Edited version of private advice

Authorisation Number: 1052159586253

Date of advice: 28 August 2023

Ruling

Subject: Genuine redundancy payment

Question

Is the payment in lieu component of the redundancy payment a genuine redundancy payment under section 83-175 of the Income Tax Assessment Act 1997?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 2023.

The scheme commenced on:

30 June 2022

Relevant facts and circumstances

1.    You provided a copy of a Deed of Release (the Deed of Release) between yourself and the Employer dated early 2023.

2.    Recital A of the Deed of Release states the date that you started working for the Employer, and that you had a contract with the Employer, from mid-2022.

3.    Recital B of the Deed of Release states that the Employer undertook a review of its operations, and concluded that a restructure was required. Due to this restructure, it was determined that your position was no longer required.

4.    Recital C of the Deed of Release states that your employment with the Employer would be terminated on the grounds of redundancy in early 2023 (Termination Date). This is defined as the 'Termination' in the Deed of Release.

5.    At the Termination Date, you were below the pension age.

6.    Clause 1.1 of the Deed of Release is the Definitions section. It provides an exhaustive definition for 'Claims' which excludes 'superannuation legislation from which the Employee cannot give a release under this Deed.'

7.    Clause 2.2(a)(i) of the Deed of Release states that you were to be paid the Redundancy Payment:

'taxed as a genuine redundancy, being a payment in satisfaction of all the Employee's entitlements on termination of the Employment including but not limited to a payment in lieu of notice and a redundancy payment, except for their entitlements to payments for annual leave and outstanding'

8.    Clause 6.5(b) of the Deed of Release states that, upon receiving the Redundancy Payment,

'the Employee will have received in full and final payment all contractual, legal and statutory entitlements arising out of or in connection with the Employment, the Contract, or the Termination, including but not limited to claims for remuneration flowing from their employment, notice of termination or a payment in lieu of notice'

9.    The Redundancy Payment was paid to you approximately 3 weeks after the Termination Date.

10.  You have provided a copy of an Employment Agreement (the Employment Agreement) between yourself and the Employer dated mid-2022.

11.  The 'Termination' section of the Employment Agreement states the following:

'After the first 3 months, it is expected that a notice period of 4 weeks, presented at writing, be provided should you wish to terminate your employment. The Company may require you to work out any period of notice or may elect to make a payment in lieu of notice.'

12.  In your private ruling application to the ATO (the Application), you stated that the Redundancy Payment related to 'payment in lieu of notice and redundancy', which you discussed verbally with the Employer. You confirmed this in a phone call in mid-2023.

13.  The Employer provided your income statement to the ATO for the 2022-23 financial year. This income statement includes the Redundancy Payment, which is divided as follows:

(a)  Half of the Redundancy Payment forms the ETP taxable component, with a PAYG withholding amount. This is taxed as ETP Type O.

(b)  Half of the Redundancy Payment forms the ETP tax-free component. This is taxed as ETP Type R.

14.  In the Application, you stated that the Employer's accountant contended that the payment that was classified as ETP Type O was the payment in lieu of notice. You confirmed this in a phone call in mid-2023.

15.  In a phone call in mid-2023, you stated that the Employer had not provided a summary of the Redundancy Payment regarding its components.

16.  In a phone call in mid-2023, you stated that you were unsure if any of the Redundancy Payment was in relation to superannuation payments. You stated that the company was based in the America and that this might have been the first redundancy that they had actioned in Australia.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 82-135

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)

Income Tax Assessment Act 1997 subsection 83-175(4)

Reasons for decision

Summary

The payment in lieu of notice component of the Redundancy Payment is not a genuine redundancy payment.

Detailed reasoning

1.    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 Income Tax Assessment Act 1997 (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.

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)).

2.    Subsection 82-135 of the ITAA 1997 includes (among others):

a.    Superannuation benefits;

b.    Unused annual leave;

c.     Long service leave payments.

Basic requirements

3.    Paragraph 7 of Taxation Ruling 2009/2 Income tax: genuine redundancy payments (TR 2009/2) lists 4 basic requirements to meet subsection 83-175(1) of the ITAA 1997:

(a)  The payment being tested must be received in consequence of an employee's termination.

(b)  That termination must involve the employee being dismissed from employment.

(c)   That dismissal must be caused by the redundancy of the employee's position.

(d)  That redundancy payment must be made genuinely because of a redundancy.

