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Edited version of your written advice
Authorisation Number: 1051233437674
Date of advice: 5 June 2017
Ruling
Subject: Genuine redundancy payment
Question
Is any part of the termination payment the Taxpayer received from the Employer upon termination of employment a genuine redundancy payment in accordance with 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
The Taxpayer commenced employment with a corporate entity (the Employer) more than 10 years ago.
The Taxpayer held a position with the Employer in a site, which came to end as the site closed down.
The Taxpayer was re-offered a same permanent position by the Employer, with altered number of days of work, but at a different site.
The Taxpayer received partial redundancy payment for the loss of days at work, which was taxed at the Taxpayer’s full marginal tax rate.
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)
Summary
No part of the termination payment received by the Taxpayer is considered a genuine redundancy payment because the Taxpayer was never terminated from employment and the position was not redundant.
Detailed reasoning
Genuine redundancy
A payment will be considered a genuine redundancy payment if all the requirements under section 83-175 of the ITAA 1997 are satisfied.
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 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.
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.
In this case, the Taxpayer’s previous position at the older site has ended as the site has closed down.
Taxpayer has confirmed that they were never terminated, and was offered at new position at the new service.
Accordingly, there was no dismissal from employment of the employee.
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: employment 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 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.
As the Taxpayer has confirmed that the Taxpayer was never terminated, the requirements of section 83-175(1) of the ITAA 1997 are not met.
Therefore, it is considered that the 'partial redundancy payment’ that was paid to the Taxpayer is not in consequence of the termination of the Taxpayer’s employment and therefore is not a genuine redundancy payment.