Edited version of Private Advice

Authorisation number: 1052275104144

Date of advice: 8 August 2024

Ruling

Subject: Termination payments and genuine redundancy payments

Question

Is the payment you received on the termination of your employment 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:

Income year ending 30 June 20YY

Relevant facts and circumstances

You received a termination of employment letter from your Employer stating that 'As a result of reduced project labour requirements your position is no longer required, and this means your employment will terminate.'

The Employer issued a memorandum which stated the following:

.....The Employer may engage an Employee ('Project Employee') for a specified period of time or for a specified task on a specified project. This means that at the end of the project the Employee's contract will come to an end and there is no guarantee of ongoing work, nor any entitlement to redundancy.

Project Duration Employees receive a payment of Severance and Project Incentive Payment as a demobilisation package due to there being no guarantee of ongoing work.

.....

You received a payment from the Employer that included:

•        Annual Leave on Termination

•        Personal Leave on Termination (ETP Taxable)

•        Rostered Day Off on Termination (ETP Taxable)

•        Project Incentive Payment on Termination (ETP Taxable)

•        Severance Payment on Termination (ETP Taxable)

You have stated that you did not receive a separation certificate on the termination of your employment.

The Workplace Agreement states the following:

Project Specific Employment

a)            The Employer may engage an Employee ('Project Employee') for a specified period of time or for a specified task on a specified project. This means that at the end of the project the Employee's contract will come to an end and there is no guarantee of ongoing work, nor any entitlement to redundancy.

b)            For the purposes of this clause, 'Specified Project' includes a specified stage of a project.

c)            A project Employee's ordinary hours of work shall be the same as a full-time Employee's ordinary hours of work unless otherwise specified in writing by the Employer at the time the Employee is engaged, and such arrangements will not increase a project Employee's ordinary hours of work in excess of that worked by a full-time employee.

Your original employment contract with the Employer confirmed that your:

•        employment type - permanent contract

•        employment basis - full-time, weekly hire, project duration

•        end date - as required by the company or until your services are terminated in accordance with this Agreement

•        severance will be paid out at the completion of your service on the project, with your final pay.

Your contract with the Employer was later varied. The variation confirmed that your:

•           employment basis - full-time, project duration

•           end date - Upon the completion of the duties and tasks required of your role. The Company reserves the right to adjust this date to align with the project resourcing schedules. Termination of employment in this instance does not constitute redundancy and therefore no additional severance payments will be due, aside from the payment of accrued entitlements and wages owed for completed work

•           employment agreement commences on the commencement date specified in the schedule and supersedes all prior agreements between the Company and you.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 82-130

Income Tax Assessment Act 1997 section 83-175

We followed these ATO view documents

Taxation Ruling TR 2009/2 Income tax: genuine redundancy payments

Reasons for decision

Genuine redundancy payments

A payment made to an employee is a genuine redundancy payment if it satisfies all of the criteria set out 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 his or her employment at the time of the dismissal.

Paragraph 11 of Taxation Ruling TR 2009/2: Income tax: genuine redundancy payments (TR 2009/2), outlines the requirements to be satisfied under subsection 83-175(1) of the ITAA 1997. These four basic conditions are that:

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

•        The termination must involve the employee being dismissed from employment.

•        The dismissal must be caused bytheredundancy of the employee's position.

•        The redundancy payment must be madegenuinely because of a redundancy.

There are further conditions that must also be satisfied before the payment can be treated as a genuine redundancy. Conditions in subsections 83-175(2) and (3) of the ITAA 1997 require that:

•        the dismissed employee is not older than specified age limits

•        the termination is not at the end of a fixed period of employment

•        the actual amount paid is not greater than the amount that could reasonably be expected had the parties been dealing at arm's length, in the event that the employer and employee are in fact not dealing at arm's length in relation to the dismissal

•        there is no arrangement entered into between the employer and the employee or the employer and another entity to employ the dismissed employee after the termination (paragraph 83-175(2)(c)); and

•        the payment is not in lieu of superannuation benefits.

Dismissal and redundancy

The term 'dismissal' is not defined in the ITAA 1997 therefore, consistent with basic principles of statutory interpretation, its meaning must be determined according to the ordinary meaning of the words, having regard to the context in which they appear.

Accordingly, the Commissioner's view, as stated at paragraph 18 in TR 2009/2, is that 'dismissal' means 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.

