Edited version of private advice

Authorisation Number: 1051549766955

Date of advice: 25 July 2019

Ruling

Subject: Genuine redundancy

Question

Should the Payment in Lieu of Notice received by a person (the Taxpayer) be treated as part of a genuine redundancy payment?

Answer

No

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The Taxpayer's employment was terminated due to redundancy.

The Employer made a redundancy payment to the Taxpayer.

The redundancy payment included payment in lieu of notice, severance payment, and payments for unused annual leave and long service leave.

The Employer has treated the severance payment as a genuine redundancy payment.

The Employer has treated the payment in lieu of notice as a taxable ETP.

The Taxpayer has requested that the payment in lieu of notice be treated as part of the genuine redundancy payment.

The Employer has declined to treat the payment in lieu notice as a part of the genuine redundancy payment, on the basis that the payment in lieu of notice would have been payable had the Taxpayer voluntarily resigned.

The Taxpayer's contract of employment (the Contract) states that the Employer may elect to pay the employee notice in lieu if they do not require them to work during the twelve week notice period.

The Taxpayer's date of birth is aged less than XX years.

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)

Reasons for decision

Detailed reasoning

Genuine redundancy

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 genuine redundancy payment is so much of a payment that:

a.    is received by an employee who is dismissed from employment because the employee's position is genuinely redundant; and

b.    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 payment must also satisfy the conditions outlined within subsections 83-175(2) and (3) of the ITAA 1997 and must not be excluded by subsection 83-175(4) of the ITAA 1997 to qualify as a genuine redundancy payment.

Payment is received by an employee dismissed from their employment because their position has been made genuinely redundant

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: employment 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 use the term 'in consequence of' in the same manner.

At 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.

In this case, the Taxpayer's employment was terminated due to redundancy, and, as a result of the termination, the Taxpayer was paid an employment termination payment that included payment in lieu of notice, severance payment, and payments for unused annual leave and long service leave. But for her termination, this payment would not have been made.

Therefore, we consider that the redundancy payment, including the payment in lieu of notice, was paid to the Taxpayer 'in consequence of' the termination of her employment with the Employer.

Dismissal caused by 'redundancy'

The terms 'dismissal' and 'redundancy' are also not defined in the ITAA 1997. Therefore, consistent with the basic principles of statutory interpretation, their meaning must be determined according to the ordinary meaning of the words, having regard to the context in which they appear.

The Commissioner's view, as stated in paragraphs 18 and 25 of TR 2009/2 is that:

18. Dismissal is a particular mode of employment termination. It requires 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.

25. An employee's position is redundant when an employer determines that it is superfluous to the employer's needs and the employer does not want the position to be occupied by anyone. Accordingly, it is fundamentally the employer's decision that a position is redundant. On occasion the decision may be unavoidable due to the circumstances surrounding the employer's operations.

No alternative positions were made available for the Taxpayer and the Taxpayer has not commenced work with the same Employer or any of its related entities since the position was made redundant and the Taxpayer was dismissed.

'Genuine' redundancy

The need for an employee's position to be genuinely redundant establishes that contrived cases of redundancy will not meet the conditions in section 83-175 of the ITAA 1997. Whether a redundancy is 'genuine' is determined on an objective basis.

The fact that an employer and employee have an understanding that a payment on termination is caused by redundancy or that the employer treats the payment as a redundancy payment for tax purposes does not of itself establish genuine redundancy.

In this case, it is clear that the Taxpayer's redundancy was not contrived and that the redundancy was genuine.

Payment must exceed the amount that would reasonably expected to be received had the employee voluntary terminated their employment

Subsection 83-175(1) of the ITAA 1997 also requires that the payment received by the Taxpayer must exceed the amount that could reasonably be expected to have been received by the Taxpayer had the Taxpayer voluntarily terminated the employment at the time of the dismissal.

In this case, the Contract states that the Taxpayer's employment may be terminated by either party by providing twelve weeks notice, or by the Employer paying the Taxpayer an amount equal to the salary in lieu of notice for that period.

The Taxpayer could have reasonably expected to have been paid this amount had the Taxpayer voluntarily terminated the employment at the time of the dismissal if the Employer did not require the Taxpayer to work the notice period.

Accordingly, the payment in lieu of notice does not form part of a genuine redundancy payment as defined in section 83-175 of the ITAA 1997 because it relates to amounts that would have been received by the Taxpayer had the taxpayer voluntarily terminated the employment at the time of the dismissal.

Consequently, the payment in lieu of notice is assessable income and should be taxed as an employment termination payment.