Edited version of private advice

Authorisation Number: 1052154558977

Date of advice: 17 August 2023

Ruling

Subject: Genuine redundancy payment

Question

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

Answer

No.

This ruling applies for the following period:

Year ended 30 June 2023

The scheme commences on:

1 July 2022

Relevant facts and circumstances

You provided a copy of your employment contact that shows you entered into an employment contract with the Employer. It was not a fixed term contract.

Your employment with the Employer was for 2 years but less than three years.

The Employer provided you with a termination letter stating due to changes in operational requirements the business will no longer require the job currently done by you accordingly your position will be made redundant. Your notice period was noted as 4 weeks and your redundancy pay as 6 weeks.

The employment with the Employer contract sets out the terms and conditions of your employment.

A clause in your employment contract states that the Employer or the Employee can terminate the agreement by providing one month's notice in writing. The Employer may, in its absolute discretion, terminate the agreement immediately at any time prior to the expiry of the notice period given by the Employee or the Employer, by making a payment to the Employee equal to the value of the Employee's salary in lieu of the period of notice or unexpired part of that notice period.

Another clause states your redundancy entitlements are as set out in National Employment Standards under the Fair Work Act 2009 (Cth). In accordance with these guidelines for a period of continuous service of 2 years but less than 3 years (your service based on your commencement date and termination date) you are entitled to redundancy pay of 6 weeks

You have provided a copy of a payslip noting the payments made to you

There is no relationship between you and the Employer.

There was no arrangement between you and the Employer, or between the Employer and another person, to employ you after the termination of your employment.

You have not returned to work for the Employer in any capacity subsequent to the termination of your employment.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 83-130

Income Tax Assessment Act 1997 section 83-135

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

Your payment in lieu of notice is not a genuine redundancy payment.

Detailed reasoning

Genuine redundancy payment

A payment made to an employee is a genuine redundancy payment (GRP) 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 employees 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 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 arms 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)).

Section 82-135 of the ITAA 1997 includes (among others):

•                     superannuation benefits;

•                     the payment of a pension or annuity; and

•                     unused annual leave (paragraph 82-135(c)) or long service leave payments (paragraph 82-135(d)).

Whether the payment in lieu if notice you received will constitute a genuine redundancy payment will be addressed below.

In order to satisfy the definition of a genuine redundancy payment under subsection 83-175(1) of the ITAA 1997 there must be a dismissal from employment and the dismissal must result from the positions being made genuinely redundant.

The term dismissal is not defined in the ITAA 1997. Therefore, it is necessary to consider the common law or ordinary meaning of the term and the meaning the judicial authorities have ascribed to it.

Dismissal from employment

Taxation Ruling TR 2009/2, titled Income Tax: genuine redundancy payments, which outlines the Commissioners view of the requirements for a payment to qualify as a GRP under section 83-175 of the ITAA 1992, discusses what constitutes a 'dismissal'. In particular:

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, for example in the case of resignation.

In your case, the Employer provided you with a termination letter stating due to changes in operational requirements the business will no longer require the job currently done by you accordingly your position was made redundant.

It is concluded that the termination of your employment constitutes a dismissal for the purposes of subsection 83-175(1) of the ITAA 1997.

The voluntary termination element

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.

Paragraphs 57 to 65 of TR 2009/2 looks at what is considered to be an amount that exceeds what could reasonably be expected by an employee in consequence of the voluntary termination of his or her employment and states:

The voluntary termination element

57. Assuming that the genuine redundancy payment requirements in section 83-175 are satisfied in relation to a payment, subsection 83-175(1) identifies that part of the payment that is specifically attributable to the fact that employment has been terminated because of redundancy. Only this part of the payment can receive tax-free treatment.

58. Subsection 83-175(1) identifies the amount attributable to redundancy by deducting the amount that could reasonably be expected to be received by the employee if he or she had voluntarily terminated employment at the time of being dismissed. In this Ruling, this is referred to as the voluntary termination element of a redundancy payment.

59. Apart from this hypothetical change in circumstances to a voluntary termination instead of a dismissal caused by redundancy, all other circumstances surrounding the termination are assumed to be the same.

60. Accordingly, if the employer and the employee were not dealing with each other at arm's length in relation to the dismissal, this must form part of the circumstances for the purposes of working out the voluntary termination element.

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 years service) and the peculiar hardship associated with being made redundant.

62. Contractual or other entitlements payable by an employer on voluntary termination are generally a sound guide as to what might reasonably be expected. However, this would be less so if the employer and employee are not dealing at arm's length.

63. There may be industry norms that could be used as a guide as to what payments would be made on voluntary termination. It may also be appropriate to compare standard payments made on voluntary termination within a particular company. However, these comparisons must take account of the actual nature of the dealings as influenced by the relationship between the parties.

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.

65. The voluntary termination element of a genuine redundancy payment is subject to tax as an employment termination payment if it is received no later than 12 months after the termination. Otherwise, this element of the payment is taxed as an ordinary amount of assessable income under section 83-295, unless the Commissioner decides to treat it as an employment termination payment.

It is clear that an amount that could reasonably be expected to be received by an employee if he or she had voluntarily terminated employment at the time of being dismissed cannot receive tax-free treatment. There is a need to look at the contractual or other entitlements payable by an employer on voluntary termination. In addition, a payment in lieu of notice can be a genuine redundancy payment provided that such a payment would not be expected on voluntary termination.

A clause in your employment contract states that the Employer or the Employee can terminate the agreement by providing one month's notice in writing. The Employer may make a payment to the Employee equal to the value of the Employee's salary in lieu of the period of notice or unexpired part of that notice period on termination of employment.

It is determined that in accordance with your employment contract, you could expect to receive one month's pay on giving notice of voluntary termination. It is at the Employer's discretion whether the payment is made in lieu of notice. Therefore, the payment in lieu of notice does not form part of the tax-free part of a genuine redundancy payment in this case, as it is not an amount that exceeds what you could reasonably be expected to receive in consequence of the voluntary termination of your employment at the time of dismissal.

As the payment in lieu of notice does not form part of the genuine redundancy payment it will be an employment termination payment as per section 82-130 of the ITAA 1997.