Edited version of your written advice

Authorisation Number: 1012891801311

Date of advice: 8 October 2015

Ruling

Subject: Genuine redundancy

Question

Is any part of the redundancy payment considered to be a genuine redundancy payment in accordance with 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 commenced on

1 July 2014

Relevant facts and circumstances

Your client was employed by the Employer.

Your client's position was made redundant due to the Employer going into liquidation.

Your client was employed with the Employer until the relevant income year.

An Employment Separation Certificate states that the reason for separation from the Employer was due to redundancy and that payments for redundancy, rostered days off and annual leave were made to your client in the relevant income year.

A PAYG payment summary - individual non-business for the year ended 30 June 20XX from the Employer lists your clients gross payment, lump sum payment A and total tax withheld.

You claim that the Employer has incorrectly included the redundancy payment at Lump Sum A of your client's payment summary for the relevant income year along with their other entitlements.

Your client is under 65 years of age.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 83-10.

Income Tax Assessment Act 1997 Section 83-15.

Income Tax Assessment Act 1997 Section 83-80.

Income Tax Assessment Act 1997 Section 83-85.

Income Tax Assessment Act 1997 Section 83-170.

Income Tax Assessment Act 1997 Section 83-175.

Reasons for decision

Summary

The redundancy payment is a genuine redundancy payment as all conditions in section 83-175 of the Income Tax Assessment Act 1997 (ITAA 1997) have been satisfied.

The redundancy payment is not required to be included in your client's income tax return for the relevant income year. You may reduce the Lump sum payment A amount on your client's payment summary for the relevant income year by the total amount of the redundancy payment when lodging their tax return for the relevant income year.

Detailed reasoning

Genuine redundancy payment

A payment made to an employee is a genuine redundancy payment if it satisfies all the criteria set out in section 83-175 of the 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 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 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 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);

(b) 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;

(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)).

Subsection 83-175(1) of the ITAA 1997

Under subsection 83-175(1) of the ITAA 1997, four components must be satisfied:

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

• That termination must involve an employee being dismissed from employment.

• That dismissal must be caused by the redundancy of the employee's position.

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

Payment is made in consequence of the termination of employment

In Taxation Ruling TR 2003/13 (TR 2003/13) the Commissioner considered the meaning of the phrase 'in consequence of' as interpreted by the Courts.

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.

As further stated by the Commissioner in paragraph 6 of TR 2003/13, there must be:

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.

Dismissal and Redundancy

The Explanatory Memorandum to the Income Tax Assessment Amendment Bill (No.3) 1984 which inserted former section 27F, which dealt with bona fide redundancy payments, into the Income Tax Assessment Act 1936 (ITAA 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.'

Consequently, it is necessary to consider the ordinary meaning of the terms 'dismissal' and 'redundancy' and the meaning the judicial authorities have ascribed to them.

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

Paragraph 18 of TR 2009/2 discusses what constitutes a dismissal:

18. Dismissal is a particular mode of employment termination. It requires 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 payment is classified as a genuine redundancy payment only upon meeting all of the requirements set under section 83-175 of the ITAA 1997 and dismissal only forms part of those requirements.

The Administrative Appeals Tribunal (AAT) in AAT Case 12, 997 (1998) 39 ATR 1073; (1998) 98 ATC 183, considered a payment received by a taxpayer was to be treated as a bona fide redundancy payment not solely due to the taxpayer having been constructively dismissed but, also due to his job having been abolished.

Paragraphs 24, 25 and 28 of TR 2009/2 provide the following in relation to the meaning of redundancy:

24. As is the case in determining if there is a dismissal, the reason for a dismissal is to be established in light of the facts and circumstances of each case. The redundancy of the relevant position must be the prevailing or most influential reason for the dismissal if there is more than one contributing cause.

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 surrounding the employer's operations.

…

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.

In this case, your client has been dismissed from their employment due to the Employer going into liquidation.

It is clear that the redundancy payment was made in consequence of the termination of your client's employment and that were it not for the termination of their employment, the payment would not have been made. Further, it is considered that your client has been dismissed from their employment because their role with the Employer has been made genuinely redundant. Accordingly, subsection 83-175(1) of the ITAA 1997 has been satisfied.

Further conditions for a genuine redundancy payment

Subsections 83-175(2), 83-175(3) and 83-175(4) of the ITAA 1997, as previously shown, set out further conditions that must be satisfied for a payment to be regarded as a genuine redundancy payment.

In this case it is considered that the further conditions were satisfied as:

(a) the dismissal of your client was made prior to them reaching 65 years of age;

(b) the dismissal was made at arm's length;

(c) there was no arrangement between your client and the Employer, or between the Employer and another person, to employ your client after the dismissal;

(d) no part of the redundancy payment was received by your client in lieu of superannuation; and

(e) the redundancy payment is not a payment excluded under section 82-135 of the ITAA 1997 (apart from paragraph 82-135(e) which includes (among others):

_ superannuation benefits;

_ the payment of a pension or annuity; and

_ unused annual leave or long service leave payments.

Tax-free amount of a genuine redundancy payment

Subsection 83-170(2) of the ITAA 1997 provides that so much of the genuine redundancy payment that does not exceed the amount worked out using the formula prescribed in subsection 83-170(3) is non-assessable, non-exempt income. Any amount in excess of the tax-free amount is taxed as an employment termination payment. The formula for working out the tax-free amount is:

Base amount + (Service amount × Years of service)

For the 2014-15 income year:

Base amount is $9,514;

Service amount is $4,758; and

Years of service is the number of whole years in the period, or sum of periods, of employment to which the payment relates.

As your client's redundancy payment is below the tax-free amount of a genuine redundancy payment, the entire amount of the payment is the tax-free part of a genuine redundancy payment. This tax-free amount is non-assessable, non-exempt income under subsection 83-170(2) of the ITAA 1997.

Consequently the redundancy payment is not required to be included in your client's income tax return for the relevant income year. You may reduce the Lump sum payment A amount on your client's payment summary for the relevant income year by the total amount of the redundancy payment when lodging their tax return for the relevant income year.