Edited version of your written advice

Authorisation Number: 1051221364797

Date of advice: 4 May 2017

Ruling

Subject: Employment termination payments

Question

Is a lump sum payment received by you from your former employer (the Employer) a genuine redundancy payment as defined in 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 2017

The scheme commences on:

1 July 2016

Relevant facts and circumstances

In the 2015-16 income year, the Employer advised you that your employment is to be terminated ‘by reason of redundancy’.

Subsequently, your employment with the Employer was terminated and, as a result of the termination, the Employer paid you a specified amount.

Following the termination, you made an application to the Fair Work Commission (the Application) alleging you were unfairly dismissed.

The Employer denied the allegation that you were unfairly dismissed, and you and the Employer agreed to fully and finally settle the matter on the basis that the Employer pay you an additional amount as a redundancy payment.

At the time of the termination, there was no arrangement between you and the Employer, or between the Employer and another person, to employ you after the termination.

You are under 65 years of age.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 82-135.

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 additional amount you received from the Employer is a genuine redundancy payment as defined in section 83-175 of the ITAA 1997.

Detailed reasoning

Genuine redundancy payments

A payment made to an employee is a genuine redundancy payment if it satisfies all the conditions set out in section 83-175 of the ITAA 1997.

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.

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. With regard to the first requirement set out in subsection 83-175(1) of the ITAA 1997, at paragraph 11 of TR 2009/2, 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; and

● 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'.

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 paragraphs 5 and 6 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.

6. The phrase requires a causal connection between the termination and the payment, although the termination need not be the dominant cause of the payment. The question of whether a payment is made in consequence of the termination of employment will be determined by the relevant facts and circumstances of each case.

In this case, your employment was terminated and, as a result your termination, you made the Application. Subsequently, you and the Employer agreed to settle the matter in relation to the Application and, as a result of the settlement, the Employer was required to pay you an additional redundancy payment.

While the additional payment was paid to you as a result of the settlement, the Application was commenced by you as a result of the termination of your employment. That is, if not for the termination, there would have been no Application, the settlement of which led to the payment. Therefore, the additional payment was made to you in consequence of your employment.

'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 Taxation Ruling TR 2009/2 Income tax: genuine redundancy payments 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, for example in the case of resignation.

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

In this case, you did not resign voluntarily rather, the Employer decided to terminate your employment because your position was redundant. Therefore, it is considered that you were dismissed by the Employer and that dismissal was caused by redundancy of your position.

In addition, there is nothing to indicate that redundancy of your position was in any way contrived therefore; we consider that you were dismissed from your employment as a result of genuine redundancy.

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

The additional payment was paid to you to settle the Application matter. If you had resigned voluntarily from your employment with the Employer at the time of the dismissal, you would not have received this payment. Therefore, the payment exceeds the amount that you 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 requirement for a genuine redundancy payment found in subsection 83-175(1) of the ITAA 1997, the further conditions for genuine redundancy payment treatment in subsections 83-175(2), (3) and (4) of the ITAA 1997 require that:

● you were dismissed before you reached 65 or an earlier mandatory age;

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

● if the dismissal is not at arm's length - 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 ;

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

● the payment is not in lieu of superannuation benefits; and

● the payment is not mentioned in section 82-135 (apart from paragraph 82-135(e) of the ITAA 1997).

Based on the information provided, the further conditions for a genuine redundancy payment have been satisfied in your case.

Therefore, the additional payment received from the Employer in settlement of the Application, is a genuine redundancy payment as defined in section 83-175 of the ITAA 1997.