Edited version of private advice

Authorisation Number: 1051904560704

Date of advice: 22 October 2021

Ruling

Subject: Genuine redundancy

Question 1

Is the termination payment, you received under a deed of release (the Deed), an employment termination payment (ETP) in accordance with section 82-130 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Question 2

Is the termination payment, you received under the Deed, a genuine redundancy payment in accordance with section 83-175 of the ITAA 1997.

Answers

1.            Yes

2.            No

This ruling applies for the following period:

Income year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

During the 19XX-XX income year, you commenced employment with your Employer.

The last written employment contract signed by you with the Employer was during the 19XX-XX income year.

You were given notice that your role was made redundant and that, absent redeployment, your employment would end at a specified date in the 20XX-XX income year.

However, prior the redundancy was finalised you were offered and accepted a number of short-term employment contracts and continued your employment until your employment was ultimately terminated by your Employer early in the 20XX-XX income year.

On specified date, your Employer notified you that your employment would end on that day and that you would receive a payment in lieu of notice equal to X weeks' remuneration plus payments for accrued unused annual leave and long service leave. These payments were not taxed as a genuine redundancy.

If you had resigned voluntarily, you would have been entitled to payment in lieu of notice and accrued unused annual leave and long service leave.

Following the termination of your employment, you claimed your Employer had not paid you the redundancy termination pay due to you under your employment contract you had with this Employer.

Accordingly, you and your employer entered into a settlement that was resolved when you and the Employer signed a deed of release which provided for an additional payment to resolve your claim in relation to breach of employment contract.

The settlement payment that was paid to you was treated by your Employer as an employer termination payment and not as a genuine redundancy.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 82-130

Income Tax Assessment Act 1997 section83-175.

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

Income Tax Assessment Act 1997 subsection 83-175(2).

Income Tax Assessment Act 1997 paragraph 83-175(2)(c).

Reasons for decision

Summary

The termination payment you received from your Employer under the deed of release (the Deed), is an ETP as this payment doesn't meet condition of genuine redundancy payment imposed under paragraph 83-175(2)(c) of the ITAA 1997.

Detailed reasoning

A person's assessable income consists of ordinary income and statutory income. An amount is statutory income if it is not ordinary income and is included in assessable income by a provision of the Income Tax Assessment Act 1936 or the ITAA 1997.

Employment termination payment

A payment is an ETP if it satisfies all the requirements in section 82-130 of ITAA 1997 and is not specifically excluded under section 82-135 of the ITAA 1997.

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

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 the termination (but see subsection (4)); and

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

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) sets out the Commissioner's views on when a payment is made 'in consequence of' termination of employment. Paragraphs 5 and 6 of TR 2003/13 state:

5. ...the Commissioner considers that a payment is received by a taxpayer in consequence of the termination of the taxpayer's employment 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 received by the taxpayer.

6.The phrase requires a causal connection between the termination and the payment, although the termination need not be the dominant cause of the payment.

As outlined in the facts and as per the terms of the Deed, the settlement amount represents a termination payment you received to resolve the Claim in relation to breach of contract. This payment was paid to you in full as a final settlement of all claims with no admission of liability.

This payment was made 'in consequence of' the termination of your employment. There is a causal connection between your termination and the payment. In other words, but for the termination of your employment, this payment would not have been made to you.

Therefore, this payment was made in consequence of the termination of employment as defined in subparagraph 82-130(1)(a)(i) of the ITAA 1997.

This amount was paid to you within 12 months of your termination, thereby satisfying paragraph 82-130(1)(b) of the ITAA 1997.

Accordingly, consideration needs to be given if this payment is specifically excluded under section 82-135 of the ITAA 1997 (thereby not satisfying paragraph 82-130(1)(c)).

Section 82-135 of the ITAA 1997 provides that certain payments are not employer termination payments. Paragraph 82-135(c) of the ITAA 1997 excludes from ETP the part of a genuine redundancy payment worked out under section 83-170 of the ITAA 1997.

