Edited version of private advice

Authorisation Number: 1052366112309

Date of advice: 27 February 2025

Ruling

Subject: Assessable income

Question 1

Is any part of the settlement amount paid to you 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.

Question 2

Are you entitled to a deduction for legal fees?

Answer 2

No.

This ruling applies for the following period:

Year ended XX June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You had employment with the Employer.

A few years ago, you filed proceedings with the court regarding your employment with the Employer.

In the 'Amended Statement of claim' document submitted for the proceedings:

The 'Employment with the First Respondent' section provides:

•                you started full time employment with the Employer.

•                In the year following the date you started with your Employer, you entered a contract with the Employer to begin a different role. This contract was oral and was made to the Director of the Employer. You did not have a job description for the position.

•                the Enterprise Agreement applied to your employment by the Employer.

The 'Reduction of workload' section provides:

•                A few years ago, the Employer advised you that some of your daily work tasks were to be outsourced. These tasks eventually started being performed by personnel overseas.

•                Several months later the Employer directed you to carry out duties outside your role.

The 'Repudiation' section provides:

•                You were locked out of the Employer's work emails and was diagnosed by a doctor as being unfit to attend work.

•                You were unable to perform work duties by reason of the lack of remote access to your work email and internal system.

•                You were diagnosed by a general practitioner with 'acute stress reaction' and was deemed unfit for work for several days.

•                You complained that your role was redundant.

•                You have not returned to normal work duties for a number of years.

•                For the above reasons, you claimed the Employer repudiated your contract.

The 'Redundancy' section provides:

•                Some duties assigned to you are a substantial deviation from your normal duties.

•                The Employer has withdrawn your normal duties.

•                The Employer no longer requires the job performed by you to be done by anyone, and the Employer repudiated the contract.

•                You informed the Employer that you accepted the Employer's repudiation of the contract.

The 'Relief' section provides:

•                You demanded the Employer to pay you the sum payable for redundancy under the enterprise agreement.

•                As an alternative to the above, you demanded the Employer to pay you the sum payable for redundancy under the Fair Work Act.

•                Some other demands of payments in relation to wages equivalent to the period of notice, long service leave, general damages, pecuniary penalty, and civil penalties.

You provided a document with the title 'Deed of Settlement and Release', which is a copy that contains the signature of the Employer but does not contain your signature (the Deed). It:

the 'Recitals' section confirms:

•                You have been an employee with the Employer for a number of years.

•                You have been on sick leave for a period. The Employer submitted a statutory workers' compensation claim shortly after you started sick leave.

•                You filed an application with the Court, in relation to your employment, seeking, among other orders, the redundancy of your employment position and an allegation that the Employer had repudiated the employment contract.

•                The Employer denied the allegations made by you in the proceedings and a Defence was filed in the proceedings.

•                You and the Employer attended court ordered mediation.

•                The parties have agreed that the Employment will come to an end and, without admission of liability by either of the Parties, the Parties have agreed to resolve all disputes and bring the proceedings to an end on the terms and conditions of this Deed.

at clause '1.1 Definitions' provides:

•                Settlement Amount means the sum to be paid as a settlement payment in the gross sum (taxed as a genuine redundancy).

at clause 2.1 states:

•                In full and final settlement of the proceedings (and all matters arising out of or in connection therewith including any final payment of employment including but not limited to annual leave, long service, and notice periods) and in consideration of the promises contained herein, the Employer agrees to pay the Settlement Amount (less any applicable taxation withholding), by way of EFT, within seven (7) days of the execution of this deed by all Parties.

Schedule 1 also provides the date of cessation of your employment.

You incurred an amount in legal fees.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1997 section 82-130

Income Tax Assessment Act 1997 section 82-135

Income Tax Assessment Act 1997 section 83-80

Income Tax Assessment Act 1997 section 83-85

Income Tax Assessment Act 1997 section 83-170

Income Tax Assessment Act 1997 section 83-175

Income Tax Assessment Act 1997 Division 82

Reasons for decision

Employment termination payment

Division 82 of the Income Tax Assessment Act 1997 (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.

(1) 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(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.

To satisfy subsection 83-175(1), both elements need to be met.

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.

Note: 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).

Unused annual leave would ordinarily be included in assessable income under section 83-10 of the ITAA 1997 and subject to marginal rates of tax.

Similarly, unused long service leave would ordinarily be included in assessable income under section 83-80 of the ITAA 1997. If this payment is made in connection with a genuine redundancy payment, section 83-85 allows a tax offset to ensure that the rate of tax on this amount does not exceed 30%.

Component 1: payment 'in consequence of' termination

The phrase 'in consequence of' is not defined in the ITAA 1997.

