Private ruling: Genuine redundancy payment / employment termination payment
Date of advice: 11 October 2017
Published: March 2018
Ruling period: Income year ended 30 June 2017
Date scheme commenced: 1 July 2016

Ruling: Q1: Is any part of the taxpayer’s final pay on termination of employment a genuine redundancy payment under section 83-175 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No. | Q2: Is any part of the taxpayer’s final pay on termination of employment an employment termination payment (ETP) under section 82-130 of the ITAA 1997? | A2: Yes, the following payments are ETPs: ● Payment in lieu ● Balance of Sick Leave accrual ● RDO ● Severance pay

Relevant facts and circumstances: You had an employment agreement. Your Employment Separation Certificate identified your reason for separation as ‘End of season or contract’. Your final pay included the following amounts paid consequent on your termination of employment: ● In lieu of notice ● Annual Leave ● Sick Leave ● RDO ● Special Leave ● Severance pay ● The payment you received in lieu of a termination notice aligns with the Work Agreement. ● The payment you received for the balance of your annual leave aligns with the Work Agreement. ● The payment you received for the balance of your accrued sick leave aligns with the Work Agreement. ● The payment you received for the balance of your RDO aligns with the Work Agreement. ● The payment you received as special leave aligns with the Work Agreement ● The severance (redundancy) payment you received aligns with the Work Agreement Assumptions No assumptions have been made.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 83-175 | Income Tax Assessment Act 1997 Section 82-130 Summary | ● Any payment where the amount accrues during the period of employment but is only payable on termination of employment regardless of the reason for termination of employment is not considered to be a genuine redundancy payment (GRP) for the purposes of section 83-175 of the Income Tax Assessment Act 1997 (ITAA 1997). ● Therefore, no part of the severance (Redundancy) payment or other component of the final payment made to you by your Employer represents a genuine redundancy payment. | ● The following components of the final pay are ETPs as they satisfy all the requirements in section 82-130 of the ITAA 1997 and are not specifically excluded under section 82-135. | Payment in lieu | Balance of Sick Leave accrual | RDO | Severance pay | Detailed reasoning | Genuine redundancy payment | A payment is a genuine redundancy payment if it satisfies all of the criteria set out in section 83-175 of the ITAA 1997 which 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 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 dismissal. | 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 arms’ length the payment does not exceed the amount that could reasonably be expected to be made if the dismissal were at arms’ 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. | 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. | A payment is not a genuine redundancy payment if it is a payment mentioned in section 82-135 (apart from paragraph 82-135(e)). | Subsection 83-175(1) of the ITAA 1997 | In discussing what constitutes a GRP in accordance with subsection 83-175(1) of the ITAA 1997, paragraph 11 of TR 2009/2 states that there are four necessary components that must be satisfied: | ● the payment must be received in consequence of a 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 is made ‘in consequence’ of the termination of employment | The phrase 'in consequence of' is not defined in the ITAA 1997. However, the courts have interpreted the phrase in a number of cases. Whilst the courts have divergent views on the meaning of this 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 contains references to repealed provisions, some of which may have been rewritten, the ruling still has effect 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. | As further stated by the Commissioner in paragraph 6 of TR 2003/13, there must be: | … 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 made in consequence of the termination of employment will be determined by the relevant facts and circumstances of each case. | In this case, your employment with the Employer was terminated and as a result of the termination you received the payment from the Employer. If your employment was not terminated, you would not have received the payment. Therefore, the payment you received was made in consequence of the termination of your employment. | Dismissal and Redundancy | The Commissioner has issued Taxation Ruling TR 2009/2 (TR 2009/2), Income Tax: genuine redundancy payments , which provides guidance on the factors to be considered in the interpretation of section 83-175 of the ITAA 1997. | The Commissioner’s view, as stated at paragraphs 18 and 25 of TR 2009/2, is that | 18. 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. | 25. 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... | At paragraph 28 of TR 2009/2, the Commissioner adds: | 28. 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. | Applying the above to your case, it is considered unclear whether your employment with the Employer was terminated by reason of redundancy. This view is based on the following: | ● You did not resign voluntarily from employment but were dismissed by the Employer; | ● You were dismissed by the Employer because the position you occupied was no longer needed by the Employer. | ● Your Employment Separation Certificate identified your reason for separation as ‘End of season or contract’. | However, whilst it may be unclear whether you were dismissed from your employment because your position was genuinely redundant or otherwise, subsection 83-175(1) of the ITAA 1997 also requires that the payment received in consequence of redundancy to exceed the amount that you would have received had you voluntarily resigned from your employment. | In this instance the Work Agreement states that you, as an Employee, will accrue a redundancy payment of two hours pay at the ordinary hourly rate of pay for each completed week of service and that any accrued redundancy payment will be paid on termination of your employment. Furthermore, the amounts representing payment in lieu of notice, special leave, RDOs, sick leave and annual leave would have also been paid had you made the decision to voluntarily resign from your employment. The same payments would have occurred if you had voluntarily terminated your employment. | Therefore, it is not considered that any of the components of your final payment satisfy the conditions of a genuine redundancy payment. | Employment Termination Payment (ETP) | A payment is an ETP if the payment satisfies all the requirements in section 82-130 of the ITAA 1997 and is not specifically excluded under section 82-135. | 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. | Payment ‘in consequence of’ the termination of employment | The facts need to show there is a direct causal connection between the payment and a termination of employment. If a termination of employment does not occur, then an employee is not entitled to the payment. | In this case, the payments of the unused sick leave, unused RDOs, payment in lieu of notice and the Severance ETP would satisfy the first ETP condition as these were paid in connection with the termination of employment. | The payments for unused annual leave and special leave do not satisfy this condition. | Payment received no later than 12 months after termination | In addition to meeting the other conditions for a payment to be an ETP, paragraph 82-130(1)(b) of the ITAA 1997 specifies that the payment must be received within 12 months of the employee’s termination of employment, unless they are covered by a determination exempting them from the 12 month rule. | Your payments satisfy this condition. | Not a payment mentioned in section 82-135 of the ITAA 1997 | Section 82-135 of the ITAA 1997 lists payments that are not employment termination payments. These include (among others): | ● superannuation benefits; | ● unused annual leave or long service leave payments; | ● foreign termination payments covered under Subdivision 83-D of the ITAA 1997; and | ● the part of a genuine redundancy payment or an early retirement scheme payment that is not covered by subsection 83-170(3) of the ITAA 1997. | The following are not considered to be one of the excluded payments referred to in Section 82-135. | ● Payment in lieu | ● Balance of Sick Leave accrual | ● RDO | ● Severance pay | Conclusion | As the payments satisfy all the conditions listed in subsection 82-130(1) of the ITAA 1997 and are not excluded payments under section 82-135, they are considered to be ETPs. | Other relevant comments | The taxable component of an ETP is included in a person’s assessable income and a tax offset applies under section 82-10 of the ITAA 1997 to effectively limit the concessional tax treatment to the applicable cap. Amounts over the cap are taxed at the top marginal rate. | The tax-free component, which consists of the invalidity segment and the pre-July 83 segment, is not included in the person’s assessable income. | More information on the taxation of ETPs is available on our website ato.gov.au by entering ‘QC 26218’ in the search field.