Private ruling: Employment termination payments
Date of advice: 26 April 2022
Published: July 2022
Ruling period: Year ending 30 June 20XX

Ruling: Q1: Is the payment made to you a genuine redundancy payment in accordance with section 83-175 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No. | Q2: Is the payment made to you an employment termination payment (ETP) in accordance with section 82-130 of the ITAA 1997? | A2: Yes.

Relevant facts and circumstances: You were employed by the Employer as an early learning centre (ELC) assistant. You were employed on a part-time basis. The Employer notified you that the ELC structure was to be remodelled with the part time hours to decrease and working days changed. The skills and duties for the role are similar. You were advised that you were eligible to be redeployed to the remodelled ELC role or you could take a redundancy. The days and number of hours you were offered were not acceptable to you and you opted to accept the redundancy. The Employer provided you a payment in consequence of your termination of employment. When you queried the taxation and classification of the payment as an ETP, the Employer maintained that ' The tax office distinguishes between 'genuine' (tax-free) and 'non-genuine' (taxable) when it comes to the tax treatment of redundancy payments. If the duties, functions and responsibilities of the departing employee are still required to be done by another employee then the redundancy is considered to be non-genuine. Such payment is taxed as an Employment Termination Payment'.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 82-130 | Income Tax Assessment Act 1997 section 82-135

Reasons for decision: Detailed Reasoning - Genuine redundancy: A payment made to an employee is a genuine redundancy payment if it satisfies all of the criteria set out in section 83-175 of the ITAA 1997. In accordance with subsection 83-175(1) of the ITAA 1997, 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. Paragraph 11 of Taxation Ruling TR 2009/2: Income tax: genuine redundancy payments (TR 2009/2), outlines the requirements to be satisfied under subsection 83-175(1) of the ITAA 1997. There are four necessary components within this requirement: • The payment being tested 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. | Detailed Reasoning - Payment 'in consequence of' termination: Taxation Ruling TR 2003/13 Income tax: employment termination payments (ETP): payments made in consequence of the termination of any employment: meaning of the phrase 'in consequence of' outlines the Commissioner's view of the phrase 'in consequence of'. The view of the courts of the meaning of the phrase that the Commissioner prefers is stated in paragraph 29 of the ruling as; 'there be a causal connection in the sense that the payment follows as an effect or result of the termination of employment. That is, but for the termination of employment the payment would not have been made to the taxpayer'. In this instance, your employment was terminated in relation to the decision taken by your Employer that the hours and days of your ELC role would be restructured. You made the decision that you could not work the new schedule and your employment was subsequently terminated. As a result of the termination, the Employer paid you XX weeks' severance pay. If not for the termination, this payment would not have been made to you. Therefore, the payment was received by you in consequence of the termination of your employment. | Detailed Reasoning - Dismissal and redundancy: The term 'dismissal' is not defined in the ITAA 1997 therefore, consistent with basic principles of statutory interpretation, its 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 at paragraph 18 in 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. 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. TR 2009/2 states: 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. On occasion the decision may be unavoidable due to the circumstances surrounding the employer's operations. There are various reasons why an employee may be dismissed from employment. In circumstances where more than one reason can be identified for the dismissal, the Commissioner considers that redundancy must be the prevailing or most influential cause of the dismissal. A restructure of an organisation does not necessarily result in redundancy where employees are dismissed following the reallocation or restructure. In these circumstances, it is necessary to consider what impact the restructure had on the duties, functions and responsibilities formerly fulfilled by the dismissed employee. In Re Marriott and Federal Commissioner of Taxation the employer did not see fit to dismiss the employee after a reallocation of duties, functions and responsibilities within the organisation. In that case it was considered that the prevailing or most influential cause of termination was the employee's own desire not to undertake the duties, functions and responsibilities he was offered following the reorganisation. [1] In this case, the Employer was reorganising its staffing needs to a new ELC model. Due to the reorganisation the Employer offered you a position in the new model that was commensurate with your previous duties, skills and function, albeit the part time hours had decreased and were on different days. Based on this information, the Employer still required ELC positions under the revised model. The roles have not been made redundant and are still required to be performed. Your decision to terminate your employment was your own desire not to undertake the duties, functions and responsibilities offered following the reorganisation. Subsequently, your termination of employment does not meet the definition of a genuine redundancy. Although the payment does not meet the definition of a genuine redundancy, it will be classed as an ETP in accordance with section 82-130 of the ITAA 1997. The payment was made in consequence of the termination of your employment and satisfies the relevant requirements for an ETP. [1] See paragraph 272 of TR 2009/2.