Edited version of private advice

Authorisation Number: 1052289169033

Date of advice: 23 October 2024

Ruling

Subject: Employment termination payment

Question 1

Is the payment an ETP under section 82-130 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 2

Is any part of the payment a genuine redundancy payment under section 83-175 of the ITAA 1997?

Answer

No.

This ruling applies for the following period:

Income year ending 30 June 20XX

Relevant facts and circumstances

You provided a statement of termination advice from your employer detailing key components of your employment termination payment and the date it was made.

You provided a letter from your employer stating that effective XX XXXX XXXX your position title will be 'Manager - Business Development' (unsigned).

You provided a letter from your employer dated XX XXXX XXXX that stated due to a restructure, your position of 'XXXX' will no longer exist in its current form. Additionally, you were offered the position of 'XXXX' in a new form. The new position is classified as a XXXX, which is remunerated at $XXXX.XX (excluding superannuation) from XX XXXX XXXX.

You provided an extract of your enterprise bargaining agreement which states under section 18.7 that 'a position may be recognised as genuinely redundant after all reasonable effort has been made to redeploy an affected Employee utilising the Reemployment Process set out under Schedule 4 and no suitable position is available' and 'where a determination is made that a genuine redundancy exists, the Employer may elect to offer a voluntary separation (severance) package to the affected Employee. Employees are under no obligation to accept an offer.'

In a phone call between yourself and an ATO officer, you stated that you accepted a 'voluntary separation severance package' from your former employer. During this call, you also mentioned that a second position was offered to yourself, other than XXXX, which you subsequently declined.

A copy of your severance agreement was requested, but this was not provided by yourself.

Detailed reasoning

Employment termination payments

By virtue of subsection 995-1(1) of ITAA 1997, employment termination payments are defined in subsection 82-130(1) of the ITAA 1997, which 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.

To determine if a payment is an employment termination payment (ETP), all the conditions in subsection 82-130(1) of the ITAA 1997 must be satisfied. Failure to satisfy any of the conditions under subsection 82-130(1) will result in the payment not being considered an employment termination payment.

Paid as a 'consequence of' the termination of your employment

For a payment to be treated as an ETP, the first condition that must be met is that the payment is made in 'consequence of' the termination of employment of the taxpayer.

The phrase 'in consequence of' is not defined in the ITAA 1997. However, the courts have interpreted the phrase in a number of cases. Taking into account the court's decisions on the meaning of the phrase, the Commissioner's view on the meaning and application of the 'in consequence of' test is set out in Taxation Ruling TR 2003/13 Income tax: eligible termination payments (ETP): payments made in consequence of the termination of any employment: meaning of the phrase 'in consequence of' (TR 2003/13).

While TR 2003/13 considered the meaning of the phrase 'in consequence of' in the context of the eligible termination payments, TR 2003/13 can still be relied upon as both the former provision under the Income Tax Assessment Act 1936 and the current provision under the ITAA 1997 both use the term 'in consequence of' in the same manner.

In paragraph 5 of TR 2003/13 the Commissioner states:

... a payment is made in respect of a taxpayer in consequence of the termination of the employment of the taxpayer if the payment 'follows as an effect or result of' the termination. In other words, but for the termination of employment, the payment would not have been made to the taxpayer.

In this case, according to a letter from your employer dated X XXXX XXXX which stated due to a restructure, your position of 'XXXX' will no longer exist in its current form. You state in your application that due to this re-structure, your employment was terminated on X XXXX XXXX. As a result of the termination, you received a payment totalling $XXXX.XX on XX XXXX XXXX. In other words, but for the termination, you would not have received that payment. Therefore, it is considered that the termination payment was received by you in consequence of the termination of your employment.

Payment is received no later than 12 months after termination

You state that your employment was terminated with your employer on XX XXXX XXXX and the payment was made on XX XXXX XXXX. As this is less than 12 months after your termination, this condition will be satisfied.

Payment is not a payment mentioned under section 82-135 of the ITAA 1997

Based on the information provided, the payment listed in section 82-135 of the ITAA 1997 which may be relevant in this case and thus requires consideration is:

•                     the part of a genuine redundancy or an early retirement scheme payment worked out under section 83-170.

Genuine redundancy payments

What is a genuine redundancy payment is set out in section 83-175 of the Income Tax Assessment Act 1997 as follows:

(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)).

The meaning of a genuine redundancy payment is set out in detail under Taxation Ruling 2009/2 income tax: genuine redundancy payments (TR 2009/2) as follows:

The basic requirement for a genuine redundancy payment

Under subsection 83-175(1), a genuine redundancy payment is one 'received by an employee who is dismissed from employment because the employee's position is genuinely redundant'.

There are four necessary components within this requirement:

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

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

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

(iv)            The redundancy payment must be made genuinely because of a redundancy.

The satisfaction of this requirement establishes the essential character of the payment. However, there are further conditions that must also be satisfied before a payment can be treated as a genuine redundancy payment. These four components are examined further in the relevant paragraphs 13 to 32 of TR 2009/2 as follows:

'Component 1: Payment 'in consequence of' termination

As discussed above, the Commissioner considers that any payment must be made 'in consequence of' the employee's termination before it can be a genuine redundancy payment. Taxation Ruling TR 2003/13 sets out the Commissioner's views on when a payment is made 'in consequence of' termination of employment.

