Private ruling: Genuine redundancy payments
Date of advice: 3 November 2016
Published: May 2017
Ruling period: Income year ended 30 June 20YY.
Date scheme commenced: 1 July 20XX.

Ruling: Q1: Is any part of the payment you received on the termination of your employment a genuine redundancy payment under section 83-175 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes.

Relevant facts and circumstances: You were notified that your position had been made redundant and, consequently, your Employment with the Employer would cease on the agreed date. Subsequently, you were advised that you will receive a lump sum termination payment.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 83-170(2) | Income Tax Assessment Act 1997 section 83-170(3) | Income Tax Assessment Act 1997 section 83-175 | Income Tax Assessment Act 1997 subsection 83-175(1) | Income Tax Assessment Act 1997 subsection 83-175(2) | Income Tax Assessment Act 1997 subsection 83-175(3) Detailed reasoning | A payment made to an employee is a GRP if it satisfies all the criteria in section 83-175 of the ITAA 1997. | In accordance with subsection 83-175(1) of the ITAA 1997, a GRP 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 their employment at the time of their dismissal. | The Commissioner of Taxation (the Commissioner) 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 is made to a person whose employment is terminated qualifies for treatment as a GRP under section 83-175 of the ITAA 1997. | In discussing that constitutes a GRP in accordance with subsection 83-175(1) of the ITAA 1997, paragraph 11 of TR 2009/2 states: | 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. | Payment 'in consequence of' 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 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: | 5. ... 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. | 'Dismissal' and 'Redundancy' | The Commissioner's view, as stated in 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… | 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 ... | Further conditions for a genuine redundancy payment | In addition to the basic requirement for a GRP found in subsection 83-175(1) of the ITAA 1997, further conditions for genuine redundancy payment treatment in subsections 83-175(2) and (3) of the ITAA 1997 require that: | ● the employee is dismissed before the earlier of 65 or a specified age; | ● the termination is not at the end of a fixed period of employment; | ● the 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 the 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. | Tax-free treatment of GRPs | Subsection 83-170(2) of the ITAA 1997 provides that so much of the GRP that does not exceed the amount worked out using the formula prescribed in subsection 83-170(3) of the ITAA 1997 is not assessable income and is not exempt income. Any amount in excess of the tax-free amount is taxed as an employment termination payment. The formula for working out the tax free amount is: | Base amount + ( Service amount x Years of service ) | For the 20XX-YY income year: | Base amount means $X,XXX; | Service amount means $X,XXX; and | Years of service means the number of whole years in the period, or sum of periods, of employment to which the payment relates. | Your employment with the Employer equates to XX whole years of service to which the GRP payment relates. | Accordingly, the tax-free part of the GRP received by you in the 20XX-YY income year is: | $X,XXX + ($X,XXX x XX) = $XXX,XXX.