Edited version of private advice

Authorisation Number: 1052033069131

Date of advice: 23 December 2022

Ruling

Subject: Employment termination and genuine redundancy payment

Question 1

Is the payment an employment termination payment (ETP) under section 82-130 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 2

Is any part of the payment a genuine redundancy payment under section 83-175 of the ITAA 1997?

Answer

No.

This ruling applies for the following period:

Financial year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You were employed by the Employer from around 20XX.

You entered a Contract of Employment (the Contract) around 20XX with the Employer for another role (the Position) and commenced with the Position from 20XX.

The Contract is a fixed term contract, with an end date in around 20XX.

In or before 20XX, the Employer commenced a business case for restructure, in which you were heavily involved in it.

You prepared a 'Proposal of Restructure' (the Proposal) dated XX XX 20XX.

The Employer approved the Proposal at management level on XX XX 20XX.

As part of the restructure, the duties of the Position and the duties of another position (the Other Position), merged to a new position, with job title XX (the New Position).

The Employer states that the New Position covers some responsibilities for the XX functions, which are outside the scope of the Position's responsibilities.

Amongst the position descriptions of the Position, the Other Position and the New Position (the Three Positions),

• while the 'key responsibilities' of the New Position involves a smaller percentage of newly created responsibilities (which do not exist in either the Position or the Other Position), almost all the 'key responsibilities' of the Position remain in the New Position. On the other hand, only a small percentage of the 'key responsibilities' of the Other Position can be found in the New Position.
• the selection criteria of the Three Positions are almost identical, except under the 'Prerequisites/Qualifications',

the Position requires

-       A recognized Undergraduate or Post Graduate Degree in Field A or other related qualification or experience of equivalent standard.

the Other Position requires

-       A recognized Undergraduate or Post Graduate Degree in Field B or other related qualification or experience of equivalent standard.

the New Position requires

-       A recognised Tertiary Degree in Field A, Field B or other related qualification, or significant experience of equivalent standard.

Based on the Proposal, the New Position was proposed to have the same level of salary and wages as the Position.

There had been discussions between the Employer and you regarding directly appointing you to the New Position. When you were informed that the Employer had decided to publicly advertise the New Position, and that you would need to apply for the New Position, disagreement arose regarding the need to apply.

You requested the termination to occur as soon as possible to avoid a drawn-out process.

On XX 20XX, you and the Employer entered a Deed of Agreement & Settlement (the Deed), in which it was agreed that

•         the Contract will be terminated effective from XX 20XX(the Termination Date)

•         the Employer will pay you $X, being an amount calculated as equivalent to Y months of ordinary time earnings as described in Clause Xe(i) of the Contract plus all entitlements for ordinary time earnings and annual leave accrued at the Termination Date

The Deed characterised

• the termination as a resignation, not a dismissal

•         the payment of $X as non-taxable, non-superannuable, general damages

You were below the age of 65 on the Termination Date.

The Employer made the payment within 1X business days after the Termination Date.

There was no agreement between you and the Employer or between the Employer and any other person or entity for your future employment, at the time of employment termination.

Following the Termination Date, the Employer appointed an acting personnel for the Position, for a period of around 3 months, commencing on X XX 20XX. Meanwhile, the Employer commenced recruitment for the New Position in late XX, announced the recruitment result around two months after that and filled the New Position around 1 month after the announcement.

The Position no longer exists after the restructure was implemented.

Clause X of the Contract states:

The Contract may be terminated before Termination Date in any of the following events:

a)    By Employer and the Employee agreeing in writing.

b)    By the Employee giving one (1) month notice in writing.

c)    By Employer...

d)    By Employer ...

e)    (i) Subject to clause X, Employer may terminate this Contract for a reason or reasons other than those specified in clauses X, X and X (including but not limited to the irretrievable breakdown in the relationship between the Employee and the Director ... or Employer, or both), by the giving of Y months' notice or payment by Employer in lieu of notice of Y months' equivalent of the Employee's Annual Cash Salary.

(ii)....

Relevant legislative provisions

Income Tax Assessment Act 1997 section 82-130

Income Tax Assessment Act 1997 section 82-135

Income Tax Assessment Act 1997 section 82-140

Income Tax Assessment Act 1997 section 83-170

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

Reasons for decision

Employment termination payments

By virtue of subsection 995-1(1) of ITAA 1997, employment termination payments are defined in subsection 82-130(1) of the ITAA 1997, which states that 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 that termination (but see subsection (4)); and

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

To determine if a payment is an employment termination payment (ETP), all the conditions in subsection 82-130(1) of the ITAA 1997 must be satisfied. Failure to satisfy any of the conditions under subsection 82-130(1) will result in the payment not being considered an employment termination payment.

Paid as a 'consequence of' the termination of your employment

For a payment to be treated as an ETP, the first condition that must be met is that the payment is made in 'consequence of' the termination of employment of the taxpayer.

