Edited version of your written advice

Authorisation Number: 1012916386117

Date of advice: 24 November 2015

Ruling

Subject: Employment termination payment.

Question

Is any part of the payment you received on termination of your employment, 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:

Income year ended 30 June 2015

The scheme commences on:

1 July 2014

Relevant facts and circumstances

You entered into an employment contract (the Contract) with your former employer in the 20XX-XX income year and commenced employment as a Group Manager of a particular area.

Your appointment was for a term of five years.

Your former employer restructured its organisational structure in the relevant incoming year, effectively disbanding the area you were Group Manager of and reallocating those functions to other areas.

Your employment with the former employer was terminated in the relevant income year, shortly after the restructure.

You were less than 65 years old at the time of the termination.

You received a separation payment in the relevant income year which comprised the following components:

• in lieu of notice

• annual leave

• long service leave

• other amount

In accordance with the Contract, the 'other amount' component includes 38 weeks' remuneration.

The Contract does not indicate that you would have been entitled to the payment 'in lieu of notice' and 'other amount' had you voluntarily resigned.

None of the payments received were for payment in lieu of superannuation benefits.

At the time of your termination there was no arrangement between you and the former employer, or between the former employer and another person, to employ you after termination.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 82-130

Income Tax Assessment Act 1997 Section 82-135

Income Tax Assessment Act 1997 Subdivision 83-D

Income Tax Assessment Act 1997 Subsection 83-10(2)

Income Tax Assessment Act 1997 Paragraph 83-15(a)

Income Tax Assessment Act 1997 Subsection 83-80(1)

Income Tax Assessment Act 1997 Subsection 83-85(1)

Income Tax Assessment Act 1997 Section 83-170

Income Tax Assessment Act 1997 Section 83-175

All references are to the ITAA 1997 unless otherwise indicated.

Reasons for decision

Summary

A portion of the separation payment is a genuine redundancy payment.

The tax-free amount of the genuine redundancy payment is calculated in accordance with subsection 83-170(3).

The remaining amount is an employment termination payment and treated as assessable income in the relevant income year.

The unused annual leave amount and unused long service leave amount are not employment termination payments. These amounts are included in your assessable income in the relevant income year. However, as these amounts were made in connection with a genuine redundancy, you are entitled to a tax offset on these amounts.

Detailed reasoning

Employment termination payment

A payment is an employment termination payment if it satisfies all the requirements in section 82-130 and is not specifically excluded under section 82-135.

Subsection 82-130(1) states:

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 the termination (but see subsection (4)); and

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

Section 82-135 provides that certain payments are not employer termination payments. Relevantly, these include (among others):

• unused annual leave or long service leave payments; and

• the tax-free part of a genuine redundancy payment or an early retirement scheme payment.

Separation payment

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) states, at paragraphs 5 and 6, that:

5. ...the Commissioner considers that 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.

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.

While TR 2003/13 contains references to repealed provisions, some of which may have been rewritten, the ruling still has effect.

Your employment was terminated in the relevant income year and a separation payment was paid to you by your former employer in the same income year. There is a clear causal connection between the termination of your employment and the payment of these amounts. The payment followed as an effect or result of the termination of your employment. In other words, but for the termination of employment these payments would not have been made to you.

Therefore, the separation payment was made in consequence of the termination of employment as defined in subparagraph 82-130(1)(a)(i).

Further, this amount was paid to you within 12 months of your termination (thereby satisfying paragraph 82-130(1)(b)).

However, it is important to note, that unused annual leave and long service leave payments are specifically excluded from being employment termination payments under section 82-135. Consequently, the amounts you received in respect of unused annual leave and unused long service leave are not employment termination payments.

Further, the tax-free part of a genuine redundancy payment is also excluded from being an employment termination payment under section 82-135.

Genuine redundancy payment

Under subsection 83-175(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 the dismissal. 

In Taxation Ruling 2009/2 Income tax: genuine redundancy payments (TR 2009/2), the Commissioner has outlined 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.

The Commissioner considers that there are four necessary components within this termination requirement:

• The payment being tested must be received in consequence of an employee's termination.

• That termination must involve the 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.

Component 1: Payment 'in consequence of' an employee's termination.

As discussed above, it is considered that the separation payment you received was in consequence of termination of your employment. Therefore, the first component of subsection 83-175(1) has been satisfied.

Component 2: Dismissed from employment.

At paragraph 8 of TR 2009/2, the Commissioner states:

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.

On the basis of the facts as presented in your case, it is evident that you did not resign but were, in fact, dismissed from your employment at the initiative of your former employer.

Therefore, the second component of subsection 83-175(1) has been satisfied.

Component 3: Dismissal caused by the redundancy

It is the Commissioner's view, as stated at paragraphs 25 and 28 of TR 2009/2, that:

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.

Based on the information provided, it is evident that your former employer made the ultimate decision that your position was redundant and that was the prevailing reason you were dismissed from your employment.

Information available confirms that the area of which you were Group Manager, was disbanded and the functions and resources reallocated to other areas. Also, there is nothing to indicate that the redundancy was caused by personal acts or default on your part.

The third requirement of a genuine redundancy has therefore been satisfied.

Component 4: 'genuinely' redundant.

The need for an employee's position to be genuinely redundant means that contrived cases of redundancy will not meet the conditions in section 83-175.

In your case, there is nothing to indicate that the redundancy is not genuine. Therefore, the fourth component of a genuine redundancy has been satisfied.

Further conditions for a genuine redundancy payment

Before a payment that meets the basic redundancy requirement in subsection 83-175(1) qualifies as a genuine redundancy payment, all other conditions in subsections 83-175(2) and (3) must be met. These conditions include:

• the payment must be made before a person turns 65 or an earlier mandatory age;

• the termination was not at the end of a fixed period of employment;

• the actual amount that was paid is not greater than the amount that could reasonably be expected to be paid had the parties been dealing at arm's length;

• the amount that was paid was in excess of what a person would have been entitled to receive if they had voluntarily resigned;

• there was no arrangement for re-employment with the employer or a related party after the termination date; and

• the payment was not in lieu of superannuation benefits.

On the basis of the information provided, it is considered that all the conditions of subsections 83-175(2) and 83-175(3) are also satisfied.

As it is accepted that your employment was terminated because your position was genuinely redundant, part of the condition under subsection 83-175(1) 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 you would receive 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 you had you voluntarily terminated your employment at the time of termination is treated as a genuine redundancy payment.

Had you terminated your employment voluntarily, the amounts you would have been entitled to are the unused annual leave and the unused long service leave amounts. Consequently, the genuine redundancy payment amount is equal to the separation payment less the unused annual leave and the unused long service leave amounts.

Taxation of a genuine redundancy payment

Subsection 83-170(2) 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 not assessable income and is not exempt income. Any amount in excess of the tax-free amount is taxed as an employment termination payment.

As per subsection 83-170(3), the formula for working out the tax-free amount is:

Base amount + (Service amount × Years of service)

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

For the 2014-15 income year:

Base amount means $9,514; and

Service amount means $4,758.

Taxation treatment of unused annual leave and long service leave

Unused annual leave and unused long service leave payments are included in your assessable income for the relevant income year and subject to marginal rates of tax (subsection 83-10(2) and subsection 83-80(1)).

However, as it has been determined that your former position is genuinely redundant, you are entitled to a tax offset which ensures that the rate of tax on these payments does not exceed 30% (excluding Medicare levy) (paragraph 83-15(a) and subsection 83-85(1)).