Edited version of your written advice

Authorisation Number: 1051192429456

Date of advice: 20 February 2017

Ruling

Subject: Genuine redundancy payment

Question

Is any part of the lump sum 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

Yes

This ruling applies for the following periods:

Income year ended 30 June 2015

Income year ended 30 June 2016

The scheme commences on

1 July 2014

Relevant facts and circumstances

1. The Taxpayer commenced employment as an apprentice skilled trade with an entity (the Employer).

2. The Taxpayer's employment was terminated by the Employer, as the Taxpayer's position was made redundant.

3. The Taxpayer was employed under an Enterprise Agreement (the Agreement).

4. The Taxpayer received a total lump sum termination payment

5. The Federal Court of Australia delivered judgement in Centennial Northern Mining Services Pty Ltd v Construction, Forestry, Mining and Energy Union (No 2) [2015] FCA 136. The Court rule that a retrenchment provision in an enterprise agreement which capped the amount that employee could receive on retrenchment to the entitlements available at the age of 60 were unlawful and therefore void.

6. In response to this decision, the Taxpayer made a claim for back payment of redundancy pay withheld by the Employer.

7. The Employer paid an additional amount by way of monthly instalments.

8. The Taxpayer was issued with a PAYG payment summary- employment termination payment for the period. This payment summary shows the second amount being entirely a taxable component and treated as an Employment termination payment (ETP) code R'.

Relevant legislative provisions

Income Tax Assessment Act 1997, section 82-135.

Income Tax Assessment Act 1997, section 83-170(2).

Income Tax Assessment Act 1997, section 83-170(3).

Income Tax Assessment Act 1997, section 83-175.

Reasons for decision

Summary

1. Part of the lump sum payment received by the Taxpayer, which consists of a severance package, is a genuine redundancy payment (GRP) as defined in section 83-175 of the ITAA 1997. In this case, the amount is not assessable income and is not exempt income. That is, it is tax-free.

2. The remainder of the GRP, is an employment termination payment (ETP), which is taxed at concessional rates.

3. The amount consisting of accrued annual leave and accrued long service leave is not a GRP. These payments are excluded from being employment termination payments by section 82-135 of the ITAA 1997.

Detailed reasoning

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

2. 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.

3. The Commissioner of Taxation has issued Taxation Ruling TR 2009/1 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.

4. In discussing what constitutes a GRP for the purposes of 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.

Payment 'in consequence of' termination

1. 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).

2. 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.

3. 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.

4. In this instance, the Taxpayer's employment was terminated by the Employer due to the redundancy of the Taxpayer's position. The severance payments in the 201X-1Y income and the additional severance payment in the 201Y-1Z income year were the result of the termination. Therefore, the total payment was received by the Taxpayer in consequence of the termination of their employment.

'Dismissal' and 'redundancy'

1. 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 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.

2. In this instance it is clear that the Taxpayer did not voluntarily resign, rather their employment was terminated because the position that the Taxpayer occupied was no longer needed and the Employer did not want the position to be occupied by anyone.

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

4. In this instance, section 82-135 of the ITAA 1997 lists payments which are not employment termination payments. Subsection 83-135(c) excludes unused annual leave payments, while unused long service leave payments are excluded under subsection 83-135(d) of the ITAA 1997. Therefore, it is considered that the payment of these amounts does not satisfy the conditions of a GRP.

5. In contrast, the severance payment is considered to meet the requirements of subsection 83-175(1) of the ITAA 1997. This amount was received as a redundancy payment per Clause 25.4.5(b).

Further conditions for a genuine redundancy payment

1. Further to the basic requirement for a GRP found in  subsection 83- 75(1) of the ITAA 1997, the conditions for genuine redundancy treatment in subsections 83-175(2) and (3) of the ITAA 1997 also require that:

● the employee is dismissed before the earlier of 65 or a specified age;

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

● the amount paid is not greater than the amount that could reasonably be expected had the parties been dealing at arm's length, (in the event that the employer and employee are in fact not dealing at arm's length in relation to the dismissal);

● there is no arrangement entered into between the employer and employee or the employer and another entity to employ the dismissed employee after the termination; and

● the payment is not in lieu of superannuation benefits.

2. On the basis of the information provided, it is considered that all the conditions of subsections 83-175(2) and 83-175(3) are also satisfied.

Tax treatment of a genuine redundancy payment

3. Subsection 83-170(2) of the ITAA 1997 provides that so much of the GRP that does not exceed the amount worked out using the formula prescribed in subsection 83-170(3) is non-assessable, non-exempt income. Any amount in excess of the tax-free amount is taxed as an employment termination payment (ETP). The formula for working out the tax-free amount is:

Base amount + (Service amount × Years of service)

For the 201X-1Y income year:

Base amount is $A

Service amount is $B; and

Years of service is the number of whole years in the period, or sum of periods, of employment to which the payment relates.

4. The Taxpayer's employment commenced and ceased on DDMMYY. Therefore the 'years of service' to which the genuine redundancy payment relates is XX whole years of service.

5. Accordingly, under subsection 83-175(3) of the ITAA, the tax-free part of the Taxpayer's GRP is:

$A + ($B × XX) = an amount

6. The $XX,X00 GRP is below the tax-free amount calculated above. Thus, all of the GRP in this income year is non-assessable, non-exempt income.

7. For the 201Y-1Z income year, under subsection 83-175(3) of the ITAA , the formula for working out the tax-free amount the Taxpayer's GRP is:

Base amount is $C;

Service amount is $D; and

Years of service is XX years.

8. Accordingly, under subsection 83-175(3) of the ITAA, the tax-free part of the Taxpayer's GRP is:

$C + ($D × XX) = an amount

An amount - an amount= an amount

9. In the 201Y-1Z income year, an amount of the total payment is below the tax-free amount.

10. Therefore of the total GRP, an amount is below the tax free amount. The remaining amount is an ETP, to be included in your assessable income for the 201Y-1Z income year.

11. This amount is referred to as the taxable component of the ETP. As this amount was paid in relation to a genuine redundancy, it is subject to the ETP cap.

12. The ETP cap for the 201Y-1Z income years is $195,000. Thus it is taxed at a minimum rate of 32% (including Medicare levy).