Edited version of your private ruling

Authorisation Number: 1012220626797

Ruling

Subject: Genuine Redundancy

Question

Is any part of the payment to be received on termination of employment excluded from assessable income as the tax-free part of a genuine redundancy payment?

Answer

No.

This ruling applies for the following periods:

For the year ending 30 June 2013

The scheme commences on:

1 July 2012

Relevant facts and circumstances

Your client is currently employed by a company (the employer).

Your client has been employed by the employer for a significant period of time.

Your client has been advised by the employer that her/his position is to be made redundant.

Your client was informed that a redundancy payment of a maximum 52 weeks salary will be paid. Your client was also advised that she/he would continue to work for the employer until the end of 2012.

The termination of your client's employment with her/his employer will occur after her/his birthday.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 82-10(2)

Income Tax Assessment Act 1997 section 82-135

Income Tax Assessment Act 1997 section 83-170

Income Tax Assessment Act 1997 Subsection 83-170(2)

Income Tax Assessment Act 1997 section 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 Paragraph 83-175(2)(a)

Income Tax Assessment Act 1997 Paragraph 83-175(2)(b)

Income Tax Assessment Act 1997 Paragraph 83-175(2)(c)

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

Income Tax Assessment Act 1997 Subsection 83-175(4)

Reasons for decision

To determine if any part of the employment termination payment your client received from the employer constitutes a genuine redundancy payment (GRP), all the conditions in section 83-175 of the Income Tax Assessment Act 1997 (ITAA 1997) will need to be satisfied.

A GRP is defined in subsection 83-175(1) of the ITAA 1997 as:

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.

Subsection 83-175(2) of the ITAA 1997 states that for a payment to qualify as a GRP all of the following conditions must be met:

· the employee is dismissed before the earlier of the following:

· the day he or she turned 65;

· 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);

· 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;

· at the time of the dismissal, there was no arrangements between the employee and the employer, or between the employer and another person, to employ the employee after the dismissal.

In addition, subsection 83-175(3) of the ITAA 1997 provides that a GRP 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 of the payment or at a later time. Further, subsection 83-175(4) provides that a payment is not a GRP if it is a payment mentioned in section 82-135.

The Commissioner has issued Taxation Ruling TR 2009/2 (TR 2009/2) which outlines the Commissioner's view of the requirements to be satisfied for a payment to qualify as a genuine redundancy payment under section 83-175 of the ITAA 1997.

It is proposed to examine each of these provisions.

The requirement under subsection 83-175(1) of the ITAA 1997

The first requirement which is specified in subsection 83-175(1) of the ITAA 1997 has three criteria:

(i) The payment is received by an employee who is dismissed from employment;

(ii) The payment is dismissed because the employee's position is genuinely redundant; and

(iii) The payment 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.

Dismissal from employment

The first criterion is that there had been a dismissal from employment, which usually means that the termination of employment is involuntary on the part of the employee concerned and is instigated by the employer.

In this case, your client was dismissed from employment by the employer. This is confirmed in a letter to your client from the employer which advised that your client's employment will be terminated due to an organisational structural review.

During the restructuring process, your client's employer has considered whether there are appropriate alternative positions throughout the business that your client might be deployed to. However, none have been identified.

Thus, the termination of your client's employment is clearly a dismissal for the purposes of subsection 83-175(1) of the ITAA 1997, because your client's employment was terminated at the instigation of the employer due to a restructuring of the organisation. Therefore, it is considered that your client has satisfied the first criterion under subsection 83-175(1) of the ITAA 1997 in this instance.

Genuine redundancy

Having established that there was a dismissal from employment for the purposes of subsection 83-175(1) of the ITAA 1997, the next criterion that needs to be considered is whether your client was dismissed because your client's position is genuinely redundant.

Redundancy is a situation where the dismissal of an employee is not caused by any consideration peculiar to the employee. Redundancy does not extend to a situation where an employee is dismissed for personal or disciplinary reasons or because the employee was inefficient, but rather because an employer no longer requires employees to carry out carry out work of a particular kind or to carry out work of a particular kind at the same location.

At paragraph 25 to 29 of TR 2009/2, the Commissioner makes the following comments regarding dismissal and redundancy:

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 of the employer's operations.

26. In some circumstances, an employer may reallocate the duties and functions attached to a particular position within the employer's organisational structure. In such cases, the former position is redundant. However, if the employee who had been working in that position is still employed by the employer following the reallocation of duties and functions, there will not be a dismissal.

27. On the other hand, if an employer may decides after a structural reorganisation to terminate an employee, the former position of the employees is effectively redundant as long as the reorganisation is the prevailing or more influential cause of the termination.

