Edited version of private advice

Authorisation Number: 1052042967842

Date of advice: 13 October 2022

Ruling

Subject: Genuine redundancy payment

Question 1

Is the payment you received on termination of your employment tax free as a genuine redundancy under section 83-175 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

Question 2

Is the payment you received an employer termination payment as defined under section 82-130 of the ITAA 1997?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

1.    You commenced employment with your Employer on xx xx xxxx.

2.    On xx xx xxxx you received a letter from the Employer in relation to your Notice of termination of your employment (Subject to Deed of Company Arrangement) stating:

a.    I refer to our meeting on xx xx xxxx to confirm your employment is being terminated with notice in accordance with the Executive Service Agreement (ESA) between you and your employer.

b.    Pursuant of clauses xx.x and xx.x of the ESA, your employer may end your employment at any time by giving you 6 months written notice.

3.    Your employment was terminated on xx.xx.xxxx

4.    You have provided a Termination Advice and payment advice.

5.    Under these clauses, you will be paid all entitlements owing to you including the 6 months pay in lieu of notice required by the contract.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 82-130

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 Subsection 83-175(3)

We followed these ATO View documents:

Taxation Ruling TR 2003/13

Taxation Ruling TR 2009/2

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 Income Tax Assessment Act 1997 (ITAA 1997).

Detailed reasoning

2.   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

3.   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.

4.   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.

5.   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.

6.   In this case, the payment made to you was in consequence of the termination of your employment with your employer as it was paid to you upon the termination of your Contract of Employment. There is a causal connection between your termination and the payment. In other words, but for the termination of your employment, the payment would not have been made.

7.   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.

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

9.   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

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

11.Paragraph 82-135(e) of the ITAA 1997 excludes from ETP the part of a genuine redundancy payment

worked out under section 83-170 of the ITAA 1997.

12.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 the employee reached pension age;

(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.

13.  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.

14.         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

15.         As assessed under paragraph 6 of this ruling we are satisfied that the payment was made to you in consequence of termination of your employment.

16.         Component 1 is satisfied.

Component 2: 'dismissal' from employment

17.         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.

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

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

20.         It is clear from the letter dated xx.xx.xxxx, titled; Notice of Termination of your employment that the decision to terminate your employment was made by the employer.

21.         Component 2 is satisfied - you were dismissed from employment.

Component 3: dismissal caused by 'redundancy'

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

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

24.  Paragraph 25 of TR 2009/2 states that:

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.

25.         You have been advised via letter dated xx.xx.xxxx that your Contract of Employment was terminated, in accordance with subclause xx.x.x of your contract that requires your employer to pay you a 'termination payment' under subclause xx.x.

26.         An email from the FTI Consulting, stating none of these payments qualify as a genuine redundancy payment, and confirms that the payment you received was not a redundancy payment as it represents a payment in lieu of notice for early termination of contract that is covered under clauses xx.x and 1xx.x of your contract. Your earnings are above the threshold where eligible concessional tax treatment would apply. Consequently, the tax withholding on the entire distribution will be at your marginal rate".

27.         The provided information also indicates that your role and duties were not made redundant as they will be performed under new positions that were proposed to be created after your termination.

28.         Hence, as your Contract of Employment provides for the early termination of your contract and your employer doesn't support the notion that the reason for your termination was a redundancy, component 3 is not satisfied.

29.         As component 3 of the redundancy requirements is not satisfied there is no need to consider other requirements of a genuine redundancy,

30.         The termination payment you received was paid to you in accordance with the terms of your Contract of Employment.

31.  The amount you received was expected, as outlined in your contract.

32.  The payment in lieu of notice doesn't meet the requirements of a genuine redundancy payment.

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