position must be the prevailing or most influential reason for the dismissal if there is more than once contributing cause.

21.         An employee's position is redundant when an employer determines that it is superfluous to the employer's needs to and the employer does not want the position to be occupied by anyone.

22.         Accordingly, it is fundamental 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.

23.         In some circumstances, an employer may reallocate the duties and functions attached to a particular position to another position within the employer's organisational structure. Is such case, the former position is redundant.

24.         As per documentation received by you, your position would no longer exist following the restructure of the division.

25.         Component 3 is satisfied - your dismissal was caused by redundancy.

Component 4: 'genuine' redundancy

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

27.         The fact that an employer and employee have an understanding that a payment on termination is caused by redundancy or that the employer treats the payment as a redundancy payment for tax purposes does not itself establish genuine redundancy.

28.         Component 4 is also satisfied based on the facts of this case.

Further conditions for a genuine redundancy payment

29.         In addition to the basic requirements for a genuine redundancy payment found in subsection 83-175(1) of the ITAA 1997, subsection 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;

•                     The termination is not at the end of a fixed period of employment;

•                     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 arrangement entered into between the employer and the employee or the employer and another entity to employ the dismissed employee after the termination; and

•                     the payment is not in lieu of superannuation benefits.

30.         Based on the information provided, it is considered that all conditions of subsections 83-175(2) and 83-175(3) have been satisfied.

Tax treatment of a genuine redundancy payment

31.         Subsection 83-170(2) of the ITAA 1997 provides that so much of the GRP 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 (ETP). The formula for working out the tax-free amount is:

Base amount + (Service amount x Years of service)

For the 20XX-XX income year:

Base amount is $X;

Service amount is $X; and

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

32.         The taxpayer's employment commenced on X X 201X and ceased on X X 202X. Therefore the 'years of service to which the genuine redundancy payment relates to is X whole years of service.

33.         Accordingly, under subsection 83-175(3) of the ITAA, the tax-free part of the taxpayer's GRP is:

$XXX + ($XX x XX years) = $XXX

Further Analysis

34.         It is noted from the final payout summary that XXX provided, that it did not view any part of the payment made to you as a redundancy payment.

35.         Your final payslip describes the payment as 'Employment Termination Payment (ETP) - Lump Sum C'.

36.         It is not the role of the ATO to arbitrate between an employer and a former employee as to the correct categorisation of a payment.

37.         The ATO is only able to form a view as to the nature of a payment based on the verifiable facts provided.

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).