The Commissioner's view is that a genuine redundancy payment 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. TR 2009/2 states:

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. On occasion the decision may be unavoidable due to the circumstances surrounding the employer's operations.

Dismissal is not synonymous with termination but involves an action to terminate employment taken by the employer irrespective of the wishes of the employee. Dismissal will not occur at the end of a contract for a fixed period of time.

Fixed period

Under subparagraph 83-175(2)(a)(ii) of the ITAA 1997, a payment made to an employee at the end of a fixed period of employment cannot normally be a genuine redundancy payment. This is because their employment simply terminates at that time in accordance with the set term specified within their employment contract.

Contracted employees are often employed for project-based work and hence a fixed period. The period of service for contracted employees that have been employed on a project duration basis is sometimes determined by the achievement of a particular task or outcome. In this situation, an employee is not redundant where the project is completed, even if it is completed before its designated time. This is because the completion of a particular task or outcome represents a particular period of service for the purposes of subparagraph 83-175(2)(a)(ii) of the ITAA 1997.

Paragraph 38 of 2009/2 provides that:

38.          In some cases, particularly those involving multi-disciplinary project-based work, an employee's period of service may be determined by reference to the achievement of a particular outcome rather than a specified period of time. The employee's period of service in these circumstances concludes on the achievement of that outcome.

Example 11 in TR 2009/2 provides a scenario on redundancy and project-based work.

148.       Buildcorp makes contributions to an industry trust on behalf of its workers to cover the company for future termination payments (other than unused annual leave payments) it might be required to make under industry awards. The workers are all employed on a daily hire basis

149.       Buildcorp has a major construction contract to build an office block. Buildcorp's employees, its subcontractors and their employees have all been advised that they can expect to be employed on the project for at least six months, depending on their trade or other qualifications.

150.       Three months into the project, all workers are terminated with a day's notice as required under their contracts because Buildcorp becomes insolvent and cannot meet its ongoing commitments.

151.       The mutual intentions of the parties is that Buildcorp's employees will be employed until the completion of their tasks on the project, even though in form the contracts are made on a daily hire basis. Accordingly, in these circumstances, there is a dismissal caused by redundancy prior to the expiration of a fixed period of employment.

152.       In contrast, if the workers had all completed their allotted tasks in keeping with the mutual intentions of the parties, any payments accruing on their termination of employment would not be eligible to be genuine redundancy payments. In these circumstances, the employees are terminated at the expiry of a fixed period of employment.

Where a contracted employee has been employed for a particular project on a weekly or daily hire basis, a payment on termination in these circumstances would be made at the end of a limited period of time of employment and would therefore not normally be a genuine redundancy payment. However, as discussed in the above example, it is possible that a project-based employee's role may become redundant prior to the end of the fixed term. Therefore, the mutual intentions of the parties are relevant in these circumstances.

In your case, you were employed in accordance with an original and subsequent contract. Both contracts were project-based. With regard to the end date, the last contract you worked under specifically states that:

Upon the completion of the duties and tasks required by your role as Position 1 - Leading Hand on the Project 1, WA (E0002051); The Company reserves the right to adjust this date to align with the project resourcing schedules. Termination of employment in this instance does not constitute redundancy and therefore no additional severance payments will be due, aside from the payment of accrued entitlements and wages owed for completed work.

The contract also stated the following:

This employment agreement (Agreement) commences on the Commencement Date specified in the Schedule and supersedes all prior agreements between the Company and you. Continuity of employment for all service-related entitlements from previous contract will be honoured.

Your last contract no longer confirmed that your employment type with the Employer was a permanent contract.

Due to the outcome of a review by the Employer, your employment position was terminated 'as a result of reduced project labour requirements'.

You cannot be dismissed where you have agreed to or approved the act or decision to terminate your employment. Where a contract of employment terminates by expiration of time or by agreement, there is no dismissal.

As your contract specified that its end date may be adjusted by the Company to align with the project resourcing schedules, there is a mutual intention from both parties that the contract may come to an end due to this condition. Therefore, it is considered by agreement, you were terminated at the end of a fixed period of employment.

As all the basic conditions and requirements under section 83-175 of the ITAA 1997 have not been satisfied, the payments you received on termination are not genuine redundancy payments. These payments, other than the annual leave, will be employment termination payments as per section 82-130.