Edited version of private advice

Authorisation Number: 7920141690797

Date of advice: 30 May 2022

Ruling

Subject: Genuine redundancy payment

Question 1

Were the payments made to you on termination of your employment, the result of a genuine redundancy under Section 83-175 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

Question 2

Is any part of the lump sum payment you received from your employer tax-free under Section 83-170 of the ITAA 1997?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You were employed by XYZ.

An Employment Termination Payment (ETP) was paid to you on XX November 20XX of $ XXX (in a single payment that included other termination entitlements).

You received correspondence from your employer - Final entitlements letter, setting out the details of final entitlements (including the ETP). Correspondence was dated 24 November 20XX.

XYZ paid the ETP to you.

XYZ did not class the ETP as resulting from a genuine redundancy, as per the final entitlements correspondence received by you.

The notice of termination of employment dated X October 20XX and sent to you stated:

'The purpose of this letter is to confirm the outcome of a recent review of the office of employer and its operational requirements, and what it means for you.

As a result of change in operational requirements, the role of position "A" is no longer required. Regrettably this means that your employment will terminate. This decision is not a reflection on your performance'.

You discussed the matter with the employer/payer over several telephone calls and via email correspondence.

You were informed by a colleague, one of the personal staff at the adviser level in the employ of the employer, that consideration was being given to removing the applicant's position and replacing it with position "B" with markedly different duties. It was indicated to the applicant that they did not possess the qualities regarded as necessary for the new role.

The position "B" role was not advertised, and the applicant had no genuine ability to apply for this role.

On XX November 20XX you contacted XYZ via email and asked to 'alter the taxation of the scheduled payment'.

On XX November 20XX you received an email from XYZ stating that:

'In respect to the taxation treatment of your final entitlements in relation to your employment in the office of your employer, XYZ considers that the termination of employment resulting from a restructure of the employer is not a genuine redundancy for the purposes of section 83-175 of the Income Tax Assessment Act 1997. The employer will require the services of someone for what is essentially the same position (i.e., your personal employee position) and for that reason fails the test of genuine redundancy' (email from XYZ).

On XX September 20XX, in an email sent from tax officer addressed to you, we confirmed the further information required to action the private ruling application request, as below:

•         the date you commenced your employment at employer XYZ

•         the date your employment was terminated

•         details of the payments you would have been entitled to receive if you resigned voluntarily

•         details of any agreements between you and your employer or between your employer and any other person or entity for future employment existing at the time your employment was terminated

•         a copy of the position description you held (Position "A") and your employee position number

•         a copy of the position description of the new employee (Position "B") and his/her position number

On XX September 20XX you sent an email to XYZ and requested a copy of the following documents:

•         an electronic copy of your most recent position description (Position "A")

•         an electronic copy of the position description of the replacement employee (Position "B").

On XX September 20XX you sent an email addressed to tax officer, the following information and/or documents were provided:

•         your employment was interrupted. Your first day of employment was: XX August 20XX, however, your first day of your after the interruption was X August 20XX

•         your date of termination (day of final employment) was XX October 20XX

•         your understanding of the Enterprise Agreement is that if you had voluntarily resigned you would not have received any severance payments. You would only have been paid out your annual leave entitlements.

•         you provided the Enterprise Agreement link on the employer website

•         there were no agreements between you and your employer and any other person or entity for future employment existing at the time your employment was terminated

•         a copy of the position description you held (Position "A"). You have not supplied your employee position number, noting that "you are not aware of a position number.

•         a copy of the position description of the new employee (Position "B") and his/her position number

Your deed of release dated XX November 20XX states that XYZ is expected to pay you the total amount of $xxx.

You received your termination payment on XX November 20XX with a breakdown as follows:

Payments:

•         Payment in lieu of Annual Leave $XXX,

•         Payment in lieu of Long Service Leave (LSL) $XXX,

•         Tax on Annual Leave, LSL - $XXX,

•         Total Net Final Entitlement $XXX

In addition, you were entitled to payment of severance benefit calculated on the length of continuous eligible service.

The severance benefit / total ETP $XXX

•         Less tax @32% on $xxx: - $XXX

•         Net $XXX

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 83-10

Income Tax Assessment Act 1997 section 83-80

Income Tax Assessment Act 1997 section 83-170

Income Tax Assessment Act 1997 section 83-175

Income Tax Assessment Act 1997 subsection 995-1(1)

Reasons for decision

Summary

The payments made to you on termination of your employment are not considered to be a result of a genuine redundancy under Section 83-175 of the Income Tax Assessment Act 1997 (ITAA 1997).

No part of the lump sum payment of $XXX made to you in the 20XX-XX income year is tax free under Section 83-170 of the ITAA 1997.

The payment of $XXX you received in the 20XX-XX income year is an employment termination payment as it was made in consequence of the termination of your employment and is not a payment which is excluded from being an employment termination payment.

As the unused annual leave and unused long service payments were not made in connection with a genuine redundancy payment, these payments will be included in your assessable income under Sections 83-10 and 83-80 of the ITAA 1997 respectively and be subject to marginal rates of tax.

Detailed reasoning

Employment termination payments

An employment termination, where the payment is made during the life of a taxpayer, is known as a life benefit termination payment (subsection 82-130(2) of the ITAA 1997).

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 courts decisions on the meaning of the phrase, the Commissioner's view on the meaning and application of the 'in consequence of' test are 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, your employment was terminated in 20XX, and as a result of the termination, you received the termination payment. 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

Your employment was terminated with the Employer in November 20XX and the payment was made in November 20XX. 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 payments listed in section 82-135 of the ITAA 1997 which may be relevant in this case and thus require consideration are:

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

•         unused annual leave (paragraph 82-135(c));

•         unused long service leave payments (paragraph 82-135(d)).

