Edited version of your written advice

Authorisation Number: 1051199085189

Date of advice: 8 March 2017

Ruling

Subject: Genuine redundancy payments

Question

For the purposes of 'Pay As You Go (PAYG)' withholding requirements under section 12-85 of the Taxation Administration Act 1953, will the termination of an employee who accepts a voluntary redundancy be treated as a genuine redundancy under section 83-175 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

This ruling applies for the following period:

Income year ending 30 June XXXX

The scheme commences on:

1 July XXXX

Relevant facts and circumstances

A state department (the Department) is undergoing organisational change, which is resulting in the reduction of its workforce as a result of the transfer of responsibilities to an unrelated agency (the Agency).

Before the reduction of staff is completed, employees of the Department impacted by the transfer of responsibilities to the Agency are invited to express an interest in accepting a voluntary redundancy.

The Chief Executive of the Department will determine a termination date for staff who submit an expression of interest in voluntary redundancy in the interests of the Department's business continuity needs.

The Chief Executive will write to staff who accept voluntary redundancies to confirm their termination of employment with the Department as at a specific date.

Voluntary redundancies are only available to permanent employees.

The redundancy package will be compromised of the following:

a. Accrued recreation leave;

b. Accrued long service leave;

c. Severance payment of two weeks' full-time pay per full-time equivalent year of services and a proportionate amount for an incomplete year of service paid at the employee's substantive level (minimum 4 weeks up to a maximum 52 weeks); and

d. Incentive payment or, 12 weeks' pay at the employee's substantive level, whichever is greater (pro rata for part-time employees).

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

Summary

The termination of an employee who accepts a voluntary redundancy will be treated as a genuine redundancy in accordance with section 83-175 of the ITAA 1997.

Consequently, a termination payment made to an employee will be a genuine redundancy payment to the extent that it 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 provided all the other conditions in section 83-175 of the ITAA 1997 have been met.

Detailed reasoning

Genuine redundancy

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 has issued Taxation Ruling TR 2009/2 Income tax: genuine redundancy payments (TR 2009/2) which provides guidance on the interpretation of section 83-175 of the ITAA 1997.

Paragraph 11 of TR 2009/2 specifies four necessary components within the requirements under subsection 83-175(1) of the ITAA 1997:

(a) the payment being tested must be received in consequence of an employee's termination.

(b) that termination must involve the employee being dismissed from employment.

(c) that dismissal must be caused by the redundancy of the employee's position.

(d) the redundancy payment must be made genuinely because of a redundancy.

Payment 'in consequence of' an employee's 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 employment of an employee is to be terminated and as a result, a specified amount is to be paid to the employee following the termination. As such, it can be said that but for the termination of employment this payment would not be made to the employee.

Therefore, it is considered that the payment is to be made to the employee in consequence of the termination of their employment.

Dismissal from employment

The Commissioner's view, as stated in paragraph 18 of TR 2009/2, is that 'dismissal' means 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, for example in the case of resignation.

At paragraph 20 of TR 2009/2, the Commissioner further states:

A dismissal can still occur even where an employee has indicated they would be interested in having their employment terminated, provided that the final decision to terminate employment remains solely with the employer.

In this case, employees will be invited to express their interest in terminating their employment on a voluntary redundancy basis; however, the ultimate decision to terminate their employment remains solely within the Department's control. Consequently, it is considered that an employee accepting a redundancy on this basis has been dismissed from employment.

Position genuinely redundant

Paragraph 25 of TR 2009/2 states:

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. On occasion the decision may be unavoidable due to the circumstances surrounding the employer's operations.

In accordance with paragraph 28 of TR 2009/2, a dismissal is not caused by redundancy where personal acts or default are the cause for termination for example, unsatisfactory performance or behaviour.

Applying the above to this case, it is considered that an employee would be dismissed from employment with the Department because their position is genuinely redundant. This view is based on the following:

● the employee would not resign voluntarily from their employment but would, in fact, be terminated by the Department at the Department's initiative;

● the employee's employment would be terminated because the Department has determined that the position they hold is no longer needed; and

● there is nothing to indicate that employment would be terminated because of any personal acts or default on the employee's part.

Consequently, a payment made to an employee on the termination of their employment will be a genuine redundancy payment to the extent that it 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 provided all the conditions in section 83-175 of the ITAA 1997 have also been met.

ATO view documents

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)

Taxation Ruling TR 2009/2 Income tax: genuine redundancy payments

Other relevant comments

Further conditions for a genuine redundancy payment

Before a payment that meets the basic redundancy requirement in subsection 83-175(1) qualifies as a genuine redundancy payment, all other conditions in subsections 83-175(2), (3) and (4) of the ITAA 1997 must be met. These conditions include:

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

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

● if the dismissal is not at arm's length - the payment is not greater than the amount that could reasonably be expected to be paid had the parties been dealing at arm's length;

● at the time of dismissal, there was no arrangement between the employee and the employer, or between the employer and another person, to employ the employee after the dismissal; and

● the payment was not in lieu of superannuation benefits.