Edited version of private advice

Authorisation Number: 1051800255359

Date of advice: 22 February 2021

Ruling

Subject: Employment termination payments

Question 1

Is the redundancy payment made to an individual (the Taxpayer) a company (the Employer) a genuine redundancy payment?

Answer

Yes

Question 2

Is the payment of Notice in-lieu made to the Taxpayer by the Employer a genuine redundancy payment?

Answer

Yes

Question 3

Is the amount over the threshold taxable?

Answer

Yes

This ruling applies for the following period:

Income year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

In the 20XX-XX income year, the Taxpayer commenced employment with the Employer.

Subsequently,the Taxpayer received a letter from the Employer stating that the Employer was being acquired by another company (the Purchasing Company). Consequently, the Taxpayer's employment would be terminated.

However, the Employer noted that the Purchasing Company would be making offers of employment and they expected that the Taxpayer would receive an offer of employment.

The Taxpayer received an email from the Purchasing Company notifying the Taxpayer that their application for a position of employment was unsuccessful.

The Taxpayer received a lump sum termination payment which included the following:

•         redundancy payment; and

•         payment in lieu of notice.

The payment was calculated in accordance with the provisions of the Fair Work Act 2009.

The Taxpayer is aged less than 65 years old.

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

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)

Taxation Administration Act 1953, subsection 359-5(1).

Taxation Administration Act 1953, subsection 357-110(1)

Reasons for decision

Questions 1 and 2

Summary

The lump sum received by the Taxpayer, consisting of the redundancy payment and payment for notice in lieu, is 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, the Taxpayer's employment was terminated because the Employer was being acquired by the Purchasing Company and the Taxpayer's position would no longer exist. While the Employer expected that the new company would make offers of employment, there was no guarantee that the Taxpayer would receive an offer. Had the Taxpayer's employment not been terminated, they would not have received the redundancy payment or the payment for notice in lieu.

'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...

It is clear from the facts that the Taxpayer did not resign voluntarily from their employment. Rather, their employment was terminated because the position they occupied was no longer needed as the Employer was selling their business.

However, while it is accepted that the Taxpayer was dismissed from their employment because their position was genuinely redundant, subsection 83-175(1) of the ITAA 1997 also requires that the payment received in consequence of redundancy exceed the amount that they would have received had they voluntarily resigned from their employment.

In this case, the redundancy payment was made in accordance with the provisions of the Fair Work Act 2009 (FWA).

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

Subparagraph 119(1)(a) of the FWA states that an employee is entitled to be paid redundancy pay by the employer if the employee's employment is terminated at the employer's initiative because the employer no longer requires the job done by the employee to be done by anyone

Subsection 119(2) of the FWA sets out the redundancy pay period for employees based on their years of service.

Under the FWA, a redundancy payment can only be made when an employee's position has been made redundant.

The Agreement states that if the Employer terminates the employment of an employee then they can elect to pay notice in lieu, which has happened in this instance.

Consequently, both the redundancy payment of $11,538.46 and the payment of $4,615.38 for notice in lieu are both considered to be 'in consequence' of the termination of the Taxpayer's employment..

'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...

In this instance, it is clear that the Taxpayer did not voluntarily resign, rather their employment was terminated because the position that the Taxpayer occupied would no longer exist due to the acquisition of the Employer's assets by another company.

Further conditions for a genuine redundancy payment

In addition to the basic requirements for a genuine redundancy payment found in subsection 83-175(1) of the ITAA 1997, subsections 83-175(2) and (3) of the ITAA 1997 set out further criteria that must be satisfied before a payment can be treated as a genuine redundancy payment as follows:

•         the payment must be made before a person turns 65 or an earlier mandatory age;

•         the termination is not at the end of a fixed period of employment;

•         the actual amount that was paid is not greater than the amount that could reasonably be expected to be paid had the parties been dealing at arm's length;

•         there was no arrangement for re-employment with the employer or a related party after the termination date; and

•         the payment was not in lieu of superannuation benefits.

On the basis of the information provided, it is considered that all the conditions of subsections 83-175(2) and 83-175(3) are also satisfied.

Questions 3

Summary

In this case, a part of the total amount of the redundancy pay and the payment for notice in lieu is not assessable income and not exempt income. That is, it is tax-free.

The remainder of the GRP is an employment termination payment (ETP), which is taxed at concessional rates.

Detailed Reasoning

Tax treatment of a genuine redundancy payment

Subsection 83-170(2) of the ITAA 1997 provides that so much of the GRP that does not exceed the amount worked out using the formula prescribed in subsection 83-170(3) is non-assessable, non-exempt income. Any amount in excess of the tax-free amount is taxed as an employment termination payment (ETP). The formula for working out the tax-free amount is:

Base amount + (Service amount × Years of service)

For the 20XX-XX income year:

Base amount is $XXXX

Service amount is $XXX and

Years of service is the number of whole years in the period, or sum of periods, of employment to which the payment relates.

The Taxpayer's employment equated to one whole year of service to which the GRP relates.

Accordingly, under subsection 83-175(3) of the ITAA, the tax-free part of the Taxpayer's GRP is:

$XXXX + ($XXX × 1) = $XXXX

Only part of the relevant payment in this case is below the tax-free amount of a GRP. Therefore, only that part of the payment is not assessable income and is not exempt income under subsection 83-170(2) of the ITAA 1997.

The remaining amount is an ETP and is included in the Taxpayer's assessable income for the 201XX-XX income year.

This amount is referred to as the taxable component of the ETP. As this is paid in relation to a genuine redundancy, it is subject to the ETP cap.

The ETP cap for the 20XX-XX income years is $XXXX. Therefore, the amount in excess of the tax-free component of the Taxpayer's GRP is to be taxed at a minimum rate of 32% (including Medicare levy).