Edited version of your written advice

Authorisation Number: 1013094085492

Date of advice: 9 December 2016

Ruling

Subject: Genuine redundancy payments

Question

Is the severance payment received by a person (the Client) from their former employer (the Employer) on the termination of their employment a genuine redundancy payment for the purposes of 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 201X

The scheme commenced on

1 July 201X

Relevant facts and circumstances

The Client was employed by the Employer on a fixed-term contract basis. Their fixed-term contract was renewed X times and terms ranged in duration from six months to five years.

The most recent fixed-term of employment was for a specified period. The terms and conditions of that period of employment were set out in an employment contract (the Contract).

The other terms and conditions of the relevant employment were set out in an enterprise agreement (the Agreement).

One month before the expiration of the Contract, the Employer advised the Client that they would not be retaining the Client's position or a substantially similar position therefore, the Client would not be offered further employment following the expiration of their current fixed-term.

Consequently, the Client's employment with the Employer was terminated on the date specified in the Contract.

In accordance with the Agreement, the Client was entitled to a severance payment on the termination.

A few weeks after the termination of their employment, the Client received a severance payment from the Employer.

There were no breaks in the Client's employment with the Employer from the commencement date to the termination date.

The Employer was the Client's sole employer during the relevant period.

During their employment with the Employer, the Client accrued sick leave, annual leave and long service leave and carried these forward from one fixed-term to the next.

The Employer made superannuation contributions on behalf of the Client.

At the time of termination of their Employment with the Employer, the Client had an expectation that their employment with the Employer would continue for another term.

The termination of the Client's employment was at arm's length.

At the time of the termination, there was no arrangement between the Employer and the Client, or between the Employer and another person, to employ the Client after the termination.

At the time of termination, the Client was under 65 years.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 83-175

Income Tax Assessment Act 1997 Subsection 83-175(1)

Income Tax Assessment Act 1997 Subsection 83-175(2)

Income Tax Assessment Act 1997 Subsection 83-175(3)

Income Tax Assessment Act 1997 Subsection 83-175(4)

Reasons for decision

The payment received by the Client on the termination of their employment with the Employer is a genuine redundancy payment for the purposes of section 83-175 of the ITAA 1997.

Detailed reasoning

Genuine redundancy payments

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

● is 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 their employment at the time of the dismissal.

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 Income tax: genuine redundancy payments (TR 2009/2).

With regard to the first requirement set out in subsection 83-175(1) of the ITAA 1997, at paragraph 11 of TR 2009/2, the Commissioner of Taxation (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.

Based on the information provided, it is accepted that the above components of subsection 83-175(1) of the ITAA 1997 have been satisfied in the Client' case.

However, while it is accepted that the Client was dismissed from their employment because their 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 they would have received had they voluntarily resigned from their employment.

If the Client had terminated their employment voluntarily at the time of dismissal, they would not have received the Payment. Therefore, the payment exceeds the amount that the Client could have reasonably expected to receive in consequence of an alternate mode of employment termination.

Further conditions for a genuine redundancy payment

In addition to the basic requirements for a genuine redundancy payment found in subsection 83-175(1) of the ITAA 1997, the further conditions for genuine redundancy payment treatment in subsections 83-175(2) and (3) of the ITAA 1997 require that:

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

● the termination is not at the end of a fixed period of employment;

● in the event that the employer and employee are not dealing at arm's length in relation to the dismissal, 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;

● 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.

At the time the Payment was made to the Client, they were under 65 years and no earlier mandatory age of termination applied, therefore the age base requirement has been met in this case.

In regard to the termination at the end of a fixed period of employment, paragraphs 36 and 37 of TR 2009/2 state:

36. 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.

37. However, some rolling fixed-term contracts may, as a matter of fact, establish an ongoing employment relationship. The reference to rolling contracts contemplates the situation where fixed-term contracts are renewed on one or more occasions following the expiry of the contracted term. However, where a contract is not renewed at the end of a contractually stipulated term, evidence is required to displace the express terms of the contract and establish an ongoing employment relationship. This is likely to be the exception rather than the rule.

Additionally, in paragraph 287 of TR 2009/2 the Commissioner states:

287. The question of whether an employment relationship continues to exist after what would otherwise be its expiration is a question of fact. If a set term is expressly stipulated in an employment contract, the Commissioner considers that this will govern the relationship unless implied terms to the contrary can be established.

In the present case, the set term of employment was stipulated in the Contract and the Client's employment terminated on the specified date.

However, evidence indicates that the express terms of the Contract should be displaced and that an ongoing employment relationship did, in fact, exist between the Client and the Employer. This view is based on the following:

● the Client's fixed-term contract was renewed X times over a period of XX years;

● there were no breaks in the Client's employment with the Employer from the commencement date to the termination date;

● the Employer was the Client's sole employer during the relevant employment period;

● during the relevant employment period, the Client accrued sick leave, annual leave, long service leave and carried these forward from one fixed- term to the next;

● the Employer made superannuation contributions on behalf of the Client throughout the relevant employment period; and

● at the time of termination of their Employment with the Employer, the Client had an expectation that their employment with the Employer would continue for another term.

Consequently, it is considered that termination, in this case, did not occur at the end of a fixed period of employment.

Based on the above, and the fact that the parties were dealing with each other at arm's length; the payment was not in lieu of superannuation benefits; and there was no arrangement to employ the Client after the termination, the Payment received by the Client is a genuine redundancy payment for the purposes of section 83-175 of the ITAA 1997.