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Ruling

Subject: Genuine redundancy payment

Question

Is any part of the payment received on termination of employment exempt from tax as a genuine redundancy payment?

Answer

No.

This ruling applies for the following period

2010-11 income year.

The scheme commenced on

1 July 2010.

Relevant facts

You state that your client commenced employment with the Company in the early 1990's.

Early in 2006 calendar year your client was appointed a senior executive position in the Company, which was the position your client held on the termination of employment.

In a letter dated towards the end of the 2009-10 income year the Company notified your client's immediate termination from employment. It was further stated that the Company had decided to appoint someone else to the senior executive position.

Not long after your client signed a Deed of Separation (the Deed) between the Company and your client. In the Deed it was agreed by both parties that your client's employment was terminated by resignation. It was further agreed that the earlier notice of termination given to your client was to be retracted.

The Deed states that a lump sum separation payment will be paid to your client over several instalments in the 2010-11 income year.

You state that the separation payment does not include an accrued leave component, and that it is not a payment in lieu of accrued superannuation benefits.

You state that there was no agreement for your client to be re-employed following the termination of employment.

You state that the termination of employment was not on account of any personal act or default on your client's part.

Reasons for decision

Summary

No part of the payment is excluded from being an employment termination payment as the tax-free part of a genuine redundancy payment as not all the conditions have been satisfied.

The payment is a taxable component of an employment termination payment and is to be included in your client's assessable income for the 2010-11 income year.

Detailed reasoning

A payment made to an employee is a genuine redundancy payment if it satisfies all criteria set out in section 83-175 of the Income Tax Assessment Act 1997 (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 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 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 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 lists payments that are not employment termination payments. Paragraph 82-135(e) provides that the part of a genuine redundancy payment worked out under section 83-170 is not an employment termination payment.

Dismissal and redundancy

A genuine redundancy payment is defined under subsection 83-175(1) of the ITAA 1997 as a payment resulting from:

(a) a dismissal; and

(b) a genuine redundancy.

The terms 'dismissal' and 'redundancy' are not defined in the ITAA 1997. Therefore, it is necessary to consider the ordinary meaning of the terms and the meaning the courts have ascribed to each word.

The Explanatory Memorandum to the Income Tax Assessment Amendment Act (No.3) 1984, which inserted former section 27F (the predecessor provision to section 83-175 of the ITAA 1997) into the Income Tax Assessment Act 1936 states, at page 91:

The terms "dismissal" and "redundancy" are not defined in the legislation and, therefore, should be given their ordinary meanings. "Dismissal" carries with it the concept of the involuntary (on the taxpayer's part) termination of employment. "Redundancy" carries the concept that the requirements of the employer for employees to carry out work of a particular kind, or for employees to carry out work of a particular kind in the place where they were so employed, have ceased or diminished or are expected to cease or diminish. Redundancy, however, would not extend to the dismissal of an employee for personal or disciplinary reasons or for reasons that the employee was inefficient.

The Commissioner has issued Taxation Ruling TR 2009/2, titled Income Tax: genuine redundancy payments. The Ruling provides guidance on the factors to be considered in the interpretation of section 83-175 of the ITAA 1997.

Paragraph 11 of TR 2009/2 states:

There are four components within the basis genuine redundancy requirement:

· The payment must be received in consequence of a termination.

· The termination must involve an employee being dismissed from employment.

· The dismissal must be caused by the redundancy of the employee's position.

· The redundancy payment must be made genuinely because of a redundancy.

Each of the requirements will be discussed individually.

The payment is in consequence of the termination of employment

In this case, the lump sum payment was received in consequence of your client's termination of employment. Therefore, the requirement in subsection 83-175(1) of the ITAA 1997 that the payment is in consequence of your client's termination of employment is satisfied.

Dismissal from employment

Dismissal requires a termination of employment at the initiative of the employer without the consent of the employee.

In this case, your client signed a Deed of Separation (the Deed) between the employer and your client towards the end of the 2009-10 income year. In the Deed it was agreed by both parties that your client's employment was terminated by reason of resignation. It was further agreed that an earlier notice of termination given to your client was to be retracted.

Despite this, it is accepted that your client was dismissed from employment by the employer. Consequently, the second requirement of a genuine redundancy has been met.

Dismissal caused by redundancy

Section 83-175 of the ITAA 1997 requires that the dismissal be caused by redundancy of the employee's position and not for some other reason. Redundancy must be the primary reason for termination of employment by way of dismissal.

At paragraphs 25 of TR 2009/2, the Commissioner makes the following comments regarding dismissal and redundancy:

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 of the employer's operations.

The Commissioner expands on the issue of determining the cause of dismissal at paragraphs 268 to 273 of TR 2009/2:

268. There are various reasons why an employee may be dismissed from employment. Redundancy may be only one of these reasons.

269. In circumstances where more than one reason can be identified for the dismissal, the Commissioner considers that redundancy must be the primary cause of the dismissal. This suggests an analysis of what is the prevailing or most influential cause of the dismissal. This question is to be answered in light of the facts and circumstances of each case.

270. The classic context for redundancy is the closure, downsizing or reorganisation of part or all of the employer's operations. Redundancy can readily be established as the prevailing or most influential cause of dismissal in the first two of these scenarios.

271. Where an employer dismisses an employee after a reorganisation of duties, functions and responsibilities, a more careful analysis is required. A restructure of an organisation does not necessarily import redundancy where employees are dismissed following the reallocation or restructure. In these circumstances, it is necessary to consider what impact the restructure had on the duties, functions and responsibilities formerly fulfilled by the dismissed employee.

272. In Re Marriott and Federal Commissioner of Taxation [[2004] AATA 806; (2004) 2004 ATC 2191; (2004) 56 ATR 1265] the employer did not see fit to dismiss the employee after a reallocation of duties, functions and responsibilities within the organisation. In this case, the employee was carrying out duties of a legal nature in the Tax Office. These duties changed upon the reorganisation, in that he was not continuing to directly negotiate settlements or train junior advocates. After carefully considering the evidence before him, Senior Member Lindsay found that there was not a dismissal (in particular there was not a constructive dismissal) and further commented that:

Whether an employee's termination is by reason of redundancy will require an assessment of the changes to determine if they were beyond or beneath the employee's qualifications, skills or experience.

273. In this case it was considered that the prevailing or most influential cause of termination was the employee's own desire not to undertake the duties, functions and responsibilities he was offered following the reorganisation.

In this case, whilst your client acknowledges that the senior executive position has not been abolished, you client maintains that, as part of a restructure of the company group, your client's employment was terminated and that the role of the new senior executive has changed significantly. Your client states that the new senior executive's organisational responsibilities have reduced and the reporting structure for the new senior executive role has also changed appreciably.

However, no documentary evidence has been provided to support this contention. Further, it is noted that neither the retracted letter notifying your client of the termination of employment nor the Deed make mention of either redundancy or that a restructure of the company group has taken place.

From this it can only be concluded that your client's employment was terminated for reasons other than redundancy.

As a result, the third requirement that there has been a dismissal because of redundancy cannot be satisfied.

The redundancy payment must be made genuinely because of a redundancy

Whether a redundancy is 'genuine' or contrived is determined on an objective basis.

In this case, from the facts provided, it is evident that there has not been a redundancy as discussed above. Therefore the requirement that the redundancy be genuine in order to classify the payment as a genuine redundancy payment does not need to be examined.

Conclusion

A payment made to an employee is a genuine redundancy payment if it satisfies all criteria set out in section 83-175 of the ITAA 1997. As subsection 82-175(1) has not been satisfied, the payment is not a genuine redundancy payment.