The phrase 'in consequence of' is not defined in the ITAA 1997. However, the courts have interpreted the phrase in a number of cases. Taking into account the court's decisions on the meaning of the phrase, the Commissioner's view on the meaning and application of the 'in consequence of' test is 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 considered the meaning of the phrase 'in consequence of' in the context of the eligible termination payments, TR 2003/13 can still be relied upon 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:

... 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 case, your employment was terminated on XX XX 20XX, and as a result of the termination, you received a payment that calculated based on the 'Termination' clause of the Contract, at Clause XX. In other words, but for the termination, you would not have received that payment. Therefore, it is considered that the termination payment was received by you in consequence of the termination of your employment.

Payment is received no later than 12 months after termination

Your employment was terminated with the Employer on XX XX 20XX and the payment was made within 1X business days. As this is less than 12 months after your termination, this condition will be satisfied.

Payment is not a payment mentioned under section 82-135 of the ITAA 1997

Based on the information provided, the payment listed in section 82-135 of the ITAA 1997 which may be relevant in this case and thus require consideration is:

•         the part of a genuine redundancy or an early retirement scheme payment worked out under section 83-170.

Genuine redundancy payments

A payment made to an employee is a genuine redundancy payment if it satisfies all the conditions set out in section 83-175 of 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 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 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.

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)).

The requirements to be satisfied before any payment made to a person whose employment is terminated qualifies for treatment as a genuine redundancy payment under section 83-175 of the ITAA 1997 are discussed in Taxation Ruling TR 2009/2 Income tax: genuine redundancy payments (TR 2009/2).

With regard to the first requirement set out in subsection 83-175(1) of the ITAA 1997, the Commissioner considers that there are four necessary components within this requirement:

•         the payment must be received in consequence of an employee's termination;

•         the termination must involve the employee being dismissed from employment;

•         dismissal must be caused by the redundancy of the employee's position; and

•         the redundancy payment must be made genuinely because of a redundancy.

Meaning of received 'in consequence of' the termination

For the reasons stated earlier, it is considered that, in this case, the termination payment is paid to you in consequence of the termination of your employment.

Meaning of 'dismissal' and 'redundancy'

The terms 'dismissal' and 'redundancy' are not defined in the ITAA 1997 and are therefore, consistent with basic principles of statutory interpretation, their meaning must be determined according to the ordinary meaning of the words, having regard to the context in which they appear.

Accordingly, the Commissioner's views, as stated in Taxation Ruling TR 2009/2, include

•         A genuine redundancy payment 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.

•         Dismissal means 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, for example in the case of resignation.

•         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 surrounding the employer's operations.

•         Contrived cases of redundancy will not meet the conditions in section 83-175 of the ITAA 1997. 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.

•         Where an employee is given notice from their employer that they will be terminated at a specified time in the future due to genuine redundancy, that employee will be dismissed because of redundancy for the purposes of section 83-175, even where an employee, following notification, negotiates with the employer or nominates to end their employment at an earlier time. Negotiation or nomination of the earlier date relates to the timing of the termination and not to the character of the termination as a dismissal.

In your case, the Commissioner considers:

•         the situation may not meet the level of 'no suitable job available for the employee with the employer, meaning that he or she must therefore be dismissed', since the 'added qualification requirement' in the New Position may not necessarily prevent you from being qualified - it was added at the background that it is essential to have 'one or more of the 4 listed qualifications', while you may have possessed one or more of the 3 listed qualifications from the Position (included in the 4 listed ones by the New Position). The disagreement arose on 'the need to apply' over 'appointing you directly to the New Position' and you consequently chose not to apply, this does not support a conclusion of 'dismissal'.

•         the decision to terminate employment was not, or at least not completely 'without the consent of the employee' - the discussions between the Council and you regarding directly appointing you to the New Position, even if unsuccessful, indicated certain level of consideration on employee's opinion/consent. In addition, you may have had a chance to be successful in the job application, if you chose to apply instead, given the fact that the selection criteria of the New Position are almost identical with the Position's - you had certain level of 'choice' rather than without your consent.

•         the Deed, which characterised the termination as a 'resignation', not a 'dismissal' can be seen as another indicator that it does not support 'dismissal'.

•         for the fact that almost all the 'key responsibilities' of the Position remain in the New Position, it is difficult to conclude that the Position is superfluous to the employer's needs. On the other hand, it may be more likely to conclude that the Other Position, for most of its key responsibilities were not retained in the New Position, is superfluous to the employer's needs.

•         it aligns with a contrived case, where the employer 'agrees' to treat the payment as a redundancy payment for tax purposes.

•         it does not amount to a situation where an employee is given notice from their employer that they will be terminated at a specified time in the future due to genuine redundancy and the employee negotiates with an earlier termination date, because it associated or partially associated with your 'choice' not to apply for the New Position. It cannot be said that there has been 'a notice given' with a certain decision of termination at a specified time at that point of time.

Consequently, no part of the $X payment will be considered a genuine redundancy payment.

Income tax treatment

Although the Deed characterised the payment as non-taxable payment, the Commissioner is of the view that in this case, it should be taxed as an ETP without treating any proportion as a genuine redundancy payment under section 83-170 of the ITAA 1997.