Edited version of private advice

Authorisation Number: 1052355190539

Date of advice: 12 February 2025

Ruling

Subject:Genuine redundancy payment

Question 1

Is any part of the payment in lieu of notice a genuine redundancy under section 83-175 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer 1

Yes.

This private ruling applies for the following period:

Income Year Ending 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

Your date of birth is in 19XX.

You provided a copy of your employment contract dated XX/XX/20XX that shows you entered into an employment contract with the Employer. It was a fixed term contract.

In late 20XX the Employer provided you with a termination letter stating due to changes in operational requirements the business will no longer require the job currently done by you accordingly your position will be made redundant. Your notice period was noted as X weeks and your redundancy pay as XX weeks.

The copy of your employment contract you provided set out your salary, commence date and position.

A clause in your employment contract states that you can resign by providing one month's notice in writing.

Another clause states if the employment is terminated under otherwise than during or at the end of any period of probation - an amount equal to the executive's remuneration package for a period of XX weeks (not to exceed the period remaining on the term of the contract).

You have provided a copy of a payslip noting the payments made to you.

An income statement from your Employer for the period X July 20XX to X December 20XX detailed the following:

•                     ETP type O

•                     ETP date XXXX-XX-XX

•                     ETP total PAYG withholding amount $XX,XXX.00

•                     ETP taxable component $XXX,XXX.XX

There is no ongoing relationship between you and the Employer, after the termination.

There was no arrangement between you and the Employer, or between the Employer and another person, to employ you after the termination of your employment.

You have not returned to work for the Employer in any capacity subsequent to the termination of your employment.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 82-130

Income Tax Assessment Act 1997 section 83-130

Income Tax Assessment Act 1997 section 83-135

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'.

Reasons for decision

Question

Is any part of the payment in lieu of notice of $XXX,XXX.XX (the Payment) a genuine redundancy under section 83-175 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Summary

Yes, the amount of $XX,XXX in lieu of notice is the tax free part of a genuine redundancy payment. This tax free amount is non-assessable, non-exempt income under subsection 83-170(2) of the ITAA 1997. The remainder would be taxable as an ETP.

Detailed reasoning

Employment termination payment

Division 82 of the ITAA 1997 contains the substantive rules governing the taxation of employment termination payments (ETPs).

The term 'employment termination payment' as defined in section 82-130 of the ITAA 1997, includes any payment made in respect of a taxpayer 'in consequence of the termination of their employment', other than certain specified payments.

A payment is an ETP if it satisfies all the requirements in section 82-130 of the ITAA 1997 and is not specifically excluded under section 82-135 of the ITAA 1997.

Subsection 82-130(1) of the ITAA 1997 states:

A payment is an employment termination payment if:

(a)           it is received by you:

(i)            in consequence of the termination of your employment; or

(ii)            after another person's death, in consequence of the termination of the other person's employment; and

(b)           it is received no later than 12 months after the termination (but see subsection (4)); and

(c)           it is not a payment mentioned in section 82-135.

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' (TR 2003/13) sets out the Commissioner's views on when a payment is made 'in consequence of' termination of employment.

Paragraphs 5 and 6 of TR 2003/13 state:

5.             ... the Commissioner considers 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.

6.             The phrase requires a causal connection between the termination and the payment, although the termination need not be the dominant cause of the payment....Common examples of ETPs include golden handshakes, contractual termination payments and payments for wrongful dismissal.

In this case, on XX November 202X, the Employer provided you with a termination of employment letter advising you that your current role will no longer be required to be performed by anyone with the employer from X December 2024.

On XX January 202X, you received an ETP, type O, in the amount of $XXX,XXX.XX, representing XX weeks of your salary.

Genuine redundancy payment

A payment made to an employee is a genuine redundancy payment if it satisfies all the conditions set out 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 employees 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 the employee reached pension age;

(ii)           if the employees 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 arms length the payment does not exceed the amount that could reasonably be expected to be made if the dismissal were at arms 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.

Payments not covered

(4)           A payment is not a genuine redundancy payment if it is a payment mentioned in section 82-135 (apart from paragraph 82-135(e)).

Section 82-135 of the ITAA 1997 includes (among others):

•                     superannuation benefits;

•                     the payment of a pension or annuity; and

•                     unused annual leave (paragraph 82-135(c)) or long service leave payments (paragraph 82-135(d)).

Whether the payment in lieu of notice of $XXX,XXX.XX you received will constitute a genuine redundancy payment will be addressed below.

In order to satisfy the definition of a genuine redundancy payment under subsection 83-175(1) of the ITAA 1997 there must be a dismissal from employment and the dismissal must result from the positions being made genuinely redundant.

The term dismissal is not defined in the ITAA 1997. Therefore, it is necessary to consider the common law or ordinary meaning of the term and the meaning the judicial authorities have ascribed to it.

Dismissal from employment

Taxation Ruling TR 2009/2 Income Tax: genuine redundancy payments (TR 2009/2), which outlines the Commissioners view of the requirements for a payment to qualify as a genuine redundancy payment under section 83-175 of the ITAA 1992, discusses what constitutes a 'dismissal'. As per paragraph 18 of TR 2009/2:

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.

In your case, the Employer provided you with a termination letter stating that due to recent structural review of the XXX project, your position is not required to be performed by anyone, accordingly your last day of the employment will be X December 20XX.

It is concluded that the termination of your employment constitutes a dismissal for the purposes of subsection 83-175(1) of the ITAA 1997.

The voluntary termination element

In accordance with the 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 as 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 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 employee could reasonably be expected to receive in consequence of the voluntary termination of their employment at the time of dismissal.

