Edited version of your written advice

Authorisation Number: 1012917793041

Date of advice: 25 November 2015

Ruling

Subject: Genuine redundancy payment

Questions

1. Are the payments made to your client on termination of employment as a result of a genuine redundancy under section 83-175 of the Income Tax Assessment Act 1997 (ITAA 1997)?

2. Is any part of the lump sum payment made to your client tax-free under section 83-170 of the ITAA 1997?

Answers

1. No.

2. No.

This ruling applies for the following period:

20WW-XX income year

The scheme commences on:

1 July 20WW

Relevant facts and circumstances

Your client commenced employment with the Employer several years ago.

Your client terminated employment with the Employer during the 20WW-XX income year.

You advised that 'due to structural changes within the organisation' your client was advised that 'their position had been abolished and that they were no longer required'.

A letter from the Employer during the 20YY-ZZ income year advised that your client was employed with the Employer unitl a specified date during the 20WW-XX income year. It was also advised that at this time the Employer does not employ a person in your client's position and has not done so since a specified date during the 20WW-XX income year.

A PAYG payment summary - employment termination payment from the Employer was provided advising that an employment termination payment was made during the 20WW-XX income year. Tax was withheld from the payment.

Your client also received an unused annual leave payment and an unused long service leave payment. Tax was withheld from the payments.

Your client is under 65 years of age.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 82-130

Income Tax Assessment Act 1997 section 82-135

Income Tax Assessment Act 1997 section 83-10

Income Tax Assessment Act 1997 section 83-80

Income Tax Assessment Act 1997 section 83-170

Income Tax Assessment Act 1997 section 83-175

Income Tax Assessment Act 1997 subsection 995-1(1)

Reasons for decision

Summary

The payments made to your client on termination of your employment are not considered to be a result of a genuine redundancy under section 83-175 of the Income Tax Assessment Act 1997 (ITAA 1997).

No part of the lump sum payment made to your client in the 20WW-XX income year is tax free under section 83-170 of the ITAA 1997.

The payment your client received in the 20WW-XX income year is an employment termination payment as it was made in consequence of the termination of your client's employment and is not a payment which is excluded from being an employment termination payment.

As the unused annual leave and unused long service payments were not made in connection with a genuine redundancy payment, these payments will be included in your client's assessable income under sections 83-10 and 83-80 of the ITAA 1997 respectively and be subject to marginal rates of tax.

Detailed reasoning

Employment termination payments

An employment termination, where the payment is made during the life of a taxpayer, is known as a life benefit termination payment (subsection 82-130(2) of the ITAA 1997).

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 employment 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.

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

For a payment to be treated as an ETP, 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, your client's employment was terminated during the 20WW-XX income year, and as a result of the termination, your client received the termination payment. In other words, but for the termination, your client would not have received that payment. Therefore, it is considered that the termination payment was received by your client in consequence of the termination of their employment.

Payment is received no later than 12 months after termination

Your client terminated employment with the Employer during the 20WW-XX income year and the payment was made during the 20WW-XX income year. As this is less than 12 months after your client's 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 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;

• unused annual leave (paragraph 82-135(c);

• unused long service leave payments (paragraph 82-135(d)).

Therefore, the payment for unused annual leave and payment for unused long service leave are not genuine redundancy payments pursuant to subsection 83-175(4) of the ITAA 1997. The taxation treatment of these payments will be addressed in due course.

Genuine redundancy payments

A payment made to an employee is a genuine redundancy payment (GRP) if it satisfies all the conditions set out in section 83-175 of 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 and 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 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 arms length the payment does not exceed the amount that could reasonably be expected to be made if the dismissal were at arms 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)).

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

For the reasons stated above, it is considered that, in this case, the termination payment is paid to your client in consequence of the termination of their 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.

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.

Applying the above to your client's circumstances, it is considered that your client did not receive the termination payment because their position was genuinely redundant as the facts of the case do not provide evidence that the duties and responsibilities formerly attached to your client's position are determined by the Employer to be unnecessary to the current needs and purposes of the organisation. The letter dated during the 20YY-ZZ income year from the Employer advised that the Employer does not employ an employee in the employee's position and has not done so since the 20WW-XX income year. However the Employer has not advised that your client's position has been abolished. Therefore this component has not been satisfied.

It is not necessary to examine if the remaining criteria set out under section 83-75 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 termination payment is an ETP, as it satisfies all the conditions in subsection 82-130 (1) of the ITAA 1997.

Taxation treatment of unused annual leave and unused long service payments

As the unused annual leave and unused long service payments are not considered to be made in connection with a genuine redundancy payment, these payments are included in your client's assessable income under sections 83-10 and 83-80 of the ITAA 1997 respectively and be subject to marginal rates of tax.