Edited version of your written advice

Authorisation Number: 1013134981417

Date of advice: 1 December 2016

Ruling

Subject: Employment termination payment

Question

Is the Payment received by a person (the Taxpayer) on the termination of their 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 period:

Income year ended 30 June 20YY

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The Taxpayer was employed by an entity (the Employer).

The Employer terminated the Taxpayer's employment without notice for serious and wilful misconduct.

The Taxpayer lodged an unfair dismissal claim in the Industrial Relations Commission alleging that the termination of their employment was harsh, unjust and unreasonable (the Claim).

The Taxpayer and the Employer subsequently agreed to settle the Claim on the terms set out in a Deed of Release and Discharge (the Deed).

Relevantly, the Deed included the following terms:

● With denial of liability, the Employer will rescind the Taxpayer's dismissal for serious and wilful misconduct (clause 2.1).

● The Employer will allow the Taxpayer to substitute voluntary resignation of their employment in place of dismissal (clause 2.2).

● The Employer will pay to the Taxpayer 22 weeks' wages (the Payment).

● The intention of the Deed is to extinguish all of the Taxpayer's Claims and all the Employer's Claims and is to taken for all purposes to give effect to that intention (clause 3.3).

● The Deed is the whole agreement between the parties concerning the subject matter and it replaces any prior agreement, arrangement or understanding concerning its subject matter (clause 7).

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 Payment received by the Taxpayer on the termination of their employment with the Employer is not a genuine redundancy payment (GRP) as defined in section 83-175 of the ITAA 1997.

Detailed Reasoning

A payment made to an employee is a GRP if it satisfies all the criteria in section 83-175 of the ITAA 1997.

In accordance with subsection 83-175(1) of the ITAA 1997, a GRP 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 their employment at the time of dismissal.

The Commissioner of Taxation (the Commissioner) has issued Taxation Ruling TR 2009/2 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 GRP under section 83-175 of the ITAA 1997.

In discussing what constitutes a GRP in accordance with subsection 83-175(1) of the ITAA 1997, paragraph 11 of TR 2009/2 states:

There are four necessary components within this requirement:

● The payment being tested must be received in consequence of an employee's termination.

● That termination must involve and 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' 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 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 instance, the Employer terminated the Taxpayer's employment on the grounds of serious and wilful misconduct by the Taxpayer. The Taxpayer disputed the nature of the termination and commenced legal proceedings against the Employer (the Claim).

The Employer rejected the Taxpayer's claims and the parties agreed to settle all claims without admission of liability for a settlement sum which included the Payment.

While the settlement of the Claim is a direct cause of the relevant payment, the Claim was lodged by the Taxpayer as a result or effect of the termination of their employment. If not for the termination, there would have been no Claim and no settlement, as a result of which, the payment is made. That is, there was a sequence of events following the termination which had a relationship and connection which ultimately led to the payment. Therefore, it is our view that the payment was received by the Taxpayer in consequence of the termination of their employment.

'Dismissal' and 'redundancy'

At paragraphs 18 and 25 of TR 2009/2, the Commissioner states:

18. 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 the employment that is terminated at the initiative of the employee…

25. 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 …

In this instance, a condition of the settlement of the Claim by the Taxpayer against the Employer, and the subsequent settlement payment, was that the Employer rescinds the Taxpayer's dismissal for serious and wilful misconduct and the Taxpayer be allowed to resign voluntarily from their employment.

As the Deed replaces any prior agreement, arrangement or understanding concerning its subject matter, it is considered that the Taxpayer's employment was not terminated at the initiative of the Employer rather, the Taxpayer's employment was terminated at the initiative of the Taxpayer. Therefore, the Taxpayer was not 'dismissed' for the purposes of subsection 83-175(1) of the ITAA 1997

Further, even if it could be argued that the Taxpayer was, in fact, dismissed by the Employer, there is nothing in the Deed (or elsewhere) to indicate that the Taxpayer was dismissed by the Employer because the Taxpayer's position had become redundant. On the contrary, the indications are that if the Taxpayer was, in fact, dismissed, the dismissal was for serious and wilful misconduct by the Taxpayer.

In accordance with paragraph 28 of TR 2009/2, a dismissal is not caused by redundancy if personal acts or default are the prevailing or most influential cause for the termination.

Consequently the Payment is not a GRP as defined in section 83-175 of the ITAA 1997.