Edited version of your written advice

Authorisation Number: 1013135742303

Date of advice: 5 December 2016

Ruling

Subject: Genuine redundancy payments

Question

Is any part of the termination payment to be received by a person (the Client) from their former employer (the Employer) a genuine redundancy payment as defined in 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 2017

The scheme commenced on

1 July 2016

Relevant facts and circumstances

The Client was employed by the Employer under a number of former contracts of employment over a period of more than ten years.

Several years ago, the Client was appointed by the Employer to a different position.

The terms and conditions of the Client's employment were set out in a contract of employment (the Contract) made between the Employer and the Client.

Relevantly, the Contract includes the following terms:

(a) The term of the appointment is for X years.

(b) The Contract will terminate X years after it has been entered into.

During the 2015-16 income year, the Client was notified by the Employer that they would not be offered a further contract of employment.

The Client disputed the non-renewal of the Contract.

Subsequently, the Employer and the Client agreed to resolve all issues concerning the employment, the Contract, and the expiry of contract under a Deed of Release (the Deed).

The Deed includes the following terms:

(a) The Client agrees to release the Employer from claims concerning the employment, the Contract and the expiry of contract.

(b) The Employer agrees to pay to the Client legal their entitlements (including salary, bonus, superannuation, reimbursements and accrued leave) and a specified sum (the Termination Payment) (being the base salary payable to the Client over the final year of the term of the Contract.

(c) Upon the receipt of the Termination Payment, legal entitlements, etc., the Client forever releases the Employer from any and all claims which the Client may have against the Employer.

(d) The Termination Payment is paid to settle the matters in dispute between the Parties.

(e) The Client agrees to do all things necessary to facilitate a smooth transition of their role to any person appointed by the Employer.

(f) The Deed is the whole agreement between the parties concerning the subject matter and replaces any prior agreement, arrangement or understanding concerning the subject matter.

The Client will cease employment with the Employer on the specified date as a result of the expiration of the Contract.

As a result of the termination of employment, the Client is expected to receive the Termination Payment during the 2015-16 income year.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 83-175

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

Further issues for you to consider

Not applicable

Anti-avoidance rules

Not applicable

Reasons for decision

Summary

The Client's employment is to be terminated on a date mutually agreed to with the Employer and not because the Client is being dismissed at the initiative of the Employer without the Client's consent.

Therefore, the Termination Payment to be received by the Client on the termination of their employment with the Employer will not be a genuine redundancy payment.

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.

Meaning of genuine redundancy

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, 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.

● 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' 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 Client has been advised by the Employer that their current contract will not be renewed and that their employment will be terminated at the specified expiry date. However, the Client disputed the Employer's decision not to renew the current contract and, to settle the dispute, the Employer agreed to pay to the Client the Termination Payment.

Based on the above, the Termination Payment would be paid in consequence of the termination of the Client's employment with the Employer because if not for the decision to terminate employment, there would be no dispute, the settlement of which led to the payment.

'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.

The Commissioner's view, as stated in paragraphs 18 and 25 of TR 2009/2 is that:

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 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 …

Under a fixed-term contract the decision to terminate employment could not be said to be at the employer's initiative because the employee and the employer would have agreed, at the time the contract was signed, that the employment would end at the contractually specified date. Thus, a 'dismissal' would not normally occur when an employee's employment ends at the expiration of a fixed-term contract.

This view is confirmed in paragraph 284 of TR 2009/2, where the Commissioner states:

It would normally be the case that someone employed on a contract for a set period could not be dismissed at the end of that period. Their employment would simply terminate because an arrangement stipulated that the employment would cease at that time.

In the present case, the term of the employment is expressly stipulated in the Contract, consequently, the Client's employment with the Employer is to terminate on the specified date as agreed under the Contract. There is no evidence to indicate that the express terms of the Contract should be displaced and that the employment is not, in fact, for the specified term. Therefore, it is considered that the Client will not be 'dismissed' from their employment for the purposes of subsection 83-175(1) of the ITAA 1997 .

Even if it could be argued that the Client's employment is not, in fact, for the specified term, and the Client would be 'dismissed' from employment, it cannot be said that 'dismissal' would be caused by the 'redundancy' of the Client's position. This is because it is not that the Employer does not want anyone to occupy the Client's position, the Employer does not want the Client to occupy the position.

As The Client will not satisfy all the requirements of subsection 83-175(1) of the ITAA 1997, the Termination Payment that they will receive will not be a genuine redundancy payment.