Edited version of your written advice

Authorisation Number: 1012979764891

Date of advice: 3 March 2016

Ruling

Subject: genuine redundancy payments

Question 1

Is the payment you received from the Trust on termination of your employment a genuine redundancy payment in accordance with 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 2016

The scheme commences on:

1 July 2015

Relevant facts and circumstances

You were employed by an employment agency (the Employer) to provide specialist skill services.

You are a member of the Trust (Trust).

Your employment with the Employer was terminated in the 2014-15 income year because your role was no longer required by the Employer.

Several days after the termination, you received a benefit of from the Trust.

In accordance with the Trusts Annual Report for the year ended 30 June 2015 (the Annual Report), member benefits are payable in the event of:

(a) retirement;

(b) redundancy;

(c) termination; or

(d) death

You are under 60 years of age.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 82-10

Income Tax Assessment Act 1997 subsection 82-10(3)

Income Tax Assessment Act 1997 section 82-130

Income Tax Assessment Act 1997 section 83-175.

Income Tax Assessment Act 1997 subsection 83-175(1).

Superannuation Industry (Supervision) Regulations 1994 subregulation 6.01(2)

Reasons for decision

Summary

The payment you received from the Trust in consequence of the termination of your employment by reason of redundancy is not a genuine redundancy payment for the purposes of section 83-175 of the ITAA 1997 because it is not in excess of the amount you could have reasonably expected to receive had you terminated your employment voluntarily at that time.

Detailed reasoning

Genuine redundancy

A payment will qualify as a genuine redundancy payment if all the requirements under section 83-175 of the ITAA 1997 are satisfied.

In accordance with subsection 83-175(1) of the ITAA 1997, a genuine redundancy payment is:

(a) so much of a payment received by an employee who is dismissed from employment because the employee's position is 'genuinely redundant'

(b) 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 the dismissal.

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

Paragraph 11 of TR 2009/2 specifies four necessary components within the requirements under subsection 83-175(1) of the ITAA 1997:

• 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.

Payment 'in consequence of' an employee's 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 paragraph 5 of TR 2003/13 the Commissioner states:

5. ... 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 with the Employer was terminated and, as a result, you received a payment from the Trust a few days later. As such, it can be said that but for the termination of employment this payment would not have been made to you.

Therefore, it is considered that the payment from the Trust was made in consequence of the termination of your employment.

'Dismissal' and 'redundancy'

The Commissioner's view, as stated in paragraph 18 of 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 superfluous 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 (paragraph 25 of TR 2009/2).

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 of the ITAA 1997.

Applying the above to your circumstances, it is considered that you were dismissed from employment with the Employer because your position was genuinely redundant. This view is based on the following:

• you did not resign voluntarily from your employment with the Employer but were, in fact, terminated by the Employer at the Employer's initiative;

• your employment was terminated because the Employer determined that the position you held was no longer needed by the Employer;

• there is nothing to indicate that the termination was caused by any personal acts or default on your part; and

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

However, while it is accepted that you were dismissed by the Employer because your position was genuinely redundant, subsection 83-175(1) of the ITAA 1997 also requires that the payment received in consequence of redundancy exceeds the amount that you would have received had you voluntarily resigned from your employment.

The benefit you received from the Trust after your employment was terminated by reason of redundancy is not greater that the benefit you would have received if you had terminated your employment voluntarily at that time. That is, the payment does not exceed the amount that you could have reasonably expected to receive in consequence of an alternate mode of employment termination.

Consequently, subsection 83-175(1) of the ITAA 1997 has not been satisfied in your case.

Therefore, the payment received from the Trust is not a genuine redundancy payment as defined in section 83-175 of the ITAA 1997.

ATO view documents

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)

Taxation Ruling TR 2009/2 Income Tax: genuine redundancy payments

Other relevant comments

The payment received from the Trust is an employment termination payment (ETP) as defined in section 82-130 of the ITAA 1997.

An ETP may be made up of two components: the 'tax-free component' and the 'taxable component'.

In accordance with section 82-10 of the ITAA 1997, the tax -free component of an ETP is not assessable income and is not exempt income. That is, it is tax-free.

The taxable component of the ETP is assessable, however a tax offset, which depends on a person's age, applies.

If a person is under their 'preservation age', subsection 82-10(3) of the ITAA 1997 applies to ensure that the rate of tax payable on the taxable component does not exceed 30%.

Preservation age is defined in subregulation 6.01(2) of the Superannuation Industry (Supervision) Regulations 1994 and, for a person born after 30 June 1964, is 60 years.