Edited version of your private ruling

Authorisation Number: 1012611811802

Ruling

Subject: Payments from a redundancy trust

Questions:

Does any part of the employment termination payments received from a redundancy trust contain a tax-free part of a genuine redundancy payment?

Advice/Answers:

No.

This ruling applies for the following periods:

Income year ended 30 June 2013

Income year ending 30 June 2014

The scheme commences on:

During the income year ended 30 June 2013

Relevant facts:

The Taxpayer was employed by the Employer.

The Employer was a party to an award (the Award). The Award contained a redundancy clause.

During the Taxpayer's employment, the Employer made contributions to a redundancy scheme (the Scheme).

The Taxpayer had a severance account with the Scheme. Under the terms of the Scheme, the Taxpayer was entitled to make a claim on termination of the Taxpayer's employment for any reason.

Subsequently, the Taxpayer was advised in a letter from the Employer that their employment will be terminated at a specified future date because their position was no longer needed. The termination was said to be due to the downturn in trading and was not a reflection on the Taxpayer's performance.

The Employer calculated the Taxpayer's entitlements on termination in accordance with the redundancy clause of the Award. From the total amount calculated, the Employer deducted an amount that the Taxpayer was entitled to receive from the Scheme. The remainder was to be paid to the Taxpayer by the Employer.

The Taxpayer's employment with the Employer was terminated as previously advised. Subsequently, the Taxpayer received two payments from the Scheme in the 20012-13 and 2013-14 income years.

Relevant legislative provisions:

Income Tax Assessment Act 1997 Section 83-170

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)

Fair Work Act 2009 Section 119

Reasons for decision

Summary

The payments received by the Taxpayer from the Scheme are not in excess of what the Taxpayer could reasonably have expected to receive in consequence of the voluntary termination of their employment at the time of the dismissal. Therefore, the payments are not genuine redundancy payments for the purposes of section 83-175 of the ITAA 1997.

It follows that payments received from the Scheme do not contain a tax-free part of a genuine redundancy payment.

Detailed reasoning

Genuine redundancy payments

Genuine redundancy payments are tax-free up to a limit worked out under section 83-170 of the ITAA 1997.

An employment termination payment is a genuine redundancy payment if it satisfies all the criteria set out in section 83-175 of the ITAA 1997.

In accordance with subsection 83-175(1) of the ITAA 1997, a genuine redundancy payment is so much of a payment that:

• is 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 their employment at the time of the dismissal.

In addition to the above, subsection 83-175(2) of the ITAA 1997 states that a genuine redundancy payment must meet the following conditions:

• the employee is dismissed before the earlier of:

n the day he or she turned 65; or

n 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 that age or complete the period of service (as applicable);

• if the dismissal was not at arm's length - the payment must not exceed the amount that could reasonably be expected to be made if the dismissal was at arm's length;

• 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.

Further, subsection 83-175(3) of the ITAA 1997 provides that 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 of the payment or at a later time.

Meaning of genuine redundancy

The requirements to be satisfied before any payment made to a person whose employment is terminated qualifies for treatment as a genuine redundancy payment under section 83-175 of the ITAA 1997 are discussed in Taxation Ruling TR 2009/2 (TR 2009/2).

With regard to the first requirement set out in subsection 83-175(1) of the ITAA 1997, the Commissioner considers that there are four necessary components within this requirement:

• the payment must be received in consequence of an employee's termination;

• the termination must involve the employee being dismissed from employment;

• dismissal must be caused by the redundancy of the employee's position; and

• the redundancy payment must be made genuinely because of a redundancy.

Taxation Ruling TR 2003/13 sets out the Commissioner's views on when a payment is made 'in consequence of' termination of employment. At paragraph 6, it states:

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. The question of whether a payment is made in consequence of the termination of employment will be determined by the relevant facts and circumstances of each case.

