Edited version of your written advice

Authorisation Number: 1012879099071

Date of advice: 17 September 2015

Ruling

Subject: Employment termination payment - genuine redundancy

Question

Is any part of the payment in lieu of notice you received 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 under the age of 65 in the 20XX-YY income year.

You commenced employment the Employer some time ago.

The Employer was placed under voluntary administration during the 20XX-YY income year and an Administrator was appointed as Joint & Several Administrators to the Employer. The Employer was subsequently liquidated.

You received a letter from the Administrator to notify you that your employment will cease during the 20XX-YY income year. In addition, the Administrator has advised you to make a claim to the Fair Entitlements Guarantee (FEG) operated by the Department of Employment. The Department of Employment will consider your claims pursuant to your unpaid employee entitlements. However, the scheme will not include the payment of unpaid superannuation.

Accordingly, your employment was terminated in the 20XX-YY income year and you received a payment from the Employer that contained a Tax-free Component and a Taxable Component.

The Taxable Component represents a Payment In Lieu Of Notice (PILN) payment. The Employer has classified the PILN as an employment termination payment (ETP).

The Tax-free Component represents a redundancy payment.

Your PILN payment does not include a payment in lieu of superannuation benefits based on above.

You state that the PILN exceeds what the Employer ordinarily pays if you had voluntarily resigned or retired.

You state that at the time of termination there was no arrangement between you and the Employer, or between the Employer and another person to employ you after your dismissal.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 82-130

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(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 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 PILN is a genuine redundancy payment in accordance with section 83-175 of the ITAA 1997.

As the total genuine redundancy payment amount you received is more than the tax free amount, the portion above the tax free amount will be an employment termination payment and is to be included as income in your tax return for the 20XX-YY income year under subsection 82 10(2) of the ITAA 1997.

Detailed reasoning

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.

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.

Meaning of received 'in consequence of' the termination

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 (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, your employment was terminated because the Employer went into voluntary administration, and as a result of the termination, you received the PILN. In other words, but for the termination, you would not have received the PILN. Therefore, it is considered that the PILN was received by you in consequence of the termination of your employment.

Meaning of 'dismissal' and 'redundancy'

The terms 'dismissal' and 'redundancy' are not defined in the ITAA 1997 therefore, consistent with basic principles of statutory interpretation, their 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.

A position is redundant when the functions, duties and responsibilities formerly attached to the position are determined by the employer to be unnecessary 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 (TR 2009/2).

Applying the above to your circumstances, it is considered that you received the PILN because your position was genuinely redundant. This view is based on the following:

• Your employment was terminated at the Employer's initiative and without your consent;

• Your position was no longer required as the Employer was placed in voluntary administration and subsequently liquidated;

• There is nothing to indicate that your employment was terminated because of any personal acts or default on your part; and

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

Does PILN exceed the amount that could reasonably be expected?

As it is accepted that there was a dismissal, part of the condition under subsection 83-175(1) of the ITAA 1997 has been met. However, subsection 83-175(1) also requires that for a payment to be a genuine redundancy payment, it should exceed the amount that would be received by the employee on voluntary termination of employment. That is, only that part of the payment that exceeds the amount that could reasonably be expected to be received by the employee had the employee voluntarily terminated their employment at the time of dismissal is treated as a genuine redundancy payment. To that effect, TR 2009/2, at paragraph 61 states:

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.

In this case, the PILN was paid to you because your employment was terminated by the Employer. You state that this amount is in excess of what you would have received had you resigned voluntarily or retired. Therefore, this condition is satisfied.

Further conditions for a genuine redundancy payment

However, to qualify as a genuine redundancy payment, in accordance with subsection 83-175(2) of the ITAA 1997, the payment must also meet all of the following conditions:

• the employee is dismissed before the earlier of:

• the day they turned 65; or

• if the employee's employment would have terminated when they reached a particular age or completed a particular period of service - the day they 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.

In addition to the above, subsections 83-175(3) and (4) of the ITAA 1997 provide 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. A payment is also not a genuine redundancy payment if it is a payment mentioned in section 82-135 of the ITAA 1997 (apart from paragraph 82-135(e)).

Based on the above, the PILN is a genuine redundancy payment because:

• You were dismissed before you turned 65;

• There is nothing to indicate that at the time of dismissal that it was not at arm's length;

• There is nothing to indicate that at the time of dismissal, there was an arrangement between you and the Employer, or between the Employer and another person to employ you after your dismissal;

• The PILN does not include a payment in lieu of superannuation benefits to which you may have become entitled; and

• It is not a payment mentioned in section 82-135 of the ITAA 1997.

Taxation of genuine redundancy payments

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 formula in subsection (3) is not assessable income and is not exempt income, that is, it is tax-free. The formula for working out the tax-free amount is:

Base amount + (Service amount x Years of service)

Years of service for the purposes of subsection 82-170(3) of the ITAA 1997 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.

The total genuine redundancy payment amount you received (that is, the Tax-free Component and the Taxable Component) is more than the tax-free amount calculated using the formula above.

As the total genuine redundancy payment amount you received is more than the tax free amount, the portion above the tax free amount will be an employment termination payment and is to be included as income in your tax return for the 20XX-YY income year under subsection 82 10(2) of the ITAA 1997.