Edited version of your written advice

Authorisation Number: 1012773354844

Ruling

Subject: Employment termination payment - genuine redundancy payment

Question

Is any part of the employment termination payment to you a genuine redundancy payment under section 83-175 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

This ruling applies for the following period:

Year ended 30 June 2015

The scheme commences on:

1 July 2014

Relevant facts and circumstances

You were aged less than 65 years in the 2014-15 income year.

You began employment at the Employer some time ago.

You have provided a notification of redundancy letter from the Employer in the 2014-15 income year. The letter explained that due to a review of staffing numbers and costs to the Employer, your position has been deemed excess to requirements.

You were provided with an option for redeployment for a specified time period. If you were not redeployed during the specified time period, you will receive a lump sum severance payment (the Payment).

Following your receipt of the notification of redundancy letter, you underwent the redeployment process to explore suitable redeployment opportunities. However, the Employer was unable to find you a suitable redeployment opportunity during that period.

You anticipate that your employment will be terminated during the 2014-15 income year.

You expect that the Payment will be made on the day of the termination of your employment or within 12 months of the termination of your employment

At the time of dismissal there will not be an arrangement (written, verbal or implied) between you and the Employer or between the Employer and another person, to employ you after the dismissal.

Relevant legislative provisions

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

Income Tax Assessment Act 1997 section 82-130

Income Tax Assessment Act 1997 subsection 82-130(1)

Income Tax Assessment Act 1997 paragraph 82-130(1)(a)

Income Tax Assessment Act 1997 subparagraph 82-130(1)(a)(i)

Income Tax Assessment Act 1997 subparagraph 82-130(1)(a)(ii)

Income Tax Assessment Act 1997 paragraph 82-130(1)(b)

Income Tax Assessment Act 1997 paragraph 82-130(1)(c)

Income Tax Assessment Act 1997 section 82-135

Income Tax Assessment Act 1997 paragraph 82-135(e)

Income Tax Assessment Act 1997 section  83-170

Income Tax Assessment Act 1997 subsection 83-170(1)

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

Income Tax Assessment Act 1997 subsection  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 subparagraph  83-175(2)(a)(i)

Income Tax Assessment Act 1997 subparagraph  83-175(2)(a)(ii)

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)

Income Tax Assessment Act 1997 subsection  955-1(1)

Reasons for decision

Summary

The amount $X is the tax free amount which is not assessable income and is not exempt income under subsection 83-170(2) of the ITAA 1997.

Accordingly, $Y (that is the lump sum severance payment less $X) will be an employment termination payment and should be included as income in your tax return for the 2014-15 income year under subsection 82-10(2) of the ITAA 1997.

Detailed reasoning

Employment termination payments

By virtue of subsection 995-1(1) of ITAA 1997, employment termination payments are defined in subsection 82-130(1) of the ITAA 1997, which states that 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 that termination (but see subsection (4)); and

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

To determine if a payment is an employee termination payment (ETP), all the conditions in subsection 82-130(1) of the ITAA 1997 must be satisfied. Failure to satisfy any of the conditions under subsection 82-130(1) will result in the payment not being considered an employment termination payment.

Furthermore, any termination payments received more than 12 months after the termination will be taxed as ordinary income at marginal tax rates, unless the taxpayer is covered by a determination exempting them from the 12 month rule.

Paid as a 'consequence of' the termination of your employment

For a payment to be treated as an employment termination payment, the first condition that must be met is that the payment is made in 'consequence of' the termination of employment of the taxpayer.

The phrase 'in consequence of' is not defined in the ITAA 1997. However, the courts have interpreted the phrase in a number of cases. Taking into account the courts decisions on the meaning of the 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 payments (ETP): payments made in consequence of the termination of any employment: meaning of the phrase 'in consequence of' (TR 2003/13).

While TR 2003/13 considered the meaning of the phrase 'in consequence of' in the context of the eligible termination payments, TR 2003/13 can still be relied upon as both the former provision under the Income Tax Assessment Act 1936 and the current provision under the ITAA 1997 both use the term 'in consequence of' in the same manner.

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.

In this case, the Employer notified you in a letter during the 2014-15 income year that your position was made redundant. The Employer has provided you with an option for redeployment for a specified time period. You will receive a lump sum severance payment (the Payment) if you are unsuccessful in redeployment and your employment is terminated.

Following your receipt of the letter, you underwent the redeployment process to explore suitable redeployment opportunities. However, the Employer was unable to find you a suitable redeployment opportunity during that period.

You anticipate that your employment will be terminated during the 2014-15 income year.

As a result of the termination, the Employer will make a payment to you. In other words, but for the termination, the Payment would not have been made to you. Therefore, it is considered that the Payment will be made to you in consequence of the termination of your employment with the Employer.

Payment is received no later than 12 months after termination

You anticipate that your termination date will be during the 2014-15 income year and you expect to receive the Payment on that date or no later than 12 months after your termination. As this will be less than 12 months after your termination, this condition will be satisfied.

