Edited version of private advice

Authorisation Number: 1052282381284

Date of advice: 29 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 2024

Relevant facts and circumstances

1.         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.'

2.         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.

.....

3.         You received a payment from the Employer that included:

•         Annual Leave on Termination XX

•         Personal Leave on Termination (ETP Taxable) XX

•         Rostered Day Off on Termination (ETP Taxable) XX

•         Project Incentive Payment on Termination (ETP Taxable) XX

•         Severance Payment on Termination (ETP Taxable) XX

4.         You advised the following:

•         Your employment with your former employer commenced on a certain date.

•         You were employed in a certain position.

•         Your duties involved activities to help with the project.

•         Your employment with your former employer was terminated on a certain date.

•         You do not know the payments you would have received had you voluntarily resigned

•         You do not know the end date of employment with your former employer as they had many other jobs in progress in the same area at the time you were terminated.

•         You have no other connection with your former employer.

•         You have had no offers from your former employer regarding future employment opportunities.

5.         You have provided the following supporting documentation:

•         A copy of your final payslip from your former employer.

•         A decision made by the FairWork Commission.

•         An undertaking in relation to the relevant workplace agreement which confirmed that Ordinary Hours for Project Specific Employment was not intended to operate to increase a project Employee's ordinary hours of work in excess of that worked by a full-time employee.

•         The relevant workplace agreement which outlined Employment Categories including Project Specific Employment. It explained that Project Specific Employment was for a specified period of time or for a specified task on a specified project and at the end of the project there was no guarantee of ongoing work, nor any entitlements to redundancy.

•         Correspondence from your former employer about the termination of your employment which confirmed that your employment with them would end on a certain date.

8.         You advised that your employment contract (including any variations to it) were all completed through the online portal of your former employer. You also agreed to the question asked within this private ruling.

9.         Your original employment contract with the Employer confirmed that your:

•         employment type - permanent contract

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

•         commencement date - on a certain date or upon first attendance at the Project...

•         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.

10.       You advised that you received correspondence from your former employer about a renumeration review which resulted in an increase to your renumeration. It included the following information about the changes to your role with your former employer:

•         employment basis - full time, project duration

•         commencement date - on a certain date.

11.       The renumeration review also advised that all the other terms and conditions of your employment with them remained unchanged and still applied. You acknowledged acceptance of these changes to your role with your former employer on a certain date.

12.       Another workplace agreement is worded similarly to the relevant workplace agreement and also outlines the Employment Categories including Project Specific Employment. It explains that Project Specific Employment is for a specified period of time or for a specified task on a specified project and at the end of the project there is no guarantee of ongoing work, nor any entitlements to redundancy.

Your arguments and contentions

13.       Within your written correspondence, you contended that another similarly worded workplace agreement was not for a fixed period of time or for a specified task. However, the role is no longer required by your former employer.

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

Employment termination payments

12.      Subsection 82-130(1) of the ITAA 1997 states that a payment is an employment termination payment if:

(a) it is received by you:

                     (i)       in consequence of the termination of your employment; or

                    (ii)       after another person's death, in consequence of the termination of the other person's employment; and

(b) it is received no later than 12 months after that termination (but see subsection (4)); and

(c) it is not a payment mentioned in section 82-135.

13.      A life benefit termination payment is a type of employment termination payment to which subparagraph 82-130(1)(a)(i) of the ITAA 1997 applies. It is made up of the following two components:

•         the tax-free component; and

•         the taxable component.

14.      The tax-free component of a life benefit termination payment is not assessable income and not exempt income under section 82-10 of the ITAA 1997.

15.      The taxable component of a life benefit termination payment is assessable income under section 82-10 of the ITAA 1997. However, a tax offset applies to those under their preservation age on the last day of the income year in which they received the payment that limits the tax rate to 30% (up to the relevant cap amount.) The remainder of the taxable component is taxed at the top marginal rate in accordance with the Income Tax Rates Act 1986.

16.      Taxation Ruling TR 2003/13 Income tax: employment termination payments (ETP): payments made in consequence of the termination of any employment: meaning of the phrase 'in consequence of' (TR 2003/13) explains the interpretation of the phrase 'in consequence of' in the context of employment termination payments.

17.      TR 2003/13 confirms that a payment is received by a person 'in consequence of' the termination of their employment if the payment 'follows as an effect or result of' their termination. That is, but for the termination of their employment, the person would not have received the payment.

Payments that are not employment termination payments

18.      Section 82-135 of the ITAA 1997 lists payments that are not employment termination payments. These include:

•         unused annual leave payments (Subdivision 83-A of the ITAA 1997)

•         the tax-free part of a genuine redundancy payment (Subdivision 83-C of the ITAA 1997).

Unused annual leave payments

19.      Subdivision 83-A of the ITAA 1997 explains how a payment for unused annual leave is taxed. It confirms that unused annual leave payments are assessable income. Annual leave incorporates:

•         leave ordinarily known as annual leave (including recreational leave and annual holidays).

•         any other leave made available in circumstances similar to those mentioned above which is ordinarily made available.

