Edited version of private advice

Authorisation Number: 1052163665307

Date of advice: 6 September 2023

Ruling

Subject: Genuine redundancy

Question

Is any part of the payment of an Amount in lieu of notice from the Employer a genuine redundancy payment under section 83-175 of the Income Tax Assessment Act 1997?

Answer

No.

This private ruling applies for the following period:

1 July 20YY to 30 June 20YY

Relevant facts and circumstances

You signed an employment contract for a position (the Position) as a permanent part time employee with the Employer in mid-20YY.

You commenced work with the Employer in mid-20YY.

You were employed in the Position with the Employer was for two years but less than three years.

A letter dated mid 20YY from the Employer (Termination letter) provides that as a result of a change in business direction and subsequent restructuring the Position is no longer needed and your employment would be terminated.

The Termination letter includes the following:

•         As per discussions with you it was agreed you would work through to end of month mid-20YY to enable a handover of the relevant functions however as also discussed this has been brought forward to start of month mid 20YY provided the handover is completed by this date.

•         Payment will be paid to you in lieu of working up until end of month mid-20YY.

•         Your employment was to end on end of month mid 2023.

•         Due to your employment ending due to redundancy you will be paid a redundancy amount of the Redundancy amount in accordance with the Professionals award and the National Employment Standards (NES). The amount represents 6 weeks pay which is based on your two years of service.

•         You will also be paid your accrued entitlements and any outstanding pay up to and including your last day of employment.

Your employment contract states:

•         The Employer may terminate your employment for any reason by providing you with the required notice or payment in lieu as set out in the NES and subject to the Act.

•         Your employment may be terminated by either party giving to the other four weeks notice in writing.

•         During the notice period, you will remain employed by the Employer and accordingly:

o    You must continue to comply with all of your employment obligations under this Agreement during the notice period; and

o    You may not commence work for yourself or for any other Person during any part of the notice period.

•         If your employer exercises its discretion to direct you to ceased work during your notice period, you will continue to receive your remuneration pursuant to this Agreement, subject to you complying with your obligations under this Agreement.

Your contract states that in the event that your employment is terminated on the grounds of redundancy you will received entitlements in accordance with the Act and the NES.

You have provided copies of a series of emails between yourself and the Employer detailing discussion in relation to the taxation of your payment in lieu of service.

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

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 82-130

Income Tax Assessment Act 1997 section 82-135

Income Tax Assessment Act 1997 subsection 83-175

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 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 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 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)).

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."

    ...

    21. 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. This will be the case 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 determining whether any payment made in these circumstances would qualify as a genuine redundancy payment, the other conditions in section 83-175 would still need to be met.

In your case, a letter dated mid 20YY from the Employer provides that as a result of a change in business direction and subsequent restructuring the Position is no longer needed and your employment would be terminated.

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 look 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.

In this case, your employment contract states

•         The Employer may terminate your employment for any reason by providing you with the required notice or payment in lieu as set out in the NES and subject to the Act.

•         Your employment may be terminated by either party giving to the other four weeks notice in writing.

•         During the notice period, you will remain employed by the Employer and accordingly:

o   You must continue to comply with all of your employment obligations under this Agreement during the notice period; and

o   You may not commence work for yourself or for any other Person during any part of the notice period.

•         If your employer exercises its discretion to direct you to cease work during your notice period, you will continue to receive your remuneration pursuant to this Agreement, subject to you complying with your obligations under this Agreement.

It is determined that in accordance with your employment contract, you could expect to receive four week'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.