Edited version of private advice

Authorisation Number: 1052134232798

Date of advice: 17 July 2023

Ruling

Subject: Employment termination payments

Question

Is any part of the termination payment, consisting of a voluntary redundancy payment and a payment in lieu of notice, received on the termination of Taxpayer's 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.

This ruling applies for the following period:

Income year ended 30 June 2022

The scheme commenced on:

1 July 2021

Relevant facts and circumstances

The Taxpayer was employed by an entity (the Employer) for more than twenty years.

The Taxpayer was employed under the terms and conditions of an Enterprise Agreement (the Agreement).

In the 2020-21 income year, the Taxpayer received a letter from the Employer advising that their position was declared "potentially excess" to requirements of the Employer a part of workforce adjustment action.

The Taxpayer was offered, but declined, an offer of a voluntary redundancy.

In a subsequent letter, the Taxpayer's position was declared "excess" in accordance with the Agreement. At that time, the Taxpayer was again offered, but declined, an offer of voluntary redundancy as there was no vacant position at the same level.

The Taxpayer commenced proceedings under the Fair Work Act (the Claim).

In accordance with the Agreement, the Taxpayer was permanently redeployed to a new position, in a lower role, within the organisation.

Subsequently, mediation commenced as part of the Claim. The Taxpayer submitted to consider the Employer's original offer of a voluntary redundancy, which had been put forward by the Employer again to settle. The original offer of a voluntary redundancy then formed the basis of the settlement sum and medication continued until an agreement was reached on the non-economical component of the final settlement sum.

The Taxpayer states that a final agreement was reached in the 2021-22 income year.

The Taxpayer was terminated following the execution of a Deed of Release (the Deed). The Taxpayer signed the Deed as a counterpart terminating their employment.

The Taxpayer received a net payment from the Employer which included a voluntary redundancy payment based on years of service along with a payment in lieu of notice. The Employer treated the Payment as a non-genuine redundancy.

The Taxpayer's date of birth is aged less than 65.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 83-10

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

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 subsection 83-175(3)

Reasons for decision

Summary

The termination of the Taxpayer's former employment does not constitute a genuine redundancy under section 83-175 of the ITAA 1997 as the position the Taxpayer permanently occupied at the time of the termination was not made redundant. Accordingly, the payment comprising of the voluntary redundancy payment and payment in lieu of notice was correctly reported as an employment termination payment (ETP).

Detailed reasoning

A payment made to an employee is a genuine redundancy payment if it satisfies all the criteria 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 their employment at the time of dismissal.

As can be seen above, subsection 83-175(1) of the ITAA 1997 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.

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 payment under section 83-175 of the ITAA 1997.

In discussing what constitutes a genuine redundancy payment in accordance with subsection 83-175(1) 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.

Payment 'in consequence of' termination

The phrase 'in consequence of' is not defined in the ITAA 1997. However, the courts have interpreted the phrase in a number of cases.

Whilst the courts have divergent views on the meaning of this phrase, the Commissioner's view on the meaning and application of the 'in consequence of' test are 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 contains references to repealed provisions, some of which may have been rewritten, the ruling still has effect 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:

5.... 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.

In this instance, to settle the Claim, the Taxpayer's employment was terminated in the 2021-22 income year with the Payment to be made within 14 days of the termination date.

Although the dominant cause of the Payment is to settle the Claim, there is a causal connection between the termination of the Taxpayer's employment and the Payment. In this case, the termination is a pre-condition for the Payment.

Based on the Commissioner's views expressed in TR 2003/13, there is, in this case, a clear connection between the termination of employment and the Payment. That is, but for the termination, the Payment would not be paid to the Taxpayer.

Consequently, the Payment was made 'in consequence of' the termination of the Taxpayer's employment with the Employer.

Dismissal

The Commissioner's view, as stated in paragraph 18 of TR 2009/2, is that:

18. Dismissal is a particular mode of employment termination. It requires 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...

Consent in this context refers to the employee freely choosing to agree to, or approve, the act or decision to terminate employment in circumstances where the employee has the capacity to make such a choice.

Consent may be either expressly stated by the employee or implied by their behaviour or conduct.

It is clear from the facts that the termination of employment was at the behest of the Employer. The Taxpayer did not initiate the termination of their employment. Rather, the Employer made a unilateral decision to terminate the employment. The Taxpayer was therefore dismissed.

Redundancy

The Commissioner's view, as stated in paragraph 25 of TR 2009/2 is that:

25. 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...

Based on the facts provided, the Taxpayer's original position was declared redundant in the 2020-21 income year and the Taxpayer was offered a voluntary redundancy, which they declined. Consequently, the Taxpayer was permanently redeployed to new position.

Following this redeployment, the Taxpayer lodged the Claim. It was agreed, by way of Deed, that the Taxpayer's employment was to be terminated according to the conditions set out in the Deed.

The Deed refers to a voluntary redundancy. However, at no point was the Taxpayer's position that the Taxpayer permanently occupied at the time of the termination, declared redundant or superfluous to the Employer's needs. Rather, they accepted the payment to settle the Claim.

Therefore, this condition has not been met and the payment received by the Taxpayer was correctly treated as an ETP as it did not meet requirements of a genuine redundancy payment.