TR 2003/13 makes clear that 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.

A severance payment that is made in respect of a taxpayer by a former employer after the termination of the taxpayer's employment, such as a golden handshake, is a payment that follows as an effect or result of the termination. Accordingly, the payment is made in consequence of the termination of employment. In such circumstances there is a causal connection between the payment and the termination of employment in that the payment would not have been made to the taxpayer but for the termination of the employment.

As confirmed by the Deed, the Employer has agreed for you to cease employment.

The Employer agreed to pay you the Settlement Amount, as a full and final settlement of the proceedings, that connects with final payment of employment including but not limited to annual leave, long service, and notice periods.

As can be seen from the above, the Settlement Amount made to you were paid in consequence of the termination of your employment:

•                There is a causal connection between the termination and the payment

•                But for the termination of your employment, you would not have received the payment

•                The termination and the payment are intertwined

Component 1 is satisfied - the payment you received was in consequence of your termination.

Component 2: '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. 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.

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.

Based on the 'Repudiation' section of the 'Amended Statement of claim' document, it may have implied that the Employer's action of locking out your access to the Employer's emails and potentially disabling your remote access to the accounting system to perform your work duties were the Employer's initiatives of the termination of your employment. But the term 'the parties have agreed that the Employment will come to an end' as under the Deed does not seem give a clear indication of 'dismissal'.

Component 3: dismissal caused by 'redundancy'.

Section 83-175 further requires that the dismissal be caused by redundancy of the employee's position, and not for some other reason.

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.

In this case, as in contrast with 'the Employer's decision', both the 'Amended Statement of claim' document and the Deed provide indicators that you demanded or sought for 'the redundancy of your position'. On the other hand, there is no sufficient information that suggests that it is fundamentally the Employer's decision that your position is redundant.

Consequently, component 3 is not satisfied.

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 this case, despite the Deed providing that a Settlement Amount (taxed as a genuine redundancy) is to be paid to you, as mentioned in the above paragraph, an employer and an employee's mutual understanding that a payment on termination is caused by redundancy for tax purposes does not of itself establish the 'genuine' redundancy.

As a result, component 4 is not considered satisfied.

Further conditions for a genuine redundancy payment

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.

Conclusion for genuine redundancy payment

In this case, your circumstances may have met some or all of the further conditions in subsections 83-175(2) and (3).

While it is required that the basic requirement in subsection 83-175(1) and the further conditions in subsections 83-175(2) and (3) are all satisfied to be considered a genuine redundancy payment, at least two of the four necessary components have not met the basic condition. This means that your Settlement Amount of $63,000 is not considered a genuine redundancy payment under section 83-175 of the ITAA 1997.

Consequently, none of the settlement payment forms a tax-free part of a genuine redundancy payment under section 83-170 of the ITAA 1997.

Legal Fees

Section 8-1 of the ITAA 1997 allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income, except where the outgoings are of a capital, private or domestic nature, or relate to the earning of exempt income.

In determining whether a deduction for legal expenses is allowed, the nature of the expenditure must be considered (Hallstroms Pty Ltd v. Federal Commissioner of Taxation (1946) 72 CLR 634; (1946) 3 AITR 436; (1946) 8 ATD 190). The nature or character of the legal expenses follows the advantage that is sought to be gained by incurring the expenses.

It also follows that the character of legal expenses is not determined by the success or failure of the legal action.

If the advantage to be gained is of a capital nature, then the expenses incurred in gaining the advantage will also be of a capital nature.

Taxation Determination TD 93/29 states:

If the legal action goes beyond a claim for a revenue item such as wages, and constitutes an action for breach of the contract of employment where the essential character of the advantage sought relates to an enduring advantage that is of a capital nature, the legal costs would not be deductible. For example, legal expense relating to an action for damages for wrongful dismissal is not deductible.

Although your legal expenses do not relate to damages for wrongful dismissal, they relate to your redundancy payment in addition to salary and wages. A redundancy payment, being compensation for the loss of the expectation of continuity of service, is a payment that is capital in nature. Such a payment is made to compensate the taxpayer for the loss of their employment position and is regarded as a capital payment (Case Y24 91 ATC 268; AAT Case 6942 (1991) 22 ATR 3184).

Redundancy payments are treated as employment termination payments and subject to special tax treatment that may result in some or all of the amount being included in your income. However, the fact that a capital payment is specifically brought to account as assessable income will not change the nature of the payment. An amount that is capital in nature will remain capital notwithstanding that it is specifically included in your assessable income.

Therefore, as a redundancy payment is capital in nature, the legal expenses incurred in obtaining the redundancy payment will also be capital in nature.

You are not entitled to a deduction for the legal fees under Section 8-1 of the ITAA 1997.