Edited version of private advice

Authorisation Number: 1051772752638

Date of advice: 2 November 2020

Ruling

Subject: Genuine redundancy

Question 1

Is any part of the payment to be paid to the Employee as a redundancy payment an employment termination payment (ETP) under subparagraph 82-130(1)(a)(i) of the Income Tax Assessment Act 1997 (ITAA) because it was received "in consequence" of the termination of the Employee's employment?

Answer

No

Question 2

Is any part of the payment to be paid to the Employee as a redundancy payment the tax free part of a genuine redundancy payment under section 83-175 of 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

You have advised that the Employee has two separate contracted positions within the Employer

The following Position Descriptions have been provided for the two contracted positions held by the Employee:

a.    Position 1 in Unit 1 of the Employer. The position is permanent part time and covered the Award

b.    Position 2 in Unit 2 of the Employer. The position is permanent part-time and covered by the Award

The two positions are completer separate and managed separately both with completely different managers and teams.

The positions both commenced at different times and were advertised separately as part time positions within the organisation and they are also paid at two separate bands.

Going forward Position 2 is being made redundant as is the whole Unit 2.

You contend this should be treated as a genuine redundancy the same as the rest of the Unit 2 unit being that Position 2 is being made redundant.

You further contend that Position 2 has nothing to do with Position 1 and it is your understanding that the second position should not be taken into account as the Employee is not being redeployed.

You have provided a copy of a redundancy calculation showing the amount that the Employee would receive upon Position 2 being made redundant.

A copy of the Award has been provided that sets out the employment conditions for the Employee.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 82-135.

Income Tax Assessment Act 1997 Section 82-10.

Income Tax Assessment Act 1997 Section 82-130.

Income Tax Assessment Act 1997 Subsection 82-130(1).

Income Tax Assessment Act 1997 Subparagraph 82-130(1)(a)(i).

Income Tax Assessment Act 1997 Subparagraph 82-130(1)(b).

Income Tax Assessment Act 1997 Subparagraph 82-130(1)(c).

Summary

No part of the payment that will be made to the Employee by the Employer upon Position 2 being made redundant is an employment termination payment nor it is a genuine redundancy payment. This is because the Employee's employment has not been terminated as they have retained one of their positions, Position 1, with the Employer.

Detailed reasoning

Employment termination payment

Section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997) states that:

employment termination payment has the meaning given by section 82-130 of the ITAA 1997.

Subsection 82-130(1) of the ITAA 1997 states that:

A payment is an employment termination payment 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.

Section 82-135 of the ITAA 1997 provides that certain payments are not employment termination payments, including:

•         a payment for unused annual leave or unused long service leave;

•         the tax-free part of a genuine redundancy payment or an early retirement scheme payment.

To determine if a payment constitutes an employment termination payment, all the conditions in section 82-130 of the ITAA 1997 must be satisfied.

Failure to satisfy any of the conditions under subsection 82-130(1) of the ITAA 1997 will result in the payment not being considered an employment termination payment. Furthermore, any termination payments received outside of the 12 months will be taxed as ordinary income at marginal tax rates, unless the taxpayer is covered by a determination exempting them from the 12 month rule.

Paid as a consequence of the termination of your employment

For a payment to be treated as an employment termination payment, the first condition that needs to be met is that there must be a payment that is made in consequence of the termination of employment of the taxpayer (see subparagraph 82-130(1)(a)(i) of the ITAA 1997).

In this case, a redundancy payment will be made in consequence of the abolishment of the Employee's Position 2.

However, a key fact of this case is that the Employee will retain one employment position, Position 1 with the Employer at the same time as the Employee's other position, Position 2 will be abolished,

The critical issue for determining if the redundancy payment is an employment termination payment is whether or not the Employee's employment was terminated in accordance with section 82-130 of the ITAA 1997.

We do not consider the facts of this case to be sufficiently different for Taxation Ruling TR 2009/2 to not apply. Our view that the redundancy payment is not an employment termination payment is consistent with the view set out in TR 2009/2.

Our view is also consistent with the overarching legislative scheme of Part 2-40 of Chapter 2 of the ITAA 1997 that seeks to deal cohesively with all payments made in consequence of the termination of a person's common law employment. This legislative scheme means that while TR 2009/2 is concerned with genuine redundancy payments, the views expressed in the Ruling with respect to the concept of 'termination of employment' apply equally in the context of employment termination payments. In this regard, paragraph 235 of TR 2009/2 states:

It is the Commissioner's view that a payment must be in consequence of termination ... before any part of that payment can be treated as a genuine redundancy payment.

Paragraph 240 of TR 2009/2 further provides:

... As it may transpire that part of a genuine redundancy payment is an ETP [employment termination payment], the whole of the redundancy payment must have been in consequence of termination. [bracketed term included]

Broadly speaking, treatment as an employment termination payment is the default for payments made in consequence of the termination of employment under Part 2-40 of Chapter 2 of the ITAA 1997. Although separately defined from an employment termination payment, the Commissioner's view expressed at paragraph 232 of TR 2009/2 is that a genuine redundancy payment is an employment termination payment unless and to the extent that it is tax-free. That is, a genuine redundancy payment is a special type of eligible termination payment with the requisite purpose and features. This view is consistent with the note to section 83-170 of the ITAA 1997.

As paragraph 16 (and paragraph 241) of TR 2009/2 provides, the loss of a particular position with an employer is not a dismissal (a particular type of termination of employment) for the purposes of subsection 83-175(1) of the ITAA 1997 unless all employment with the employer is severed. The only exception to this is the case of a dual capacity employee who holds an office with the employer at the same time as having a common law employment relationship. This exception arises because of the operation of section 80-5 as explained in TR 2009/2. This exception does not apply if the person is employed only in the capacity of a common law employee.

