Edited version of your written advice

Authorisation Number: 1051433815927

Date of advice: 26 September 2018

Ruling

Subject: Genuine redundancy

Relevant facts and circumstances

Your Client was employed with the Employer.

In 1989 your Client commenced employment with the Employer.

The Employer had undertaken a business review and identified that your Client’s position will no longer be required in the Employer’s regional structure in late 2017.

In a letter dated mid-2017, the Employer confirmed your Client’s contract of employment with the Employer will cease in late 2017 as stated in your Clients employment contract dated.

Your Client’s contract and employment was terminated in late 2017.

Your Client received an initial separation certificate from the Employer in late 2017 stating no amount was due to be paid.

The Employer has stated in the initial separation certificate that no entitlements were payable. Therefore the payment does not represent entitlements but a redundancy payment received in consequence of the termination of contract.

Your Client was on contract and the Employer said she was not entitled to any payment of the redundancy entitlements.

As your Client had been contracting with the Employer for a period of years they thought they should have received a redundancy package.

Your Client sought legal counsel to pursue the matter of a redundancy payment form the Employer.

Your Client commenced legal proceedings after the initial separation certificate was received and took the Employer to court and through their lawyers pursued the payment of a redundancy payment by the Employer.

The legal action resulted in your Client receiving an amount (Settlement payment) being paid in 2018 as shown on the revised separation certificate which conflicts with the settlement statement signed by the Employer.

You have stated that the Settlement payment as calculated in accordance with section 83-170 of the ITAA 1997 should be wholly assessable as a bona fide redundancy payment. You further state this is evident by the original separation certificate having no entitlements on it at as well as the settlement statement stating that the amount was a redundancy payment.

Relevant legislative provisions

Income Tax Assessment Act 1997 subsection 82-130(4).

Income Tax Assessment Act 1997 section 82-135.

Income Tax Assessment Act 1997 paragraph 82-135(e).

Income Tax Assessment Act 1997 section 83-170.

Income Tax Assessment Act 1997 section 83-175.

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 Settlement 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 in late 2017. 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 ‘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 Settlement payment your Client received on the termination of employment is not a genuine redundancy payment.