28. A dismissal is not caused by redundancy where personal acts or default are the prevailing or most influential cause for the termination. For example, a person may be dismissed due to unsatisfactory performance or behaviour.

29. In some cases, an employer may decide to reorganise or restructure their organisation at the same time as identifying underperformance of particular members of staff or areas within the existing organisational structure. In the event that employees are dismissed in these circumstances, careful consideration will need to be given to what was the prevailing or most influential cause of dismissal.

It is evident from the above that if the prevailing or most influential cause of termination was not redundancy, notwithstanding that the position occupied by a dismissed employee may have been abolished, the dismissal would not constitute a redundancy.

The employer advised all employees that the company is restructuring in order to leverage synergies across two main business channels to form an integrated team. Furthermore, in a letter, the employer has confirmed that roles were abolished as a result of the restructure.

The termination of your client's employment was not on account of any personal act or default on your client's part, and was not due to the ordinary and customary turnover of labour. Rather, the employer no longer required anyone to perform the job your client had been doing. Therefore, the employee's decision to terminate your client's employment is due to a redundancy.

Accordingly, it is considered that the second criterion under subsection 83-175(1) of the ITAA 1997 has been satisfied.

The payment exceeds what your client would have received in consequence of the voluntary termination of your client's

The third criterion that needs to be considered is whether the payment exceeds the amount that your client could reasonably be expected to receive in consequence of the voluntary termination of your client's employment.

The Commissioner considers that it is necessary to show how the amount an employee is entitled to be paid exceeds the amount that is payable to employees who voluntarily terminate their employment.

Paragraphs 61 to 63 of TR 2009/2 state:

61. It would generally be expected that a greater amount would be paid on redundancy than voluntary termination. This recognises the purpose of redundancy payments, being primarily to compensate for loss of non-transferable entitlements (for example accrued sick leave and accrued long service leave prior to 10 years service) and the peculiar hardship associated with being made redundant.

62. Contractual or other entitlements payable by an employee on voluntary termination are generally a sound guide as to what might reasonably be expected…

63. There may be industry norms that could be used as a guide as to what payments would be made on voluntary termination…

As stated on a letter, your client will be terminated from her/his employment and will receive a redundancy payment. Your client will be entitled to 52 weeks of salary and unused annual and long service entitlements in line with company policy and statutory requirements.

The payment comprising 52 weeks salary will be made upon termination of your client's employment due to her/his role being abolished. The payment is considered to be made in circumstances of a genuine redundancy, and is in excess of the amount that could reasonably be expected to be received in consequence of a termination.

All the criteria stipulated in subsection 83-175(1) of the ITAA 1997 have been satisfied. However, a GRP must also satisfy the conditions in subsections 83-175(2) to 83-175(4) of the ITAA 1997.

The requirement under paragraphs 83-175(2)(a) and (b) of the ITAA 1997

As already noted previously, paragraphs 83-175(2)(a) of the ITAA 1997 prescribes that the employee must be dismissed before the earlier of:

· the day he or she turned 65; or

· 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 applicable).

In your client's case, it is noted that the termination of her/his employment will occur after your client's 65^th birthday. Under strict application of the legislation, the Commissioner has no discretion to waive this requirement of the legislation. Consequently, the requirement under paragraph 83-175(2)(a) has not been satisfied.

The requirement under paragraph 83-175(2)(c) of the ITAA 1997

Also as noted previously, paragraphs 83-175(2)(c) of the ITAA 1997 requires that 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 the dismissal.

In the present case, there was no re-employment by your client's employer or evidence of any re-employment arrangement with another entity, so it is accepted that your client has satisfied the requirement under paragraph 83-175(2)(c) of the ITAA 1997 in this case.

The requirement under subsections 83-175(3) and 83-175(4) of the ITAA 1997

Subsection 83-175(3) of the ITAA 1997 provides that a GRP does not include any part of a payment that is received in lieu of superannuation benefits. No part of your client's payment was made to your client in lieu of superannuation benefits. Therefore it is accepted that the requirement under subsection 83-175(3) of the ITAA 1997 is satisfied.

Also as noted previously, subsection 83-175(4) of the ITAA 1997 provides that a payment is not a GRP if it is a payment mentioned in section 82-135 of the ITAA 1997 (other than a GRP or early retirement scheme payment).

Section 82-135 of the ITAA 1997 includes payments such as pensions, foreign termination payments, unused annual leave and unused long service leave.

A letter from your client's employer has indicated that the termination payment will not include any payments in lieu of superannuation benefits.

Thus, the requirements under subsections 83-175(3) and 83-175(4) have been satisfied.

Conclusion

As your client does not satisfy all the criteria set out in section 83-175 of the ITAA 1997, consequently, it has been determined that the payment to be received upon the termination of employment will not constitute a GRP for the purposes of section 83-170.