Edited version of your written advice

Authorisation Number: 1013140972431

Date of advice: 10 January 2017

Ruling

Subject: Employment termination payments

Question

Is any part of the payment received by a person (the Taxpayer) from an entity (the Employer) on the termination of 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

In 200X, the Taxpayer commenced casual employment with the Employer as a tradesman on an offshore project.

Upon completion of the relevant project, the Taxpayer's employment was terminated and a new offer of employment was made by the Employer to the Taxpayer for work on another offshore project.

The Taxpayer estimates that their employment with the Employer was renewed in the above manner approximately XY times before the Taxpayer's employment was finally terminated in 20XX-YY income year.

The terms and conditions of the Taxpayer most recent employment with the Employer were set out in an enterprise agreement (the Agreement).

In accordance with the Agreement, the Employer is required to pay to the Taxpayer a termination payment and redundancy accrual payment upon completion of the employment with the Employer.

In 20XX, as a result of the termination, the Taxpayer received an employment termination payment (the Payment).

The Payment was not in lieu of superannuation benefits.

The Taxpayer did not accumulate any leave entitlements during their employment with the Employer.

There were several breaks in the Taxpayer's employment with the Employer from 200X to 20XX.

During the period 200X to 20XX, the Taxpayer had worked for other employers.

The Taxpayer is less than 65 years of age.

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 paragraph 83-175(2)(a)

Income Tax Assessment Act 1997 subparagraph 83-175(2)(a)(i)

Income Tax Assessment Act 1997 subparagraph 83-175(2)(a)(ii)

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

Reasons for decision

Summary

The Taxpayer's employment was terminated at the end of a fixed period of employment. Therefore, the Payment the Taxpayer received on the termination of their employment with the Employer is not a genuine redundancy payment.

Detailed Reasoning

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

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 Taxpayer's case.

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

If the Taxpayer 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 Taxpayer 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, subsections 83-175(2) and (3) of the ITAA 1997 set out further criteria that must be satisfied before a payment can be treated as a genuine redundancy payment as follows:

● 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;

● 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.

Relevantly, rolling fixed-term contracts and multi-disciplinary project-based work are discussed at paragraphs 36 and 38 of TR 2009/2 which 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.

38. In some cases, particularly those involving multi-disciplinary project-based work, an employee's period of service may be determined by reference to the achievement of a particular outcome rather than a specified period of time. The employee's period of service in these circumstances concludes on the achievement of that outcome.

Further, at paragraphs 288 and 289 of TR 2009/2, the Commissioner states:

288. In some industries workers are employed on a project basis. The fact that a project is completed, even where the project is completed before a designated time, is not a situation where workers are redundant. For these purposes, the Commissioner considers that the termination on completion of a particular task or outcome represents a particular period of service for the purposes of subparagraph 83-175(2)(a)(ii). If the completion of the task or outcome gives rise to a payment, such a payment would normally be an employment termination payment, not a genuine redundancy payment.

289. It is also common in these types of project based industries for workers to be employed on a weekly or daily hire basis. Once again, the outcome here may be that there is not a genuine redundancy payment because a termination payment is made at the end of a limited period of time of employment. This is so even if the payments are referred to as redundancy payments.

The Taxpayer's employment was terminated upon completion of a particular construction project. As such, the Commissioner considers that, in this case, termination on completion of a particular project represents a particular period of service for the purposes of subparagraph 83-175(2)(a)(ii) of the ITAA 1997. That is, the termination occurred at the end of a fixed period of employment.

On the basis of the information provided, it is considered that subsection 83-175(2) of the ITAA 1997 has not been satisfied. Accordingly, the Payment the Taxpayer received on the termination of employment is not a genuine redundancy payment.