It follows that any payment that meets the requirement identified at paragraph 11 of this Ruling will satisfy the 'in consequence of' condition for employment termination payments under paragraph 82-130(1)(a).

Some other payments, such as unused annual leave and unused long service leave, may also be made in consequence of termination. Any such payments that receive a more specific tax treatment are excluded from being genuine redundancy payments by subsection 83-175(4).'

In your circumstances, it is accepted that they payment was made in consequence of termination.

'Component 2: 'Dismissal' from employment

Subject to the exception recognised in paragraph 17 of this Ruling, the loss of a particular position with an employer is not a dismissal for the purposes of subsection 83-175(1) unless all employment with the employer is severed. 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.

The exception to this general principle is the case of a person holding an office with the employer at the same time as having a common law employment relationship with the same employer. In this case dismissal from either the office or common law employment involves a dismissal from employment for the purposes of subsection 83-175(1). An example is a person who is both a director of the employer company and a common law employee of the company who is terminated from one of these two capacities.

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.

Consent in this context refers to the employee freely choosing to agree to or approve the act or decision to terminate employment in circumstances where the employee has the capacity to make such a choice. Determining whether an employee has consented to their termination requires an assessment of the facts and circumstances of each case. Consent may be either expressly stated by the employee or implied by their behaviour or conduct.

A dismissal can still occur even where an employee has indicated that they would be interested in having their employment terminated, provided that the final decision to terminate employment remains solely with the employer. Such a case may arise where expressions of interest in receiving a redundancy package are sought from employees as part of a structured process undertaken by the employer as a means of promoting industrial harmony.

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.

Cases of 'constructive dismissal' are a dismissal for the purposes of subsection 83-175(1). Constructive dismissal is currently recognised to occur where the actions or behaviour of the employer in relation to the employment relationship effectively curtails the element of consent on the employee's behalf. The simplest example of constructive dismissal is where an employee resigns under threat (explicit or implicit) of dismissal. Another example is where the employee resigns after the employer offers work in an alternative position which is inappropriate given the employee's particular circumstances (for example, their skills or experience). While in form this appears to be a termination at the employee's initiative, it is recognised at law to be a dismissal.'

In your circumstances, it is not accepted that you were dismissed from your employment. This is because other suitable jobs were made available. Additionally, dismissal requires a decision to terminate at the employer's initiative, without the consent of the employee. You had a choice of two other positions and freely chose to terminate your employment.

'Component 3: Dismissal caused by 'redundancy'

As noted in paragraph 18 of this Ruling, dismissal is a particular mode of employment termination. Section 83-175 further requires that the dismissal be caused by redundancy of the employee's position, and not for some other reason.

As is the case in determining if there is a dismissal, the reason for a dismissal is to be established in light of the facts and circumstances of each case. The redundancy of the relevant position must be the prevailing or most influential reason for the dismissal if there is more than one contributing cause.

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.

In some circumstances, an employer may reallocate the duties and functions attached to a particular position to another position within the employer's organisational structure. In such cases, the former position is redundant. However, if the employee who had been working in that position is still employed by the employer following the reallocation of duties and functions, there will not be a dismissal.

On the other hand, if an employer decides after downsizing or some other structural reorganisation to terminate an employee, the former position of the employee is redundant as long as the downsizing or reorganisation is the prevailing or most influential cause of the termination.

A dismissal is not caused by redundancy where personal acts or default are the prevailing or most influential cause for the termination. For example, a person may be dismissed due to unsatisfactory performance or behaviour.

In some cases, an employer may decide to restructure their organisation at the same time as identifying underperformance of particular members of staff or areas within the existing organisational structure. In the event that employees are dismissed in these circumstances, careful consideration will need to be given to what was the prevailing or most influential cause of dismissal.

In circumstances where an employee resigns after being offered alternative employment with an employer following an organisational restructure, it will be necessary to assess whether the termination of employment amounts to a constructive dismissal.'

In your circumstances, it is accepted that your duties and functions attached to your position were re-allocated to another position within the same employer's organisational structure. However, you had the option to still be employed by the same employer following the reallocation of duties and functions despite the redundancy of your former position but you made a personal choice not to accept the new position you were offered. Therefore, we consider that the prevailing cause of termination of your employment was due to your voluntary termination and not due to a constructive dismissal.

'Component 4: 'Genuine' redundancy

Contrived cases of redundancy will not meet the conditions in section 83-175. Whether a redundancy is 'genuine' is determined on an objective basis.

The fact that an employer and employee have an understanding that a payment on termination is caused by redundancy or that the employer treats the payment as a redundancy payment for tax purposes does not of itself establish genuine redundancy.'

In your circumstances, it is accepted that your former position was made redundant, but objectively this is not a genuine redundancy.

Therefore, in your circumstances, no part of the ETP is a genuine redundancy payment under section 83-175 of the ITAA 1997. This is because there were suitable jobs available which were offered to you by the same employer. However, you declined those jobs and freely chose to enter a no-fault, voluntary redundancy agreement with your former employer. All four basic conditions are required to be satisfied the payment to be considered a genuine redundancy payment.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 82-130

Income Tax Assessment Act 1997 section 82-135

Income Tax Assessment Act 1997 section 82-140

Income Tax Assessment Act 1997 section 83-170

Income Tax Assessment Act 1997 subsection 83-175(1)