Edited version of your written advice

Authorisation Number: 1051504323941

Date of advice: 11 April 2019

Ruling

Subject: Employment termination payments

Question

Is the lump sum payment received by you 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:

Income year ended 30 June 2018

The scheme commences on:

1 July 2017

Relevant facts and circumstances

You commenced employment with an entity (the Employer) in the 2016-17 income year.

In the 2017- 18 income year, your employment was terminated by the Employer due to genuine redundancy.

You were employed under an Employment Contract (the Agreement).

Relevantly, the Agreement includes the following terms:

● If your position is made redundant, you are not entitled to any payment except where it is required under the FW Act.

In the 2017-18, you received a lump sum payment, which was the equivalent to one week of salary. No tax was withheld on this amount.

Subsequently, the Employer agreed to pay you an additional three weeks salary in lieu of notice on the condition that you did not pursue further action against the Employer.

In the 2018-19 income year, you received a second payment which was equivalent to three weeks of salary. Tax was withheld on this payment.

Relevant legislative provisions

Income Tax Assessment Act 1997, section 83-175.

Fair Work Act 2009, section 119.

Fair Work Act 2009, section 121.

Reasons for decision

Summary

The second payment is not a genuine redundancy payment (GRP) as defined in section 83-175 of the Income Tax Assessment Act 1997 (ITAA1997) as it was not received in consequence of the termination of your employment

Detailed reasoning

A payment made to an employee is a GRP if it satisfies all the criteria in section 83-175 of the ITAA 1997.

In accordance with subsection 83-175(1) of the ITAA 1997, a GRP 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.

The Commissioner of Taxation has issued Taxation Ruling TR 2009/1 Income tax: genuine redundancy payments (TR 2009/2), which outlines the requirements to be satisfied before any payment made to a person whose employment is terminated qualifies for treatment as a GRP under section 83-175 of the ITAA 1997.

In discussing what constitutes a GRP for the purposes of subsection 83-175(1) of the ITAA 1997, paragraph 11 of TR 2009/2 states:

There are four necessary components within this requirement:

● The payment being tested must be received in consequence of an employee’s termination.

● That termination must involve an employee being dismissed from employment.

● That dismissal must be caused by the redundancy of the employee’s position.

● 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’ (TR 2003/13).

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:

.... 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.

In this instance, your redundancy entitlements are governed by the provisions in the Fair Work Act 2009 (FWA).

Section 119 of the FWA outlines a person’s entitlements to redundancy pay.

Subsection 119(2) of the FWA states that an employee who has worked at least one year but less than two years is entitled to a redundancy pay period of four weeks.

Pursuant to subsection 121(1) of the FWA, section 119 does not apply to the termination of a person’s employment, if immediately before the time of termination, or at the time a person was given notice the employee’s period of continuous service with the employer is less than 12 months.

In this instance, the Agreement stipulated that you were not entitled to any redundancy entitlements other than those stipulated in the FWA. The payment, being one week of salary, was the result of the termination.

In contrast, the Employer only agreed to pay an additional amount on the condition that you did not pursue further action against the Employer. Therefore, it cannot be said that ‘but for’ the termination you would not have received the second payment as the payment was made to avoid further legal action.

Consequently, the second payment is not considered to be a genuine redundancy payment for the purposes of section 83-175 of the ITAA 1997.