Edited version of private advice

Authorisation Number: 1051920633544

Date of advice: 9 December 2021

Ruling

Subject: Genuine redundancy payment

Question 1

Is any part of the payment in lieu of notice made to you on the termination of your employment a tax-free part of a genuine redundancy payment under section 83-170 of the Income Tax Assessment Act 1997? (ITAA 1997)

Answer

No.

Question 2

Is the lump sum payment of unused annual leave you received on termination of your employment eligible for a tax offset under subsection 83-15(a)(i) of ITAA 1997?

Answer

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

•         You commenced employment with your former employer several years ago.

•         Your former employer terminated your employment.

•         You received a lump sum payment, made up of payment in lieu of notice and unused annual leave.

Relevant legislative provisions

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 paragraph 82-130(1)(b)

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

Income Tax Assessment Act 1997 section 82-135

Income Tax Assessment Act 1997 paragraph 82-135(c)

Income Tax Assessment Act 1997 section 83-10

Income Tax Assessment Act 1997 section 83-15

Income Tax Assessment Act 1997 subparagraph section 83-15(a)(i)

Income Tax Assessment Act 1997 section 83-85

Income Tax Assessment Act 1997 section 83-170

Income Tax Assessment Act 1997 subsection 83-170(2)

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

Income Tax Assessment Act 1997 subparagraph 83-175(2)(a)(ii)

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

Income Tax Assessment Act 1997 subsection 83-175(3)

Income Tax Assessment Act 1997 subsection 83-175(4)

Reasons for decision

Summary

1.   No part of the payment you received upon the termination of your employment contract constitutes a tax-free part of a genuine redundancy payment under section 83-170 of the ITAA 1997.

2.   The payment of unused annual leave you received is not eligible for a tax offset under subsection 83-15(a)(i) of the ITAA 1997.

Detailed reasoning

3.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

4.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.

5.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.

6.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.

7.The 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.

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

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

10.          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)).

Genuine redundancy payment

11.          Section 82-135 of the ITAA 1997 provides that certain payments are not employer termination payments.

12.          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.

13.The matter of what is a genuine redundancy payment is defined by section 83-175. The section identifies:

                                       •            the conditions that must be satisfied for at least part of a payment to be treated as a genuine redundancy payment;

                                       •            how to work out what amount of the payment is a genuine redundancy payment; and

                                       •            what payments are excluded from being a genuine redundancy payment

14.A payment made to an employee is a genuine redundancy payment if it satisfies all the conditions 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 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 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 employee's 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.

15.          As can be seen above, section 83-175(1) contains two elements to be satisfied for a payment to be considered a genuine redundancy payment:

                •      The payment is received by an employee who is dismissed because their position is genuinely redundant; and

                •      The payment exceeds the amount that could reasonably be expected to be received by the employee if their employment was terminated voluntarily at that time

16.  For a genuine redundancy payment to exist, both elements need to be satisfied.

17.  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.

18.  Paragraph 11 of TR 2009/2 states:

There are four necessary components within this requirement:

•         The payment 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.

Component 1: payment 'in consequence of' termination

19.  The phrase 'in consequence of' is not defined in the ITAA 1997.

20.  As outlined in TR 2003/13 above, it is considered that the payment received by you was made in consequence of the termination of your employment.

21.  You received a payment of a specified value from your employer upon the termination of your employment.

22.  There is a causal connection between the termination and the payment - but for the termination of your employment, you would not have received the payment.

23.  Component 1 is satisfied.

Component 2: 'dismissal' from employment

24.  The Commissioner's view is that a genuine redundancy can only arise where there is no suitable job available for the employee with the employer, meaning that he or she must therefore be dismissed.

25.  Dismissal requires a decision to terminate employment at the employer's initiative without the consent of the employee.

26.  Determining whether an employee has consented to their termination requires an assessment of the facts and circumstances of each case.

27.  It is clear from the language used by your employer in the correspondence provided to you that the termination of your employment was at the directive of the employer.

28.  You were not provided with a choice as to whether you wished to continue your employment.

29.  You were provided with notice from your employer that your employment would end on a specified date, determined by them.