20.      Subsection 83-10(3) of the ITAA 1997 explains that a payment received by a person in consequence of the termination of their employment is an unused annual leave payment if:

•         it is for annual leave that has not been used; or

•         it is a bonus or other additional payment for annual leave that has not been used; or

•         it is for annual leave, or is a bonus or other additional payment for annual leave to which a person was not entitled to just before their employment termination, but would have been made available to them at a later time if it were not for their employment termination.

21.      A tax offset applies under section 83-15 of the ITAA 1997 to ensure that the rate of tax on an unused annual leave payment does not exceed 30% to the extent that the payment was made in respect of employment before 18 August 1993 or the payment was made in connection with a genuine redundancy payment, an early retirement scheme payment or the invalidity segment of an employment termination payment or superannuation benefit.

Genuine redundancy payments

22.      Subdivision 83-C of the ITAA 1997 explains what a genuine redundancy payment is and how it is taxed. Section 83-175 of the ITAA 1997 states that:

(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 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.

(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 the 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)).

23.      Taxation Ruling TR 2009/2 Income tax: genuine redundancy payments (TR 2009/2) discusses the basic conditions and requirements that a payment must satisfy to be a genuine redundancy payment.

24.      It confirms that there are four basic conditions that a payment must satisfy to be a genuine redundancy payment. 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 by the redundancy of the employee's position.

•         The redundancy payment must be made genuinely because of a redundancy.

25.      Relevantly, TR 2009/2 provides guidance on when an employee is being dismissed from employment at paragraphs 16-22 and 241-258. It also provides guidance on when the dismissal is caused by the redundancy of an employee's position at paragraphs 23-30 and 259-276.

26.      It explains that dismissal is a particular mode of employment termination as it requires a decision to terminate employment at the employer's initiative without the consent of the employee. This is in contrast to situations where an employee has given their consent and freely chooses to agree to or approve the act or decision to terminate their employment. Where a contract of employment terminates by effluxion of time or by agreement, there is no dismissal[1].

27.      TR 2009/2 explains that an employee's position is redundant in circumstances where the employer determines that the functions, duties and responsibilities attached to that position are superfluous to their needs and they do not require the position to be occupied by anyone.

28.      Contracted employees are often employed for a particular project. The completion of work required to be performed by an employee for the purposes of the project may give rise to several payments on termination. However, these payments would not ordinarily qualify as genuine redundancy payments.

29.      Paragraphs 31-32 and 277-280 of TR 2009/2 confirms that a redundancy payment must be made genuinely because of a redundancy. Contrived cases will not satisfy the conditions in subsection 83-175(1) of the ITAA 1997.

30.      TR 2009/2 states that there are five further requirements that a payment must satisfy to be a genuine redundancy payment. These additional requirements are:

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

•         The dismissed employee is not older than the specified age limits.

•         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 and another entity to employ the dismissed employee after termination.

•         The payment is not in lieu of superannuation benefits.

31.      Relevantly, TR 2009/2 provides guidance on the requirement that the termination must not be at the end of a fixed period of employment at paragraphs 36-39 and 284-290. It discusses how this requirement applies to contracted employees that have been employed on a project duration basis and their period of service.

32.      TR 2009/2 confirms that a payment made at the end of a fixed period of employment would not normally satisfy the requirements to be a genuine redundancy payment. It also explains that a set term specified within an employment contract will govern the employment relationship unless implied terms to the contrary can be established.

33.      Where an employment contract is for a specified period of time, an employee cannot be dismissed at the end of that period of time. This is because their employment simply terminates at that time in accordance with the set term specified within their employment contract.

34.      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. A payment on termination in these circumstances would normally be an employment termination payment.

35.      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, the length of the period for which they have been employed and the number of times their employment contract is renewed are relevant considerations when making this assessment.

36.      In circumstances where the employment of a contracted employee extends over a number of projects (including interim periods between projects where they are retained), then an assessment of all the facts and circumstances will be required to determine whether a termination payment satisfies all the conditions and requirements to be a genuine redundancy payment.

37.      TR 2009/2 explains the requirement that the employee must not be older than the specified age limits at paragraphs 34-35 and 282-283. It discusses the requirements that the payment must not be in lieu of superannuation benefits at paragraphs 53-54 and 310-312 and that there must be no arrangement entered into between the employer and the employee and another entity to employ the dismissed employee after the termination at paragraph 50-52 and 306-309. The requirement that the actual amount paid is not greater than the amount that could reasonably be expected had the parties being dealing at arm's length (in the event that the employer and the employee are not in fact dealing at arm's length in relation to the dismissal) is analysed at paragraphs 40-49 and 291-305 within TR 2009/2.

Application to your circumstances

38.      You entered into an employment contract with your former employer which was signed by you on a certain date. This employment contract with your former employer confirmed what your position with them would be.

39.      Under your employment contract with your former employer, it confirmed that your Employment Type with them was Permanent Contract. It stated that your Employment Basis was on a full-time, weekly hire, project duration basis and would commence 'on a certain date or upon first attendance at the Project...'. It also specified that the end date would be 'As required by the Company or until your services are terminated in accordance with the Agreement'.