Examples 13 and 14 of TR 2009/2 are synonymous with the facts of this case and illustrate that the loss of a particular position with an employer is not a dismissal or termination unless all employment with the employer is terminated:

Example 13 - Business acquisition leading to redundancy, constructive dismissal

161. Dave Dolphin works as the Sales Manager for the Big Fish Company (Big Fish) which sells swimwear.

162. Big Fish acquires Plankton Pty Ltd (Plankton), a company that sells leisure clothing. As part of the acquisition, Big Fish employs Plankton's Sales Manager, Marion Minky. Marion assumes the role of Sales Manager in respect of all of Big Fish's expanded operations. Dave is offered a role as a swimwear sales representative for a particular district. This offer involves a considerable pay cut. As Dave sees his experience is better suited to the management of a team of salespeople rather than in front line sales, he decides to resign.

163. While Dave may have the skills to do the job he is offered, the job has significantly different duties and functions to that he performed previously. Accordingly, the synergies created by the acquisition of Plankton make Dave's former position redundant.

164. Therefore, a termination payment received by Dave in these circumstances may be characterised as a genuine redundancy payment on the basis that Dave was constructively dismissed due to redundancy.

Example 14 - Business acquisition, acceptance of demotion

165. Assume the same facts as Example 13, except Dave chooses to accept the swimwear sales representative position together with a lump sum payment to compensate him for the loss of his Sales Manager position.

166. In these circumstances, Dave's employment with Big Fish is not terminated. Therefore, the lump sum payment cannot be characterised as a genuine redundancy payment.

Unless all employment with the employer is terminated there cannot be an employment termination payment.

Genuine redundancy payment

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

This section states:

(1) A genuine redundancy payment is so much of a payment received by an employee who is dismissed from employment because the employees position is genuinely redundant as exceeds the amount that could reasonably be expected to be received by the employee in consequence of the voluntary termination of his or her employment at the time of dismissal.

(2) A genuine redundancy payment must satisfy the following conditions:

(a) the employee is dismissed before the earlier of the following:

(i) the day he or she turned 65;

(ii) if the employees employment would have terminated when he or she reached a particular age or completed a particular period of service the day he or she would reach the age or complete the period of service (as the case may be);

(b) if the dismissal was not at arm's length the payment does not exceed the amount that could reasonably be expected to be made if the dismissal were at arm's length;

(c) at the time of the dismissal, there was no arrangement between the employee and the employer, or between the employer and another person, to employ the employee after dismissal.

(3) However, a genuine redundancy payment does not include any part of a payment that was received by the employee in lieu of superannuation benefits to which the employee may have become entitled at the time the payment was received or at a later time.

Payments not covered

(4) A payment is not a genuine redundancy payment if it is a payment mentioned in section 82-135 (apart from paragraph 82-135(e)).

Section 82-135 of the ITAA 1997 lists payments that are not employment termination payments. Paragraph 82-135(e) of the ITAA 1997 provides that the part of a genuine redundancy payment worked out under section 83-170 of the ITAA 1997 is not an employment termination payment.

Dismissal and redundancy

A genuine redundancy payment is defined under subsection 83-175(1) of the ITAA 1997 as a payment resulting from both:

(a)  a dismissal; and

(b)  a genuine redundancy.

The terms 'dismissal' and 'redundancy' are not defined in the ITAA 1997. Therefore, it is necessary to consider the ordinary meaning of the terms and the meaning the courts have ascribed to each word.

The Explanatory Memorandum to the Income Tax Assessment Amendment Act (No.3) 1984,which inserted former section 27F of the Income Tax Assessment Act 1936 (ITAA 1936), the predecessor to section 83-175 of the ITAA 1997, states at page 91:

The terms "dismissal" and "redundancy" are not defined in the legislation and, therefore, should be given their ordinary meanings. "Dismissal" carries with it the concept of the involuntary (on the taxpayer's part) termination of employment. "Redundancy" carries the concept that the requirements of the employer for employees to carry out work of a particular kind, or for employees to carry out work of a particular kind in the place where they were so employed, have ceased or diminished or are expected to cease or diminish. Redundancy, however, would not extend to the dismissal of an employee for personal or disciplinary reasons or for reasons that the employee was inefficient. [bold emphasis added]

As noted above, the Commissioner has issued TR 2009/2 which provides guidance on the factors to be considered in the interpretation of section 83-175 of the ITAA 1997.

Paragraph 11 of TR 2009/2 states:

There are four components within the basis genuine redundancy requirement:

•         The payment must be received in consequence of a termination.

•         The termination must involve an employee being dismissed from employment.

•         The dismissal must be caused by the redundancy of the employee's position.

•         The redundancy payment must be made genuinely because of a redundancy.

•         The payment is in consequence of the termination of employment.

As noted previously, it has been determined that the payment will not be received in consequence of the termination of the Employee's employment. Therefore, the requirement in subsection 83-175(1) of the ITAA 1997 that the payment is in consequence of your Employee's termination of employment has not be satisfied. Accordingly, the redundancy payment cannot be classified as a genuine redundancy payment.

Conclusion

It is considered that no part of the payment to the Employee for the termination of Position 2 constitutes an employment termination payment or a genuine redundancy payment within the meaning of the ITAA 1997.

Therefore, the total payment of would have to be included in the Employee's assessable income as gross payments for the 20XX-20XX income year.