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Date of advice: 24 November 2015

Ruling

Subject: Genuine redundancy

Question

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

Answer

No.

This ruling applies for the following periods:

Income year ending 30 June 2015

The scheme commences on:

1 July 2014

Relevant facts and circumstances

During the 20XX-XX income year, you were employed by your former employer (the Employer) on a contract basis.

Your remuneration and conditions of employment were specified in the Contract of Employment (the Contract) signed by yourself and the Employer.

A clause in the Contract provides that the Contract will be terminated on the earliest occurrence of a number of specified events.

On a date in the relevant income year, one of the specified termination events eventuated. Consequently, in accordance with the terms of the Contract, your employment was terminated on that date.

At or about the same time, the office you worked in (the Office) was effectively disbanded, with all staff terminated and administrative and financial arrangements concluded.

Following a complete re-organisation of roles and functions, a new Office was established. .This new Office had completely different staff, changed administrative arrangements and a separate financial report to the previous Office. Also, another employee was appointed to occupy the position previously held by you.

Following your termination, you received a termination payment from the Employer. You are under 65 years of age.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 83-175

Reasons for decision

Summary

Your employment with the Employer was terminated at the end of a contractually specified term.

Further, the Employer did not terminate your employment because they did not want your position to be occupied by any person, but because they did not want to have the position occupied by you.

Consequently, termination of your employment is not considered to be a result of a genuine redundancy for the purposes of section 83-175 of ITAA 1997.

Detailed reasoning

Genuine redundancy payments

Section 83-175 of ITAA 1997 defines a genuine redundancy payment as:

• so much of a payment received by an employee who is dismissed from employment because their 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 their employment at the time of dismissal.

In accordance with subsection 83-175(2) of the ITAA 1997, a genuine redundancy payment must also 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 employees 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 the dismissal.

Dismissal and redundancy

The Commissioner has issued Taxation Ruling TR 2009/2, titled Income Tax: genuine redundancy payments (TR 2009/2) which outlines 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 ITAA 1997.

Paragraph 11 of TR 2009/2 states that there are four components within the genuine redundancy requirement:

• The payment 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.

Each of the requirements will be discussed individually.

Payment '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. Whilst the courts have divergent views on the meaning of this 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 contains references to repealed provisions, some of which may have been rewritten, the ruling still has effect 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 paragraphs 5 and 6 of TR 2003/13 the Commissioner states:

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.

In this case, your employment with the Employer was terminated during the relevant income year and, as a result, a payment comprising of termination and certain other benefits was paid to you by the Employer during the relevant income year.

Therefore, it is considered that the payment was made in consequence of the termination of your employment. Therefore, the first requirement of a genuine redundancy has been met.

'Dismissal' 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.

Your employment was terminated at the initiative of the Employer when one of the conditions for termination of your employment was met. Consequently, the second requirement of a genuine redundancy has been met.

Dismissal caused by redundancy

At paragraph  25 of TR 2009/2, the Commissioner makes the following comments:

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 of the employer's operations.

In your case, it is clear that employment was for a contractually specified term which commenced during the 20YY-YY income year and ended during the relevant income year. When a new Office was established, another employee was employed to occupy the position previously held by you.

Based on the above, it is not that the Employer no longer required your position to be occupied by any employee; rather it is the case that the Employer did not want that position to be occupied by you.

Therefore, it is considered that you were not dismissed by the Employer because your position was redundant as required under subsection 83-175(1) of the ITAA 1997.

It is not necessary to examine if the remaining criteria set out under section 83-175 of the ITAA 1997 have been met. The failure of one criterion is sufficient to exclude the payment from being treated as a genuine redundancy payment and accorded the concessional taxation treatment under section 83-175 of the ITAA 1997.

Therefore, the payment received from the Employer on the termination of your employment is not a genuine redundancy payment in accordance with section 83-175 of the ITAA 1997.

Other relevant comments

Even if it may be argued that your employment with the Employer was terminated because your position was, in fact, redundant, the payment fails the requirement specified in subparagraph 83-175(2)(a)(ii) of the ITAA 1997 because your employment was terminated when the period stipulated in the Contract was completed.

This view is confirmed by paragraph 36 of TR 2009/2, where the Commissioner states:

Under subparagraph 83-175(2)(a)(ii), a payment made at the end of a fixed period of employment cannot normally be a genuine redundancy payment.

Also, at paragraph 284 of TR 2009/2 the Commissioner explain that:

It would normally be the case that someone employed on a contract for a set period could not be dismissed at the end of that period. Their employment would simply terminate because an arrangement stipulated that the employment would cease at that time.