Edited version of private advice

Authorisation Number: 1051956265972

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Date of advice: 10 March 2022

Ruling

Subject: Genuine redundancy payment

Question

Is any part of the payment in lieu of notice a genuine redundancy under section 83-175 of the Income Tax assessment act 1997 (ITAA 1997)?

Answer

Yes, the total payment in lieu of notice represents a genuine redundancy payment.

This ruling applies for the following period:

Year ended 30 June 2021

The scheme commences on:

1 October 2020

Relevant facts and circumstances

•         You are below the pension age.

•         You were covered by an employment contract with the Employer. It was not a fixed term contract.

•         There is no relationship between you and the Employer.

•         The Employer provided you with a termination letter stating due to COVID-19 your position had been made redundant.

•         A clause in your employment contract states that "your employment may be terminated in writing at any time by the Employer or you giving 4 weeks' notice"

•         A clause states if notice is given by either you or the Employer, the Employer may, at its discretion "provide you with payment wholly or partly in lieu of notice (for the avoidance of any doubt, the Employer's right to make such a payment does not give you any right to demand such a payment)".

•         On termination of your employment you were provided with an employment separation certificate stating you were entitled to 4 weeks' redundancy pay and 4 weeks' payment in lieu of notice.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 83-175

Other relevant documents

Taxation Ruling TR 2009/2: Income tax: genuine redundancy payments

Reasons for decision

Summary

You are entitled to the full payment in lieu of notice as a genuine redundancy payment.

Detailed reasoning

Genuine redundancy payments

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.

In accordance with subsection 83-175(1) of the ITAA 1997, 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, 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 the dismissal.

Paragraph 11 of Taxation Ruling TR 2009/2: Income tax: genuine redundancy payments (TR 2009/2), outlines the requirements to be satisfied under subsection 83-175(1) of the ITAA 1997. 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.

In your case, we confirm you were terminated from your employment as a result of your Employer's decision to restructure their business and make your position redundant.

Based on this information, the essential components have been satisfied in this case, however there are further conditions that must be met before the payment can be treated as a genuine redundancy. Conditions in subsections 83-175(2) and (3) of the ITAA 1997 require that:

•         the dismissed employee is not older than 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 the employee or the employer and another entity to employ the dismissed employee after the termination (paragraph 83-175(2)(c)); and

•         the payment is not in lieu of superannuation benefits.

Based on the information provided, the conditions in subsections 83-175(2) and (3) of the ITAA 1997 are satisfied.

Voluntary termination of employment element

Subsection 83-175(1) of the ITAA 1997 requires the payment to exceed the amount that the Employee could reasonably be expected to receive in consequence of voluntarily terminating their employment.

Paragraphs 61, 62 and 64 of TR 2009/2 state:

61. It would generally be expected that a greater amount would be paid on redundancy than voluntary termination. This recognises the purpose of redundancy payments, being primarily to compensate for loss of non-transferable entitlements (for example accrued sick leave and accrued long service leave prior to 10 year's service) and the peculiar hardship associated with being made redundant.

62. Contractual or other entitlements payable by an employee on voluntary termination are generally a sound guide as to what might reasonably be expected. ...

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

As a result of your termination you received a 4 weeks' severance payment which was treated as a genuine redundancy payment. The payment is in excess of the amount that could reasonably be expected to be received as a consequence of voluntary termination.

You also received a payment in lieu of notice amount which is equal to 4 weeks' wages.

Upon examination of your employment contract, we note that after completion of probation your employment may be terminated in writing at any time by the Employer or you giving 4 weeks' notice.

The employment contract states that the Employer may, at its discretion, provide you with wholly or partly a payment in lieu of notice (for the avoidance of doubt, the Employer's right to make such a payment does not give you any right to demand such a payment).

The termination letter and the clauses in your employment contract show that the payment in lieu of notice is not expected on voluntary termination and is paid at the discretion of the Employer. Subsequently, it is in excess of the amount that could reasonably be expected to be received as a consequence of voluntary termination.

Conclusion

Your payment in lieu of notice is a genuine redundancy payment as it satisfies all the conditions in section 83-175 of the ITAA 1997.