30.  Component 2 is satisfied.

Component 3: dismissal caused by 'redundancy'

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

32.  The reason for a dismissal is to be established in light of the facts and circumstances of each case.

33.  You have advised that you were verbally told that your position was redundant.

34.  You have been provided with confirmation of this in writing.

35.  Component 3 is satisfied.

Component 4: 'genuine' redundancy

36.  Contrived cases of redundancy will not meet the conditions in section 83-175. Whether a redundancy is 'genuine' is determined on an objective basis.

37.  The fact that an employer and 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.

38.  In addition to the basic requirement for a genuine redundancy payment found in subsection 83-175(1), the further conditions for genuine redundancy payment treatment in subsections 83-175(2) and (3) require that:

•         the dismissed employee is not older than the specified age limits;

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

•         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;

•         there is no arrangement entered into between the employer and employee or the employer and another entity to employ the dismissed employee after the termination; and

•         the payment is not in lieu of superannuation benefits.

Age-based limits

39.  Under paragraph 83-175(2)(a), an employee must be less than the pension age at the time of dismissal for a redundancy payment to qualify as a genuine redundancy payment.

40.  At the time of your dismissal, you were less than the pension age (as defined in subsection 23(1) of the Social Security Act 1991).

41.  This condition is satisfied.

Not the end of a particular period of employment

42.  Under subparagraph 83-175(2)(a)(ii), a payment made at the end of a fixed period of employment cannot normally be a genuine redundancy payment.

43.  The employment contract you provided does not contain any reference to a fixed period of contract.

44.  The termination did not occur at the end of a fixed period of employment.

45.  This condition is satisfied.

Arm's length amount

46.  This condition only needs to be met if it is established that the employer and employee are not dealing at arm's length in relation to the dismissal.

47.  There is no suggestion that yourself and the employer were not dealing at arm's length. The amount of the payment you received is referenced in your employment contract.

48.  This condition does not apply.

No stipulated arrangement to employ

49.  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.

50.  There is no suggestion of any kind of agreement to employ you at a future date.

51.  This condition is satisfied.

Payments not in lieu of superannuation benefits

52.  Under subsection 83-175(3), a payment is not a genuine redundancy payment to the extent that it is made in place of superannuation benefits due at the time or in the future.

53.  You have been provided with a document detailing the amounts of superannuation benefits to be paid to you.

54.  These are separate to the payment made to you in lieu of notice.

55.  This condition is satisfied.

56.  It is considered that you received a payment due to your position being genuinely redundant:

•         you received the payment in consequence of the termination of your employment

•         you were dismissed from your employment

•         the dismissal was caused by redundancy

•         the redundancy was genuine

57.  The other requirement under subsection 83-175(1) is that the payment exceeds the amount that could reasonably be expected to be received by the employee if their employment was terminated voluntarily at that time.

58.  Paragraph 64 of the TR 2009/2 states that:

a.    A payment in lieu of notice can be a genuine redundancy paymentprovided that such a payment would not be expected on voluntary termination.

59.  Your employment contract entitled you to a payment of three months in lieu of notice.

60.  The director sent you an email confirming the employer's understanding of this entitlement.

61.  You confirmed that the payment was calculated according to the terms of your contract.

62.  As such, it cannot be a genuine redundancy payment.

63.  The payment in lieu of notice has been correctly treated as an ETP for tax purposes.

Lump sum payment for unused annual leave

64.  Any payments that receive a more specific tax treatment are excluded from being genuine redundancy payments by subsection 83-175 (4) of the ITAA 1997.

65.  This includes unused annual leave.

66.  Unused annual leave would ordinarily be included in assessable income under section 83-10 of the ITAA 1997 and subject to marginal rates of tax.

67.  However, if this payment is made in connection with a genuine redundancy payment, subparagraph 83-15(a)(i) allows a tax offset to ensure that the rate of tax on this amount does not exceed 30%.

68.  You have not received a genuine redundancy payment.

•         The payment in lieu of notice is not in excess of what you would have received upon voluntary termination, and can therefore not be a genuine redundancy payment, as per section 83-175(1) of the ITAA 1997.

•         The unused annual leave is specifically excluded from being a genuine redundancy payment under subsection 83-175(4).

69.  As the payment of your unused annual leave has not been made in connection with a genuine redundancy payment, you are not entitled to the tax offset under subparagraph 83-15(a)(i).

Conclusion

70.  The payment in lieu of notice has been correctly treated as an ETP for tax purposes.

71.  The payment of unused annual leave is subject to tax at marginal rates.