Private ruling: Payments on termination of employment
Date of advice: 15 December 2015
Published: February 2016
Ruling period: Income year ended 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Will any part of the redundancy payment received by Your Client on termination of employment be a tax-free part of a genuine redundancy payment under section 83-170 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes.

Relevant facts and circumstances: In the relevant income year, a person (Your Client) commenced employment with their former employer (the Employer). The terms of Your Client's employment were set out in an Employment Offer (the Offer). In accordance with the terms of the Offer, Your Client's employment with the Employer could be termination at any time: • By the Company, by giving you not less than two months' notice in writing or pay in lieu of notice; • By you, by giving the Company not less than two months' notice in writing; • By mutual agreement between you and the Company; … Should your position become redundant, the above provisions as to termination do not apply and the following parameters shall apply instead: • The Company must make a payment in lieu of notice that is equivalent to two month's pay; and • The Company will make a redundancy payment that is line with current legislation. Less than a year later, Your Client was advised by the Employer in writing that: • they no longer require Your Client's role and, consequently Your Client's contract is terminated, effective immediately, on the grounds of redundancy; and • the estimated Redundancy Component of Your Client's termination payment. Several days later, in accordance with contractual requirements, the Employer paid Your Client a redundancy payment. Your Client's contract of employment was not for a specified fixed period of time. There was no arrangement between Your Client and the Employer, or between the Employer and another person, either prior to termination or subsequent, to employ Your Client after termination. Termination payment received by Your Client was not in lieu of superannuation benefits.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 83-170. | Income Tax Assessment Act 1997 Section 83-175.

Reasons for decision: Summary: Redundancy payment received by Your Client from the Employer is a genuine redundancy payment for the purposes of section 83-175 of the ITAA 1997. Therefore, a portion of the payment is a not assessable income and is not exempt income. That is, it is tax-free. The remainder of the payment is an employment termination payment and is taxed accordingly. | Detailed Reasoning - Genuine redundancy payment: 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. In Taxation Ruling 2009/2 Income tax: genuine redundancy payments (TR 2009/2), the Commissioner has outlined 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. The Commissioner considers that there are four necessary components within this termination requirement: • The payment being tested must be received in consequence of an employee's termination. • That termination must involve the 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' an employee's termination: 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 paragraphs 5 and 6 of TR 2003/13 the Commissioner states: 5. ...the Commissioner considers that 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. 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. 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 Client's employment with the Employer was terminated during the relevant income year and a redundancy payment was paid to Your Client several days later. The payment followed as a result of the termination of Your Client's employment. As such, it may be said that but for the termination of employment this payment would not have been made. Therefore, it is considered that the above payment was made in consequence of the termination of Your Client's employment. As such, the first requirement of a genuine redundancy has been met. | Detailed Reasoning - 'Dismissal' from employment: At paragraph 8 of TR 2009/2, the Commissioner states: 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. In this case, it is evident that Your Client did not resign voluntarily from employment but was, in fact, terminated by the Employer at the Employer's initiative. Therefore, it is considered that Your Client has been dismissed from their employment and the second requirement of genuine redundancy has been met. | Detailed Reasoning - Dismissal caused by the 'redundancy': At paragraphs 25 and 28 of TR 2009/2, the Commissioner makes the following comments: 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 of the employer's operations. 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. Based on the information provided, it is evident that the Employer made the ultimate decision that Your Client's position was redundant and that was the prevailing reason they were dismissed from their employment. In addition, there is nothing to indicate that the redundancy was caused by personal acts or default on Your Client's part. Therefore, the third requirement of a genuine redundancy has therefore been satisfied. | Detailed Reasoning - 'Genuinely' redundancy.: The need for an employee's position to be genuinely redundant means that contrived cases of redundancy will not meet the conditions in section 83-175 of the ITAA 1997. In this case, there is nothing to indicate that the redundancy is not genuine. Therefore, the fourth component of a genuine redundancy has been satisfied. | Detailed Reasoning - Further conditions for a genuine redundancy payment: Before a payment that meets the basic redundancy requirement in subsection 83-175(1) of the ITAA 1997 qualifies as a genuine redundancy payment, all other conditions in subsections 83-175(2) and (3) of the ITAA 1997 must be met. These conditions include: • the payment must be made before a person turns 65 or an earlier mandatory age; • the termination was not at the end of a fixed period of employment; • the actual amount that was paid is not greater than the amount that could reasonably be expected to be paid had the parties been dealing at arm's length; • there was no arrangement for re-employment with the employer or a related party after the termination date; and • the payment was not in lieu of superannuation benefits. On the basis of the information provided, it is considered that all the conditions of subsections 83-175(2) and 83-175(3) of the ITAA 1997 are also satisfied. As it is accepted that Your Client's employment was terminated because their position was genuinely redundant, part of the condition under subsection 83-175(1) of the ITAA 1997 has been met. However, subsection 83-175(1) also requires that for a payment to be a genuine redundancy payment, it should exceed what Your Client would have received had they voluntarily resigned from their employment. That is, only that part of the payment that exceeds the amount that could reasonably be expected to be received by Your Client had they voluntarily terminated their employment at the time of termination is treated as a genuine redundancy payment. In accordance with the Offer, where employment is terminated by an employee, the employee is required to give two months' notice in writing; and where employment is terminated because their position is redundant, the Employer is required to make a payment in lieu of notice that is equivalent to two month's pay and a redundancy payment in line with current legislation. From the above paragraph it is clear that redundancy payment is in excess of what Your Client would have received upon voluntary resignation. Therefore, subsection 83-175(1) of the ITAA 1997 has been satisfied. | Detailed Reasoning - Tax-free amount of a genuine redundancy payment: Subsection 83-170(2) of the ITAA 1997 provides that so much of the genuine redundancy payment that does not exceed the amount worked out using the formula prescribed in subsection 83-170(3) of the ITAA 1997 is non-assessable, non-exempt income. In accordance with sub section 83-170(3) of the ITAA 1997, the formula for working out the tax-free amount is: Base amount + (Service amount × Years of service) Years of service is the number of whole years in the period, or sum of periods, of employment to which the payment relates. For the 2013-14 income year: Base amount is $9,246; and Service amount is $4,624 The amount in excess of the tax-free amount of Your Client's redundancy payment calculated using the above formula is an employment termination payment and is taxed accordingly.