Edited version of private advice

Authorisation Number: 1051589704920

Date of advice: 9 October 2019

Ruling

Subject: Genuine redundancy payments

Question

Is any part of the payment you received on the termination of your 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:

Income year ended 30 June 2020

The scheme commences on:

1 July 2019

Relevant facts and circumstances

More than 10 years ago, you commenced employment with an Entity (the Employer) as a Customer Service Representative.

In 201X, you suffered a psychological injury arising in the course of your employment.

Your claim for compensation under state legislation (the Act) was accepted by an agent (the Agent) for the Return to Work Corporation.

You received income support payments from the Agent. You have not returned to any form of work with the Employer.

You sought a return to work with the Employer under the Act, by filing an application in the Employment Tribunal (the Tribunal) 2019 (the Claim).

You separately disputed a rejection by the Agent to provide a return to work plan. This dispute has been settlement in principle between you, the Employer and the Agent.

The Employer filed a Notice of Desire to be Heard with the Tribunal with respect to both actions, and became a party to the proceedings.

You and the Employer agreed to settle the Claim on the terms of the Release and Discharge Agreement (the Agreement) which provides, in part, that:

(a)   You and the Employer agree that it is not, and will not be, reasonably practicable for you to return to work at the Employer's workplace. Your position is redundant.

(b)   Your employment with the Employer terminates on the date that the Agreement is signed by you.

(c)   In return for receiving the Payment, you will release absolutely and discharge the Employer and its related entities from all claims, actions, suits, causes of action, demands, liability, damages costs arising in any way concerning or in the course of your employment with the Employer or its termination that you have now and may have in the future if the Agreement had not been executed.

The Payment has not yet been made.

You have advised that there is presently a reduction in the required number of workers which has contributed to your redundancy.

You are aged less than 65 years.

Relevant legislative provisions

Income Tax Assessment Act 1997, section 82-135.

Income Tax Assessment Act 1997, section 83-170(2).

Income Tax Assessment Act 1997, section 83-170(3).

Income Tax Assessment Act 1997, section 83-175

Reasons for decision

Summary

The payment that you will receive on the termination of your employment is not a genuine redundancy payment (GRP) as defined in section 83-175 of the ITAA 1997.

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 at the time of dismissal.

The Commissioner of Taxation has issued Taxation Ruling TR 2009/2 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 in accordance with 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:

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 instance, to settle your Claim, your employment is to terminate on a specified date. The Payment is to be made within 14 days of the termination date.

Although the dominant cause of the Payment is to settle the Claim, there is a causal connection between the termination of your employment and the Payment. In this case, the termination is a pre-condition for the Payment.

Based on the Commissioner's views expressed in TR 2003/13, there is, in this case, a clear connection between the termination of the Taxpayer's employment and the Payment. That is, but for the termination, the Payment would not be paid to you.

Consequently, the Payment is to be made 'in consequence of' the termination of the Taxpayer's employment with the Employer.

'Dismissal' and 'redundancy'

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...

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...

Under the Act if a worker, who has been incapacitated for work in consequence of a workplace injury, is able to return to work, the employer from whose employment the injury arose must provide suitable employment for the worker.

However, this does not apply if it is not reasonably practicable to provide employment.

The Agreement between you and the Employer states that it is agreed that is not reasonably practicable for you to return to work and that your position is redundant.

Paragraph 32 of the TR 2009/2 states:

32. The fact that an employer and an 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.

While the Agreement states that your position is redundant, it does not appear that the prevailing or most influential reason for the termination of your employment was that your position was superfluous to the Employer's needs. The Employer did not unilaterally decide that your position was superfluous to their business needs. Rather, the prevailing or most influential reason for the termination of your employment was to settle the Claim between you, the Employer and the Agent in relation to a return to work plan.

Consequently, your position is not considered to be genuinely redundant and the Payment is not considered to be a GRP.

Employment termination payments

Division 82 of the ITAA 1997 sets out how ETP are treated for income tax purposes.

In accordance with section 82-130 of the ITAA 1997, a payment is ETP if:

(a) it is received by you:

(i) in consequence of the termination of your employment; or

(ii) after another person's death, in consequence of the termination of the other person's employment; and

(b) it is received no later than 12 months after that termination (but see subsection (4)); and

(c) it is not a payment mentioned in section 82-135.

As discussed above, it is considered that the Payment is to be received by your in consequence of the termination of your employment.

Provided that the Payment is received by you within 12 months of that termination, subparagraph 82-130(b) will be satisfied.

Additionally, the Payment is not a payment mentioned in section 82-135 of the ITAA 1997. Therefore, the Payment is an ETP pursuant to section 82-130 of the ITAA 1997.

Taxation of employment termination payments

An ETP made may be comprised of the following components:

·        the tax fee component; and

·        the taxable component

Subsection 82-10(1) of the ITAA 1997, states that the 'tax free component' of a life benefit termination payment is not assessable income and is not exempt income.

Tax free component is defined in section 82-140 of the ITAA 1997 as so much of the ETP as consists of the following:

a.     the invalidity segment of the payment with the meaning of section 82-150 of the ITAA 1997;

b.     the pre-July 83 segment of the payment within the meaning of section 82-155 of the ITAA 1997.

Under section 82-150 an employment termination payment includes an invalidity segment if:

(a)   The payment was made to a person because they stopped being gainfully employed; and

(b)   The person stopped being gainfully employed because he or she suffered from ill-health (whether physical or mental); and

(c)   The gainful employment stopped before the person's last retirement day; and

(d)   Two legally qualified medical practitioners have certified that, because of the ill health, it is unlikely that the person can ever be gainfully employed in a capacity for which he or she is reasonably qualified because of education, experience or training.

Taxable component

Pursuant to section 82-10(2) of the ITAA 1997, the taxable component of a life benefit ETP is assessable income.

In accordance with section 82-145 of the ITAA 1997, the taxable component of an ETP is the amount remaining after deducting the tax free component from the total payment.

For recipients below preservation age, the taxable component of an ETP is taxed at 30% for amounts below the ETP cap amount ($200,000 for the 2017-18 income year), and at the top marginal rate for amounts above the cap (subsection 82-10(3) of the ITAA 1997).

Preservation age for persons born after 30 June 1964 is 60 years (subregulation 6.01(2) of the Superannuation Industry (Supervision) Regulations 1994.