Edited version of your written advice

Authorisation Number: 1051432439774

Date of advice: 21 September 2018

Ruling

Subject: Employment termination payment

Question

Is any part of the ex-gratia payment made to your client under a Deed of Release 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 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

In the 20XX-XX income year your client commenced employment with the Employer in a temporary full-time position.

The terms and conditions of your client’s employment were set out in a letter which showed:

● employment was on a fixed-term basis, the commencement date, and a conclusion date in the 20XX-XX income year;

● the terms and conditions of employment were set out in the letter;

● your client accepted the terms set out in the letter, which constituted the entire understanding between your client and the Employer in relation to the terms and conditions of employment.

The Employer offered an extension to your client’s temporary appointment on three occasions, with the appointment to conclude on a date in the 20XX-XX income year.

In the 20XX-XX income year, a letter from the Employer offered your client a fixed-term position. The letter showed the position commencement date, and a conclusion date in the 20XX-XX income year. The letter included the terms and conditions of employment.

The Employer offered an extension to your client’s appointment on two occasions with the appointment to conclude on a date in the 20XX-XX income year.

In 20XX, a letter from the Employer offered your client a fixed-term full-time position. The letter showed:

● the position commencement date;

● the position conclusion date in the 20XX-XX income year;

● the terms and conditions of employment were set out in the letter.

In 20XX, a letter from the Employer confirmed that your client’s employment would conclude on the date previously specified in the 20XX letter. In this 20XX letter:

● the Employer advised there was no requirement to renew the appointment;

● the Employer offered your client a Deed of Release (the Deed) where an ex-gratia payment would be made;

● the payment was equivalent to the amount that would be provided for a redundancy payment, in the event the position was a permanent position and no longer required.

The Deed was signed on the day your client’s employment terminated, and stated the date of employment termination, and the amount of ex-gratia payment your client received.

You provided a PAYG Payment Summary – employment termination payment from the Employer.

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 end of a set term which was expressly stipulated in your client’s last employment contract. Therefore, the ex-gratia 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 Income Tax Assessment Act 1997 (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 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.

A ‘dismissal’ would not ordinarily occur for an employee employed under a fixed-term contract. In paragraph 284 of TR 2009/2 the Commissioner states:

It would normally be the case that someone employed on a contract for a set period could not be dismissed at the end of that period. Their employment would simply terminate because an arrangement stipulated that the employment would cease at that time [emphasis added].

In other words, under a fixed-term contract, the decision to terminate employment could not be said to be at the employer’s initiative because the employee and the employer would have a mutual understanding at the time the contract was signed that the employment would end at a pre-determined date. Thus, a ‘dismissal’ would not normally occur when an employee’s employment ends at the expiration of a fixed-term contract.

In paragraph 37 of TR 2009/2 the Commissioner states:

However, some rolling fixed-term contracts may, as a matter of fact, establish an ongoing employment relationship. The reference to rolling contracts contemplates the situation where fixed-term contracts are renewed on one or more occasions following the expiry of the contracted term. However, where a contract is not renewed at the end of a contractually stipulated term, evidence is required to displace the express terms of the contract and establish an ongoing employment relationship [emphasis added]. This is likely to be the exception rather than the rule.

Additionally, in paragraph 287 of TR 2009/2 the Commissioner states:

The question of whether an employment relationship continues to exist after what would otherwise be its expiration is a question of fact. If a set term is expressly stipulated in an employment contract, the Commissioner considers that this will govern the relationship unless implied terms to the contrary can be established [emphasis added].

In the present case, in a letter to your client, the set term was expressly stipulated to end on a specified date. There is no evidence to indicate that the express terms should be displaced and that an employment relationship, in fact, existed. It cannot be said that the decision to terminate employment was at the Employer's initiative without the consent of your client. Your client’s employment simply terminated because an arrangement stipulated that the employment would cease at a specified time. Therefore, it is considered that your client was not be ‘dismissed’ from their employment.

On the basis of the information provided, it is considered that subsection 83-175(2) ITAA 1997 has not been satisfied. Accordingly, the ex-gratia payment your client received on the termination of employment is not a genuine redundancy payment.