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Edited version of your written advice
Authorisation Number: 1012997930475
Date of advice: 3 May 2016
Ruling
Subject: Genuine redundancy payments
Question
Is the 'Assignment Completion Incentive' payment you received on the 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 period
Income year ending 30 June 2016
The scheme commenced on
1 July 2015
Relevant facts and circumstances
Several months ago, your employment was terminated by reason of redundancy.
Following the termination of your employment, you received from your former employer (the Employer) a separation package which included an 'Assignment Completion Incentive' (ACI) payment.
The Employer's 'Assignment Completion Incentive Procedure' provides that:
(a) the purpose of the ACI is to give a bonus to those employees of the Employer who remain in their role until it is completed; and
(b) the ACI is paid as a percentage of an employee's earned assignment base salary upon successful completion of assignment.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 83-175
Income Tax Assessment Act 1997 Subsection 83-175(1)
Reasons for decision
Summary
The ACI payment you 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.
Detailed reasoning
A payment made to an employee is a genuine redundancy payment if it satisfies all the conditions set out in section 83-175 of the ITAA 1997.
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 employees position is genuinely redundant;
(b) and 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.
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:
(a) the payment being tested must be received in consequence of an employee's termination.
(b) that termination must involve the employee being dismissed from employment.
(c) that dismissal must be caused by the redundancy of the employee's position.
(d) 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, the ACI payment was paid to you when your employment was terminated by the Employer. However, based on the information provided, the payment did not follow as an 'effect or result of' the termination but as a result of successfully completing an assignment; and it would have been paid whether or not your employment was terminated. Therefore, although the payment was made to you on the occasion of the termination of your employment, it cannot be said that but for the termination, the payment would not have been made to you.
Consequently, it is considered that the ACI payment you received from the Employer was not received in consequence of the termination of your employment. As such, the first condition of a genuine redundancy payment under subsection 83-175(1) of the ITAA 1997 has not been met. As this condition has not been satisfied the remaining conditions under section 83-175 of the ITAA 1997 are not required to be addressed.
Therefore, while it is accepted that the termination of your employment was the result of your position becoming redundant, the ACI payment is not a genuine redundancy payment because it was not made in consequence of the termination of your employment.