Edited version of private advice

Authorisation Number: 1051862156657

Date of advice: 15 July 2021

Ruling

Subject: Genuine redundancy payment

Question

Is any part of the payment made under a Deed of Release (the Deed), a genuine redundancy payment pursuant to section 83-175 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No

This ruling applies for the following period:

30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

1.            The Taxpayer commenced an international assignment (the Assignment) with their former employer (the Company).

2.            The Assignment that was for a specified period was sebquently extended.

3.            In accordance with the Taxpayer's, he/she were to return to work for the Company in Australia upon the end of the Assignment.

4.            When the Assignment ended , the Company was unable to locate a suitable postion in Australia for the Taxpayer their employment was subsequently terminated.

5.            The Taxpayer commenced a legal action agains the Company.

6.            The Taxpayer signed a Deed with the Company.

7.            The Deed states that in exchange of releasing the Company from all claims whatsoever, the Company will pay the Taxpayer an amount to a nominated bank account.

8.            The agreed payment was made by the Company as an employment termination payment.

9.            Prior the termination the Taxpayer held an executive position with the Company. No evidence had been provided to support the Taxpayer's claim that this position no longer exists within the Company.

Relevant legislative provisions

Income Tax Assessment Act 1997 paragraph 82-135(e).

Income Tax Assessment Act 1997 section 83-175.

Income Tax Assessment Act 1997 subsection 83-175(1).

Income Tax Assessment Act 1997 section 995-1.

Reasons for decision

Summary

10.         No part of the payment made to the Taxpayer under the Deed is excluded from being an employment termination payment (ETP) as not all the conditions of genuine redundancy payment have been satisfied.

Detailed reasoning

11.         A payment made to an employee is a genuine redundancy payment if it satisfies all criteria set out in section 83-175 of the Income Tax Assessment Act 1997 (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 arms length - the payment does not exceed the amount that could reasonably be expected to be made if the dismissal were at arms 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)).

12.         Section 82-135 of the ITAA 1997 lists payments that are not ETPs. 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 ETP.

Dismissal and redundancy

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

(a) a dismissal; and

(b) a genuine redundancy.

14.         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.

15.         The Explanatory Memorandum to the Income Tax Assessment Amendment Act (No.3) 1984, which inserted former section 27F into the ITAA 1936 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.

16.         The Commissioner has issued Taxation Ruling TR 2009/2, titled Income Tax: genuine redundancy payments. This Ruling provides guidance on the factors to be considered in the interpretation of section 83-175 of the ITAA 1997.

17.         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 an employee's 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.

18.         Each of the requirements will be discussed individually.

The payment is in consequence of the termination of employment

19.         In this case, it is clear from the contents of the Deed that the payment was received in consequence of the termination of the Taxpayer's employment. Therefore, the requirement in subsection 83-175(1) of the ITAA 1997 that the payment is in consequence the termination of the Taxpayer's employment, is satisfied.

Dismissal from employment

20.         Dismissal requires a termination of employment at the initiative of the employer without the consent of the employee.

21.         In this case, the Taxpayer's employment with the Company was terminated without their consent.

22.         Consequently, the second requirement of a genuine redundancy has been also met.

Dismissal caused by redundancy

23.         Section 83-175 of the ITAA 1997 requires that the dismissal be caused by redundancy of the employee's position and not for some other reason.

24.         At paragraph 25 of TR 2009/2, the Commissioner makes the following comments regarding dismissal caused by 'redundancy':

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 of the employer's operations. (emphasis added)

25.         The Commissioner expands on this issue of determining the cause of dismissal at paragraphs 268 to 273 of TR 2009/2:

268. There are various reasons why an employee may be dismissed from employment. Redundancy may be only one of these reasons.

269. In circumstances where more than one reason can be identified for the dismissal, the Commissioner considers that redundancy must be the prevailing or most influential cause of the dismissal. This question is to be answered in light of the facts and circumstances of each case.

270. The classic context for redundancy is the closure, downsizing or reorganisation of part or all of the employer's operations. Redundancy can readily be established as the prevailing or most influential cause of dismissal in the first two of these scenarios.

26.         In this case, the Taxpayer contend that their former position with the Company has been abolished. However, the Taxpayer did not provide any documentary evidence that would support this contention.

27.         The Deed and the payment summary issued to the Taxpayer state that the payment in question is an 'ETP'.

28.         As noted previously, the income tax legislation concerns itself with the redundancy of the position and not the redundancy of the person occupying the position.

29.         The provided information supports that whilst the Taxpayer's services were no longer required, the position he/she formerly occupied is still needed. No evidence had been provided that the position of an executive officer within the Company has been abolished.

30.         Therefore, it can only be concluded that the Taxpayer's employment was terminated for reasons other than redundancy.

31.         As a result, the third requirement that requires for the dismissal to be mainly due to the redundancy of the Taxpayer's position, had not been satisfied.

The redundancy payment must be made genuinely because of a redundancy

32.         Whether a redundancy is 'genuine' or contrived is determined on objective basis. As the Taxpayer's did not satisfy the previous requirement, there is no need for us to consider whether the Taxpayer's redundancy was 'genuine' or contrived.

Conclusion

33.         As previously explained, 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. As the payment that was made to the Taxpayer did not satisfy all of the criteria prescribed under subsection 82-175(1) of the ITAA 1997, it is not a genuine redundancy payment.