40.      You also received correspondence from your former employer about a renumeration review which resulted in an increase to your renumeration. The renumeration review also included information about some changes to your position and advised that you would now be employed in a certain position and that your Employment Basis was on a full-time, project duration basis. It stated that the commencement date for these changes was 'on a certain date'.

41.      The renumeration review advised that all the other terms and conditions relating to your employment with your former employer remained unchanged and still applied. You acknowledged acceptance of these changes to your role on a certain date.

42.      You then received correspondence from your former employer which advised you that your employment with them would terminate on a certain date.

43.      Your final payslip from your former employer confirmed your gross income for that period and detailed the following amounts:

•         Annual Leave on Termination XX

•         Personal Leave on Termination (ETP Taxable) XX

•         Rostered Day Off on Termination (ETP Taxable) XX

•         Project Incentive Payment on Termination (ETP Taxable) XX

•         Severance on Termination (ETP Taxable) XX

44.      The payment you received for Annual Leave on Termination forms part of your assessable income under Subdivision 83-A of the ITAA 1997 which confirms the tax treatment for unused annual leave payments.

45.      Subsection 82-130(1) of the ITAA 1997 states that a payment will be an employment termination payment if:

(a) it is received by you:

                     (i)       in consequence of the termination of your employment; or

                    (ii)       after another person's death, in consequence of the termination of the other person's employment; and

(b) it is received no later than 12 months after that termination (but see subsection (4)); and

(c) it is not a payment mentioned in section 82-135.

46.      The payments you received for Personal Leave on Termination, Rostered Day Off on Termination, Project Incentive Payment on Termination and Severance on Termination are employment termination payments as they were received by you in consequence of the termination of your employment, you received these payments within 12 months of the termination of your employment and they were not payments mentioned within section 82-135 of the ITAA 1997.

47.      The basic conditions and requirements for a payment to be a genuine redundancy payment under section 83-175 of the ITAA 1997 require that:

•         The payment being tested must be received in consequence of your termination.

•         The termination must involve you being dismissed from employment.

•         The dismissal must be caused by the redundancy of your position.

•         The redundancy payment must be made genuinely because of a redundancy.

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

•         You are not older than the specified age limits.

•         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 your former employer and you were in fact not dealing at arm's length in relation to the dismissal.

•         There was no arrangement entered into between your former employer and you and another entity to employ you after your termination.

•         The payment is not in lieu of superannuation benefits.

48.      The payments you received for Personal Leave on Termination, Rostered Day Off on Termination, Project Incentive Payment on Termination and Severance on Termination are not genuine redundancy payments as some of the basic conditions and requirements under section 83-175 of the ITAA 1997 have not been satisfied. These are that:

•         The termination must involve you being dismissed from your employment.

•         The dismissal must be caused by the redundancy of your position.

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

49.      Your employment contract with your former employer specified its commencement date and its end date (that is, the period of service/period of employment). It stated that the end date of your employment with your former employer would be upon 'As required by the Company or until your services are terminated in accordance with the Agreement'.

50.      You agreed to the end date within your employment contract with your former employer when you signed it on a certain date.

51.      You also received correspondence from your former employer about a renumeration review. This resulted in an increase to your renumeration and included information about some changes to your role.

52.      The renumeration review confirmed that all other terms and conditions of your original employment contract with them (such as the end date) remained unchanged and still applied. You acknowledged acceptance of these changes to your role with your former employer on a certain date.

53.      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 effluxion of time or by agreement, there is no dismissal.

54.      Your original employment contract with your former employer stated that your Employment Basis was on a full-time, weekly hire, project duration basis. The correspondence you received from your former employer about a renumeration review made some changes to your role with them. It confirmed that your Employment Basis with them was now on a full-time, project duration basis.

55.      Where an employee has been employed on a project duration basis, their period of service is often determined by the achievement of a particular task or outcome. An employee is not redundant where the project has been completed, even if it has been completed before its designated time.

56.      As your original employment contract with your former employer specified its commencement date and end date, you were terminated at the end of a fixed period of employment. The correspondence you received from your former employer about a renumeration review did not alter the end date of your employment with them.

57.      Although the length of the period for which an employee has been employed, the number of times their employment contract has been renewed and whether they have been retained during interim periods between projects are relevant considerations, you signed your original employment contract with your former employer on a certain date and then agreed to some slight changes to this on a certain date. You were not retained during interim periods between projects with your former employer.

58.      As all the basic conditions and requirements under section 83-175 of the ITAA 1997 have not been satisfied, the payments you received for Personal Leave on Termination, Rostered Day Off on Termination, Project Incentive Payment on Termination and Severance on Termination cannot be genuine redundancy payments and have been correctly taxed as employment termination payments.

[1] Advertiser Newspapers Pty Ltd v Industrial Relations Commission of South Australia [1999] SASC 300; (1999) 74 SASR 240; (1999) 90 IR 211 at 28.