Genuine redundancy payments

Subsection 83-175(1) of the ITAA 1997 provides basic requirement for genuine redundancy.

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 genuine redundancy under section 83 175 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.

Paragraph 33 of the TR 2009/2 states that in addition to the basic requirements found in subsection 83-175(1) of the ITAA 1997 there are further conditions for genuine redundancy payment treatment listed in subsections 83-175(2) and (3) of the ITAA 1997. These are:

•                     the dismissed employee is not older than specified age limits (paragraphs 34 and 35 of this Ruling)

•                     the termination is not at the end of a fixed period of employment (paragraphs 36 to 39 of this Ruling)

•                     the actual amount paid is not greater than the amount that could reasonably be expected had the parties been dealing at arm's length, in the event that the employer and employee are in fact not dealing at arm's length in relation to the dismissal (paragraphs 40 to 49 of this Ruling);

•                     there is no arrangement entered into between the employer and the employee or the employer and another entity to employ the dismissed employee after the termination (paragraphs 50 to 52 of this Ruling); and

•                     the payment is not in lieu of superannuation benefits (paragraphs 53 and 54 of this Ruling).

Paragraphs 50 and 51 of TR 2009/2 discuss the requirement listed under paragraph 83-175(2)(c) of the ITAA 1997. These paragraphs state:

50. Under paragraph 83-175(2)(c), an arrangement to employ an employee after his or her termination prevents a dismissal giving rise to a genuine redundancy payment if that arrangement is entered into between either:

•                    the employer and the dismissed employee; or

•                    the employer and another entity.

51. In the second of these two cases, the other entity would commonly be the new employer, although this need not necessarily be the case. For instance, there could be an arrangement between a subsidiary company, the employer, and a holding company, the other entity, to employ the terminating employee in another subsidiary company within the group.

Paragraphs 306 to 309 of TR 2009/2 further state:

306.Under paragraph 83-175(2)(c), an arrangement to employ an employee after his or her termination may prevent a dismissal giving rise to a genuine redundancy payment. An arrangement in this context is defined widely:

arrangement means any arrangement, agreement, understanding, promise or undertaking, whether express or implied, and whether or not enforceable (or intended to be enforceable) by legal proceedings.

307. In the Commissioner's view, the phrase 'arrangement...to employ' is confined to common law employment relationships. The apparent purpose of paragraph 83-175(2)(c) is to limit access to concessional tax treatment where an employee is terminated but is certain of continuing remuneration in the future under a common law employment contract because of an arrangement to which the employer is a party. (emphasis added)

308. For the condition in paragraph 83-175(2)(c) to fail, it is necessary for the employment arrangement to be entered into between either:

•                    the employer and the employee; or

•                    the employer and another entity.

309.Accordingly, if the employee has independently entered into an arrangement with another entity for that entity to employ him or her after the time of the dismissal from the original employer, the condition in paragraph 83-175(2)(c) will still be met. On the other hand, given the breadth of the meaning of 'arrangement', an implied understanding between two related companies at the time of an employee's dismissal with one of those companies to the effect that the employee will be employed at a later time with the other is sufficient for this condition not to be met.

Based on the information you provided, you were offered and accepted number of short-term employment contracts prior and after your position was made redundant at a specified date in the 20XX-XX income year. For this reason, the termination payment doesn't meet the requirement of genuine redundancy payment imposed under paragraph 83-175(2)(c) of the ITAA 1997.

Consequently, the termination payment your received from your Employer under the provided Deed, is an ETP as it meets all requirements imposed under subsection 82-130(1) of the ITAA 1997.

Conclusion

The termination payment you received from your Employer under the provided Deed, is an ETP as this payment doesn't meet condition of genuine redundancy payment imposed under paragraph 83-175(2)(c) of the ITAA 1997.