TR 2009/2 looks at what is considered to be an amount that exceeds what could reasonably be expected by an employee in consequence of the voluntary termination of his or her employment.

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 an employee ending their employment because of their own choice or on their own accord. Most notably this would include resignation and retirement.

Accordingly, the amount that could reasonably be expected to be received by an employee if he or she had voluntarily terminated employment at the time of being dismissed cannot receive tax-free treatment. There is a need to look at the contractual or other entitlements payable by an employer on voluntary termination. In addition, a payment in lieu of notice can be a genuine redundancy payment provided that such a payment would not be expected on voluntary termination.

In your case, it is considered that in accordance with the clause XX of the Contract, at the time of giving notice, you could expect to receive 4 weeks' pay in your normal pay cycle. At the time of dismissal, at the end of the 4 weeks, you would have no further entitlements. Another Contract's clause states that if the employment is terminated under otherwise than during or at the end of any period of probation - an amount equal to the executive's remuneration package for a period of XX weeks.

Therefore, the payment in lieu of notice is an amount that exceeds what you could reasonably be expected to receive in consequence of the voluntary termination of your employment at the time of dismissal.

You received a payment in excess of XX weeks of what you would have received on voluntary termination and therefor the amount of $XXX,XXX.XX payment in lieu of notice forms potential genuine redundancy payment.

It is concluded that the termination of your employment constitutes a dismissal for the purposes of subsection 83-175(1) of the ITAA 1997.

Further conditions for a genuine redundancy payment

In addition to the basic requirement for a genuine redundancy payment found in subsection 83-175(1) of the ITAA 1997, the further conditions for genuine redundancy payment treatment in subsections 83-175(2) and (3) require that:

•                     the dismissed employee is not older than the specified age limits;

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

•                     the actual 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 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.

Age-based limits

Under paragraph 83-175(2)(a) of the ITAA 1997, an employee must be less than the pension age at the time of dismissal for a redundancy payment to qualify as a genuine redundancy payment.

At the time of employment termination, you were XX years of age.

At this time, the pension age (as defined in subsection 23(1) of the Social Security Act 1991) was 67 years.

You were less than the pension age at the time of dismissal.

This condition is met.

Not the end of a particular period of employment

Under subparagraph 83-175(2)(a)(ii) of the ITAA 1997, a payment made at the end of a fixed period of employment cannot normally be a genuine redundancy payment.

It would normally be the case that someone employed on a contract for a set period could not be dismissedat the end of that period. The employment would simply terminate because the arrangement stipulated that the employment would cease at that time.

As per TR 2009/2, Senior Member Sweidan in Winsen v Commissioner of Taxation found this to be the case where a person was employed for a succession of fixed periods, at the end of the last of which there was no continuation of employment and no renewal of the contract for a further fixed period.

In this case, your employment commenced on XX XX 20XX and should have run for a period of X years until XX XX 20XX, but it was terminated early, on X December 20XX.

Accordingly, this condition is met.

Arm's length amount

This condition only needs to be met if it is established that the employer and employee are not dealing at arm's length in relation to the dismissal.

There is no suggestion that you and the Employer were not dealing at arm's length in relation to the dismissal.

Therefore, this condition does not apply.

No stipulated arrangement to employ

Under paragraph 83-175(2)(c) of the ITAA 1997, an arrangement to employ an employee after his or her termination prevents a dismissal giving rise to a genuine redundancy payment if that arrangement is entered into between either:

•                     the employer and the dismissed employee; or

•                     the employer and another entity.

Your employment termination letter issued to you X weeks before the termination date clearly states your current role will no longer be required to be performed by anyone.

There was no arrangement between you and the Employer or between the Employer and another person, to employ you following the termination of your employment.

This condition is met.

Payments not in lieu of superannuation benefits

Under subsection 83-175(3) of the ITAA 1997, a payment is not a genuine redundancy payment to the extent that it is made in place of superannuation benefits due at the time or in the future.

Superannuation benefits are also specifically excluded from being genuine redundancy payments under subsection 83-175(4) of the ITAA 1997.

There is no evidence in the documentation provided to suggest any part of the payment received was in relation to superannuation benefits.

This condition is met.

Tax-Free and taxable amount of a genuine redundancy

Some or all of a genuine redundancy payment may be non-assessable non-exempt income, and accordingly tax-free, under section 83-170 of the ITAA 1997.

The extent to which the payment is tax-free will depend on the amount of the payment and the total number of whole years of employment to which the payment relates. There is no requirement for the years of service to be continuous when applying the threshold in section 83-170 of the ITAA 1997.

Any amount of a genuine redundancy payment in excess of the tax-free amount worked out under section 83-170 of the ITAA 1997 will be taxable as an employment termination payment. This is so even where the amount is received more than 12 months after the termination.

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 20XX income year:

Base amount is $XX,XXX;

Service amount is $X,XXX; and

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

Your employment commenced on XX December 20XX and ceased X December 20XX. Hence the 'years of service' to which the genuine redundancy payment relates is X whole year of service.

Accordingly, the tax-free part of a genuine redundancy payment you can receive in the 20XX income year under subsection 83-175(3) of the ITAA 1997 is:

$XX,XXX + ($X,XXX × 1) = $XX,XXX

As the payment in lieu of notice of $XXX,XXX.XX is also a genuine redundancy payment and is above the tax-free amount of a genuine redundancy payment, only $XX,XXX of the payment in lieu of notice is the tax-free part of a genuine redundancy payment. This tax-free amount is non-assessable, non-exempt income under subsection 83-170(2) of the ITAA 1997.

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