Edited version of private advice

Authorisation Number: 1052344068417

Date of advice: 19 December 2024

Ruling

Subject: Genuine Redundancy

Question 1

Is any part of the payment made to you on the expiry of your employment contract that resulted in the termination of your rolling fixed-term employment, a tax-free part of a genuine redundancy payment under section 83-170 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer 1

No.

This ruling applies for the following period:

Year ending 30 June 2024

The scheme commenced on:

1 July 2023

Relevant facts and circumstances

The Taxpayer started their employment with the Employer on XX October 20XX

On XX November 20XX the Taxpayer were offered a secondment to the role of manager, for an initial 12 months commencing on XX January 20XX, with an anticipated end date of XX January 20XX. With all other conditions of the contract being unchanged.

Within the initial contract signed by the Taxpayer, it was stated that the Employer could terminate employment at anytime with two months' notice given to the employee or payment in lieu of that two months' notice.

In the application statement, it is contend that the Employer offered the Taxpayer the opportunity to leave the Employer with entitlement to:

•                     Normal termination payments (Unused leave entitlements and payment in lieu of notice); and

•                     An additional payment representing 52 weeks of salary.

This was declined and a Deed of Release was implemented.

The Deed of Release agrees to termination payments of:

•                     Any unpaid salary

•                     Two months of base rate pay in lieu of the notice.

•                     Any additional lump sum.

•                     Accrued but untaken annual leave

•                     Accrued long service leave.

Further information was supplied to the ATO regarding email information between the Taxpayer and their representative and the Taxpayer and Employer.

Assumptions

We assume that the content of the unexecuted deed provided is the same in all respects as that of the executed deed.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 82-130

Income Tax Assessment Act 1997 section 83-10

Income Tax Assessment Act 1997 section 83-85

Income Tax Assessment Act 1997 section 83-170

Income Tax Assessment Act 1997 subsection 83-170(2)

Income Tax Assessment Act 1997 subsection 83-170(3)

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 paragraph 83-175(2)(a)

Income Tax Assessment Act 1997 subparagraph 83-175(2)(a)(ii)

Income Tax Assessment Act 1997 paragraph 83-175(2)(c)

Income Tax Assessment Act 1997 subsection 83-175(3)

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

Social Security Act 1991 subsection 23(1)

Reasons for decision

The termination of your former employment does not constitute a genuine redundancy under section 83-175 of the ITAA 1997.

No part of the payment you received upon the termination of your contract constitutes a tax-free part of a genuine redundancy payment under section 83-170 of the ITAA 1997.

Detailed Reasoning

Employment termination payment

Division 82 of the ITAA 1997 contains the substantive rules governing the taxation of employment termination payments (ETPs).

The term 'employment termination payment' as defined in section 82-130, includes any payment made in respect of a taxpayer 'in consequence of the termination of their employment', other than certain specified payments.

A payment is an ETP if it satisfies all the requirements in section 82-130 of the ITAA 1997 and is not specifically excluded under section 82-135 of the ITAA 1997.

Subsection 82-130(1) of the ITAA 1997 states:

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 the termination (but see subsection (4)); and

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

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) sets out the Commissioner's views on when a payment is made 'in consequence of' termination of employment.

Paragraphs 5 and 6 of TR 2003/13 state:

(5)           ....the Commissioner considers that a payment is received by a taxpayer in consequence of the termination of the taxpayer's employment 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 received by the taxpayer.

(6)           The phrase requires a causal connection between the termination and the payment, although the termination need not be the dominant cause of the payment.

Common examples of ETPs include golden handshakes, contractual termination payments and payments for wrongful dismissal.

Genuine redundancy payment

Section 82-135 of the ITAA 1997 provides that certain payments are not ETPs.

Paragraph 82-135(c) of the ITAA 1997 excludes from an ETP the part of a genuine redundancy payment worked out under section 83-170 of the ITAA 1997. This payment is tax-free.

The matter of what is a genuine redundancy payment is defined by section 83-175. The section identifies:

•                     the conditions that must be satisfied for at least part of a payment to be treated as a genuine redundancy payment;

•                     how to work out what amount of the payment is a genuine redundancy payment; and

What payments are excluded from being a genuine redundancy payment 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 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 he or she turned 65;

(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.

As can be seen above, subsection 83-175(1) contains two elements to be satisfied for a payment to be considered a genuine redundancy payment:

•                     The payment is received by an employee who is dismissed because their position is genuinely redundant; and

•                     The payment exceeds the amount that could reasonably be expected to be received by the employee if their employment was terminated voluntarily at that time

For a genuine redundancy payment to exist, both elements need to be satisfied.

The Commissioner of Taxation has issued Taxation Ruling TR 2009/2 Income tax: genuine redundancy payments (TR 2009/2), which outlines the requirements to be satisfied before any payment made to a person whose employment is terminated qualifies for treatment as a genuine redundancy under section 83-175 of the ITAA 1997.

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'.

Paragraph 11 of TR 2009/2 states:

There are four necessary components within this requirement:

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

•                     That termination must involve an employee being dismissed from employment.

•                     That dismissal must be caused by the redundancy of the employee's position.

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

Payment 'in consequence of' termination

The Commissioner considers that a payment is received by a taxpayer in consequence of the termination of the taxpayer's employment 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 received by the taxpayer.

The phrase requires a causal connection between the termination and the payment, although the termination need not be the dominant cause of the payment. The question of whether a payment is received in consequence of the termination of employment will be determined by the relevant facts and circumstances of each case.

The provided information supports that all payments made to you, whether provided for in the Enterprise Bargaining Agreement or determined via settlement, were paid in consequence of the termination of your employment.

This condition is satisfied.

'Dismissal' from employment

The Commissioner's view is that a genuine redundancy 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.

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.

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.

It is clear from the facts captured in the Deed, that the termination of your employment was at the behest of your employer.

This condition is satisfied.

Dismissal caused by 'redundancy'

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.

The provided documents show that the position was not considered redundant by the employer, but rather an exercise of their right under the employment contract.

Evidence was also provided of a Deed of release, a secondment and allocation of duties'.

Due to the information provided, this condition is not satisfied.

'Genuine' redundancy

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 addition to the basic requirement for a genuine redundancy payment found in subsection 83-175(1), the further conditions for genuine redundancy payment treatment in subsections 83-175(2) and (3) require that:

•                     the dismissed employee is not older than the 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 employee or the employer and another entity to employ the dismissed employee after the termination; and

•                     the payment is not in lieu of superannuation benefits.

This condition is not satisfied, as the termination occurred as per the employment contract.