4.    The first condition is that the payment be received in consequence of the termination of your employment. Clause 6.5(b) of the Deed of Release specifies that, upon receiving the Redundancy payment, you will have received all entitlements arising out of or in connection with the termination of your employment.

5.    The second condition requires that you be dismissed from your employment, which paragraph 16 of TR 2009/2 defines as meaning that 'all employment with the employer is severed.' The income statement for the 2022-23 financial year that the Employer submitted to the ATO lists the period of pay from mid-2022 to a date which is 4 days after the Termination Date. There is no information in the Deed of Release to suggest that you will be employed in another position by the Employer or any related entity.

6.    Paragraph 25 of TR 2009/2 outlines the third condition, being that the employee's position has only been made redundant once 'the employer determines that it is superfluous to the employer's needs and the employer does not want the position to be occupied by anyone.' Recital B of the Deed of Release outlined that the Employer, as part of their restructure, had determined that your position was no longer required.

7.    The final condition is that the payment was genuinely made due to a redundancy. Clause 2.2(a)(i) of the Deed of Release specifies that this payment was made to you 'as a genuine redundancy'.

8.    Therefore, the Redundancy Payment has met all of the conditions under subsection 83-175(1) of the ITAA 1997.

Further requirements

9.    Paragraph 33 of TR 2009/2 outlines five further requirements that a payment must meet, under subsections 83-175(2) and (3) of the ITAA 1997, to be a genuine redundancy payment. These requirements are:

(a)  the employee has not reached pension age;

(b)  the termination does not occur at the end of a fixed employment period;

(c)   the payment is not greater than the amount expected at arm's length, if the parties had not been dealing at arm's length;

(d)  there is no arrangement entered into between the employer (or another entity) and the employee to employ the dismissed employee after termination;

(e)  the payment is not in lieu of superannuation benefits.

10.  You had not reached pension age before your employment was terminated.

11.  The Redundancy Payment was made a date which would not seem to be the end of any particular fixed period of employment.

12.  Paragraph 40 of TR 2009/2 states that the condition regarding arm's length dealings need only be met where it had already been established that you and the Employer were not dealing at arm's length in relation to your redundancy, which is not evident on the facts.

13.  There is no evidence that there was an arrangement to employ you by the employer or another entity after termination.

14.  You have stated that you do not believe the Redundancy Payment to be in lieu of superannuation benefits. Additionally, Clause 1.1 would seem to suggest that superannuation benefits were purposely excluded from contemplation in the Deed of Release, being an employee entitlement under law.

15.  Therefore, the Redundancy Payment has met all of the conditions under subsections 83-175(2) and 83-175(3) of the ITAA 1997.

16.  Subsection 83-175(4) of the ITAA 1997 requires that the Redundancy Payment not be mentioned in section 82-135 of the ITAA 1997. Clauses 1.1 and 2.2 of the Deed of Release make clear that the Redundancy Payment was not paid in relation to superannuation benefits or leave entitlements, and so subsection 83-175(4) of the ITAA 1997 does not apply.

17.  As the Redundancy Payment has met all of the requirements under section 83-175 of the ITAA 1997, it can be determined to be a genuine redundancy payment.

The voluntary termination element

18.  Subsection 83-175(1) of the ITAA 1997 specifies that only the part of a redundancy payment specifically attributable to redundancy (that is, that the employment was terminated due to redundancy) can receive tax-free treatment.

19.  Any amount that the employee could have reasonably been expected to receive upon voluntary termination would be referred to as the 'voluntary termination element'. 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 termination.

20.  Paragraph 64 of TR 2009/2 states the following:

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

21.  Paragraphs 62 and 63 of TR 2009/2 provide the factors that can be considered to determine whether the payment in lieu of notice would be greater than what would be expected on voluntary termination, with paragraph 62 stating the following:

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

22.  The 'Termination' section in the Employment Agreement states that a notice period of 4 weeks is expected to be presented to the Employer, in writing, should you wish to terminate your employment, but the Employer may choose to either request that you work out that period of notice or may make a payment to you in lieu of notice.

23.  Therefore, you could have reasonably expected to receive payment of 4 weeks' salary if you voluntary terminated your employment, and so it would not have been considered in excess of an amount reasonably expected upon voluntary termination.

24.  Therefore, the payment in lieu of notice component of the Redundancy Payment is not a genuine redundancy payment.

25.  As the Redundancy Payment was received no later than 12 months after termination, the payment in lieu component must be taxed as an employment termination payment.