Payment is not a payment mentioned under section 82-135 of the ITAA 1997

Based on the information provided, the only payments listed in section 82-135 of the ITAA 1997 which may be relevant in this case and thus require consideration are:

• the part of a genuine redundancy or an early retirement scheme payment worked out under section 83-170.

Genuine redundancy payments

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.

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 Income tax: genuine redundancy payments (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.

Each of these requirements will be considered in turn below.

Payment must be received in consequence of an employee's termination

For the reasons stated above, it is considered that, in this case, the Payment will be received by you in consequence of the termination of your employment.

Termination must involve the employee being dismissed from employment

The term 'dismissal' is not defined in the ITAA 1997 therefore, consistent with basic principles of statutory interpretation, its meaning must be determined according to the ordinary meaning of the words, having regard to the context in which they appear.

Accordingly, 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.

Furthermore, the loss of a particular position with an employer is not a dismissal for the purposes of subsection 83-175(1) of the ITAA 1997 unless all employment with the employer is severed (paragraph 16, TR 2009/2).

In this case, the Employer notified you in a letter during the 2014-15 income year that your position was made redundant. Accordingly, the decision to terminate your employment was at the initiative of the Employer.

You anticipate that your employment will be terminated during the 2014-15 income year.

The termination is without your consent and it is anticipated that your employment will be terminated during the 2014-15 income year. Therefore this requirement is satisfied.

Dismissal must be caused by the redundancy of the employee's position

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 (paragraph 25, TR 2009/2).

In this case, the Employer has deemed your position to be excess to requirements and ceased to exist in the 2014-15 income year. Therefore this requirement is satisfied.

The redundancy payment must be made genuinely because of a redundancy

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 (paragraph 32, TR 2009/2).

Based on the reasons above, we accept that the redundancy payment will be genuinely made because of a redundancy.

Exceeds the amount that could reasonably be expected

The payment that you receive must exceed the amount that could reasonably be expected to be received by you in consequence of the voluntary termination of your employment at the time of the dismissal.

In this case you chose to undergo the redeployment process upon receiving the notification of redundancy letter. The letter provides that in the event that you are not redeployed by the completion of the redeployment period you will receive the Payment. Had you voluntarily resigned you would not have received the Payment.

As the amount that you are expected to receive is more than the amount that would have been reasonably expected had you voluntarily resigned, this requirement is satisfied.

Further conditions for a genuine redundancy payment

Further conditions must be satisfied in order for the Payment to be considered a genuine redundancy payment (see subsection 83-175(2) of the ITAA 1997).

The first condition requires that the taxpayer is dismissed before the earlier of the day the taxpayer turns 65 or the day they reach a particular age or completed a particular period of service that would have terminated the taxpayer's employment.

This condition will be satisfied as it is anticipated that you will be dismissed before you turn 65 years of age.

The second condition requires that if the dismissal were not at arm's length, that the payment does not exceed the amount that could be reasonably expected to be made if the dismissal were at arm's length.

This condition does not apply as the dismissal will be at arm's length.

The third condition is that at the time of 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.

This condition is satisfied as, at the time of dismissal there will not be an arrangement (written, verbal or implied) between you and the Employer or between the Employer and another person, to employ you after the dismissal.

Not a payment received by the employee in lieu of superannuation benefits

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.

This condition is satisfied as the Payment will not be received in lieu of superannuation benefits.

Not a payment mentioned in section 82-135 of the ITAA 1997

Subsection 83-175(4) of the ITAA 1997 provides that 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 or long service leave payments.

This condition is satisfied as the Payment is not a payment mentioned in section 82-135 of the ITAA 1997 (apart from paragraph 82-135(e)).

The redundancy payment is a genuine redundancy payment under sections 83-170 and 83-175 of the ITAA 1997

As previously mentioned, all of the conditions set out in section 83–175 of the ITAA 1997 must be satisfied for the Payment to qualify as a genuine redundancy payment.

An examination of the information provided shows that in relation to the Payment you have satisfied all of the relevant conditions set out in section 83–175 of the ITAA 1997. Consequently it is considered that the Payment constitutes a genuine redundancy payment for the purposes of section 83–170 of the ITAA 1997.

Tax treatment of this genuine redundancy payment

Section 83-170 of the ITAA 1997 provides that so much of the genuine redundancy payment that does not exceed the amount worked out using the prescribed formula is not assessable income and is not exempt income. The formula for working out the tax-free amount is:

Base amount + (Service amount x Years of service)

For the 2014-15 income year:

Base amount means $9,514;

Service amount means $4,758; and

Years of service means the number of whole years in the period, or sum of periods, of employment to which the payment relates. It should be noted that six months, eight months or even eleven months do not count as a whole year for the purposes of this calculation.

1. Therefore, the amount of $X is the tax free amount which is not assessable income and is not exempt income under subsection 83-170(2) of the ITAA 1997.

2. Accordingly, as you anticipate to receive a Payment that is more than $X, only $Y (that is the Payment less $X) will be an employment termination payment and should be included as income in your tax return for the 2014-15 income year under subsection 82-10(2) of the ITAA 1997.