In this case, it is considered that the termination of the Taxpayer's employment was the cause for the payments to the Taxpayer, that is, but for the termination the payments would not have been made to the Taxpayer. Therefore, the payment was received by the Taxpayer in consequence of the termination of the Taxpayer's employment.

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 Commissioner's view, as stated in Taxation Ruling TR 2009/2, is that dismissal means 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. 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 of the ITAA 1997.

A position is redundant when the functions, duties and responsibilities formerly attached to the position are determined by the employer to be superfluous to the current needs and purposes of the organisation. A dismissal is not caused by redundancy where personal acts or default are the cause for termination for example, unsatisfactory performance or behaviour (TR 2009/2).

Contrived cases of redundancy will not meet the conditions in section 83-175 of the ITAA 1997. 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 of itself establish genuine redundancy. Thus, whether a redundancy is 'genuine' is determined on an objective basis (TR 2009/2).

Applying the above to the Taxpayer's circumstances, it is considered that the Taxpayer was dismissed from employment because their position was genuinely redundant. This view is based on the following:

• the Employer gave notice to the Taxpayer that their employment will be terminated at a specified time because their position was no longer needed;

• Taxpayer's employment was terminated as a result of a downturn in trading and not because of any issues with the Taxpayer's performance or behaviour; and

• there is nothing to indicate that the redundancy was in any way contrived.

However, while it is accepted that the Taxpayer was dismissed from their employment because their position was genuinely redundant, subsection 83-175(1) of the ITAA 1997 also requires that for a payment to be a genuine redundancy payment, it should exceed the amount that would be received by the Taxpayer on the voluntary termination of their employment. That is, only that part of the payment that exceeds the amount that could reasonably be expected to be received by the Taxpayer had the Taxpayer voluntarily terminated their employment at the time of dismissal is treated as a genuine redundancy payment. To that effect, TR 2009/2, at paragraphs 61 and 62, states:

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 employer on voluntary termination are generally a sound guide as to what might reasonably be expected …

The Taxpayer had a certain number of full years of service with the Employer and their entitlement at termination was calculated by the Employer with reference to the number of full years of service and the redundancy provisions specified in the Award. The total amount to be paid to the Taxpayer comprised of an amount that the Taxpayer was entitled to receive from the Scheme and the amount that was to be paid by the Employer.

The amount paid by the Scheme is the amount that the Taxpayer was entitled to receive on termination of employment for any reason, including voluntary resignation. Consequently the amount that exceeds the amount that could reasonably be expected to be received by the taxpayer at the time of dismissal is the amount which was paid by the Employer.

However, the payments that are the subject of this ruling are the payments made by the Scheme. As these two amounts are not in excess of the amount that the Taxpayer could reasonably be expected to receive on the voluntary termination of their employment at the time of dismissal, these payments do not meet the requirements of subsection 83-175(1) of the ITAA 1997.

This view is confirmed in Class Ruling CR 2010/40 (CR 2010/40) which discusses the tax treatment of payments made from Fund 2. Whilst the ruling refers to payments made from Fund 2 the circumstances for payments made by Scheme from severance accounts are similar to those from Fund 2.

Paragraphs 107 and 108 of CR 2010/40 state:

107. The amount that accrues to a particular worker (and therefore, becomes payable from a particular account) is in no way dependent on the nature of the termination of employment or the account to which the amounts are credited. The worker's entitlement is always to the balance of the account. There is no additional amount as contemplated by paragraphs 61 to 63 of TR 2009/2.

108. Given this, the Commissioner considers that a payment from a Genuine Redundancy Account does not exceed the amount that the worker could have expected to receive had they voluntarily terminated their employment.

As a basic condition under subsection 83-175(1) of the ITAA 1997 has not been met, we do not need to consider whether other conditions of section 83-175 of the ITAA 1997 have been met. Therefore, payments made by the Scheme are not genuine redundancy payments for the purposes of section 83-175.

It follows that that payments received by the Taxpayer from the Scheme do not contain a tax-free part of a genuine redundancy payment.