Edited version of your written advice

Authorisation Number: 1051424240947

Date of advice: 3 September 2018

Ruling

Subject: Employment termination payment

Question

Is any part of the severance payment received by your client 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:

Year ended 30 June 2017

The scheme commences on:

1 July 2016

Relevant facts and circumstances

In the 2014-15 income year, your client commenced employment with a non-resident employer, as a manager on an assignment associated with a project (the Project).

Your client was employed only for the Project until the achievement of all requirements of their role on the Project. Upon completion of their role on the Project, your client’s employment was terminated.

The terms and conditions of your client’s employment with the Employer were set out in a signed agreement (the Agreement).

In accordance with the Agreement, the Employer is required to pay your client a severance award upon resignation.

A letter from the Employer advised that your client’s service was no longer required for the Project after a specified date, and that letter served as a notice of completion of assignment for the Project.

Another letter from the Employer advised that your client’s employment was extended due to significant changes occurring in the Project since the date of the last letter. Your client was required to remain employed until a specified date at which point their assignment would be considered complete.

A final letter from the Employer advised that your client’s employment was extended again due to significant changes occurring in the Project since the date of the last letter. Your client was required to remain employed until a specified date at which point their assignment would be considered complete.

A final payslip was provided which shows the last working date in the 2016-17 income year and the amounts paid on termination in the foreign currency.

An experience certificate from the Employer was provided.

Your client, who is less than 65 years of age, is an Australian resident for tax purposes.

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

Your client’s employment was terminated at the achievement of a particular outcome. Therefore, the severance payment your client received on the termination of their employment is not a genuine redundancy payment.

Detailed Reasoning

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

Meaning of genuine redundancy

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 (TR 2009/2).

With regard to the first requirement set out in subsection 83-175(1) of the ITAA 1997, the Commissioner considers that there are four necessary components within this requirement:

● the payment must be received in consequence of an employee's termination;

● the termination must involve the employee being dismissed from employment;

● dismissal must be caused by the redundancy of the employee's position; and

● the redundancy payment must be made genuinely because of a redundancy.

Each of these requirements will be considered in turn below.

Payment must be received ‘in consequence of’ an employee's termination

From the facts of this case, it is accepted that the severance payment was received by your client in consequence of the termination of their employment.

Termination must involve the employee being ‘dismissed’ from employment

The term ‘dismissal’ is not defined in the ITAA 1997 therefore, consistent with basic principles of statutory interpretation, its meaning must be determined according to the ordinary meaning of the words, having regard to the context in which they appear.

Accordingly, the Commissioner's view, as stated in 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.

Relevantly, fixed-term contracts and 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 [emphasis added].

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 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) [emphasis added]. 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. …

Your client’s employment was terminated in the 2016-17 income year upon completion of their role on a particular project. As such, the Commissioner considers that, in this case, termination on completion of their role on 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) ITAA 1997 has not been satisfied. Accordingly, the severance payment your client received on the termination of employment is not a genuine redundancy payment.