Genuine redundancy payments

A payment made to an employee is a genuine redundancy payment (GRP) if it satisfies all the conditions set out in section 83-175 of 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.

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

With regard to the first requirement set out in subsection 83-175(1) of the ITAA 1997, the Commissioner considers that there are four necessary components within this requirement:

•         the payment must be received in consequence of an employee's termination;

•         the termination must involve the employee being dismissed from employment;

•         dismissal must be caused by the redundancy of the employee's position; and

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

Meaning of received 'in consequence of' the termination

For the reasons stated above, it is considered that, in this case, the termination payment is paid to you in consequence of the termination of your employment.

Meaning of 'dismissal' and 'redundancy'

The terms 'dismissal' and 'redundancy' are not defined in the ITAA 1997 and are therefore, consistent with basic principles of statutory interpretation, their 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 in Taxation Ruling 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.

A position is redundant when the functions, duties and responsibilities formerly attached to the position are determined by the employer to be unnecessary to the current needs and purposes of the organisation. A dismissal is not caused by redundancy where personal acts or default are the cause for termination for example, unsatisfactory performance or behaviour.

Contrived cases of redundancy will not meet the conditions in section 83-175 of the ITAA 1997. 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.

Applying the above circumstances, it is considered that you did not receive the termination payment because your position was genuinely redundant as the facts of the case do not provide evidence that the duties and responsibilities formerly attached to your position are determined by the Employer to be no longer required after a review of the office of the employer and its operational and purposes of the organisation. There is no evidence provided from the Employer to advise that your position has been abolished. Therefore, this component has not been satisfied.

The payment advice does not reflect a genuine redundancy payment.

It is not necessary to examine if the remaining criteria set out under section 83-75 of the ITAA 1997 have been met. The failure of one criterion is sufficient to exclude the payment from being treated as a genuine redundancy payment and accorded the concessional taxation treatment under section 83-175 of the ITAA 1997.

Therefore, the termination payment of $XXX is an ETP, as it satisfies all the conditions in subsection 82-130 (1) of the ITAA 1997.

Unused annual leave and unused long service leave

Payments that are not employment termination payments are specified under section 82-135 of ITAA. This section states that following payments are not employment termination payments:

(a) a *superannuation benefit (see Divisions 301 to 307);

(b) a payment of a pension or an *annuity (whether or not the payment is a superannuation benefit); and

(c) an *unused annual leave payment (see Subdivision 83-A);

(d) an *unused long service leave payment (see Subdivision 83-B);

Therefore, the payment for unused annual leave ($XXX) and payment for unused long service leave ($XXX Team Marginal LSL-acc and $XXX Team Marginal LSL-Ent) are not employment termination payments pursuant to section 82-135 of the ITAA 1997.

Taxation treatment of unused annual leave and unused long service leave payments

Unused annual leave payments

Subdivision 83-A of the ITAA 1997 provides details regarding the taxation treatment of unused annual leave payments. Section 83-5 of the ITAA 1997 states that you are entitled to a tax offset for a payment that you receive in consequence of the termination of your employment that is for unused annual leave.

Pursuant to section 83-10(2) of the ITAA 1997 your assessable income includes an unused annual leave payment that you receive. Section 83-10(3) states that a payment that you receive in consequence of the termination of your employment is an unused annual leave payment if:

(a) it is for annual leave you have not used; or

(b) it is a bonus or other additional payment for annual leave you have not used; or

(c) it is for annual leave, or is a bonus or other additional payment for annual leave, to which you were not entitled just before the employment termination, but that would have been made available to you at a later time if it were not for the employment termination.

Section 83-15 of the ITAA 1997 states that you are entitled to a tax offset to ensure that the rate of tax on an unused annual leave payment does not exceed 30%, to the extent that:

(a) the payment was made in connection with a payment that includes, or consists of, any of the following:

(i) a genuine redundancy payment;

(ii) an early retirement scheme payment;

(iii) the invalidity segment of an employment termination payment or superannuation benefit; or

(b) the payment was made in respect of employment before 18 August 1993.

As the unused annual leave payment is not considered to be made in connection with any of the above conditions, the payment is included in your assessable income under section 83-10 of the ITAA 1997 and is subject to your marginal rate of tax.

Unused long service leave payments

Subdivision 83-B of the ITAA 1997 provides details regarding the taxation treatment of unused long service leave payments. Section 83-65 of the ITAA 1997 states that you are entitled to a tax offset for a payment that you receive in consequence of the termination of your employment that is for unused long service leave. Section 83-70 states that this subdivision applies to leave (long service leave) of the following types (whether it is made available as an entitlement or as a privilege), other than annual leave to which section 83-10 applies:

(a) leave ordinarily known as long service leave, including long leave, furlough and extended leave;

(b) any other leave made available in circumstances similar to those in which the leave mentioned in paragraph (a) is ordinarily made available;

(c) if your employer has entered into a scheme or arrangement for leave and, because of the existence and nature of the scheme or arrangement, the employer does not have to comply with the requirements of a law of the Commonwealth, or of a State or Territory, relating to leave mentioned in paragraph (a) or (b) - leave made available under the scheme or arrangement.

Pursuant to section 83-75 of the ITAA 1997 a payment that you receive in consequence of the termination of your employment is an unused long service leave payment if:

(a) it is for long service leave you have not used; or

(b) it is for long service leave to which you were not entitled just before the employment termination, but that would have been made available to you at a later time if it were not for the employment termination.

Section 83-80 to section 83-115 of the ITAA 1997 provides guidance on how to calculate the taxation of unused long service leave payments as this varies according to the type of employment and the dates of employment.

The unused long service leave payment is not considered to be made in connection with a genuine redundancy and this will be included in your assessable income under section 83-80 of the ITAA 1997.