Private ruling: Employment termination payment
Date of advice: 14 October 2019
Published: December 2019
Ruling period: Income year ended 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Is any part of the payment you received on termination of employment, considered to be a genuine redundancy payment in accordance with section 83-175 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No.

Relevant facts and circumstances: You are under 65 years of age. In the 20XX-XX income year you commenced employment with the Former Employer, in a full-time capacity. In the 20XX-XX income year the Former Employer restructured elements of their organisation and advised you that you would continue in your current role for part of the week and for the remainder of the week work in a different role/team. You resigned from employment with the Former Employer in the 20XX-XX income year. A Deed of Settlement and Release (the Deed) was executed between yourself and the Former Employer in the 20XX-XX income year. The Deed stated that you resigned from employment in the 20XX-XX income year. Shortly after the Deed was executed you received a termination payment comprising an amount representing salary, an amount representing unused annual leave and an amount representing unused long service leave. The Former Employer has provided correspondence which confirmed that you resigned from your former position, that you were not made redundant and that they still require your former role.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 82-130 | Income Tax Assessment Act 1997 Subsection 82-130(1) | Income Tax Assessment Act 1997 Subparagraph 82-130(1)(a)(i) | Income Tax Assessment Act 1997 Paragraph 82-130(1)(b) | Income Tax Assessment Act 1997 Section 82-135 | 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(4) All references are to the ITAA 1997 unless otherwise indicated.

Reasons for decision: Summary: The amount you received from the Former Employer representing salary is an employment termination payment (ETP) and treated as assessable income in the 20XX-XX income year. The amount up to the ETP cap amount is subject to tax at a concessional rate. The unused annual leave amount and the unused long service leave amount are not ETPs. These amounts are included in your assessable income in the 20XX-XX income year and subject to marginal rates of tax. | Detailed Reasoning - Detailed reasoning: A payment is an ETP if it satisfies all the requirements in section 82-130 and is not specifically excluded under section 82-135. Subsection 82-130(1) states: 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 the termination (but see subsection (4)); and (c) it is not a payment mentioned in section 82-135. Section 82-135 provides that certain payments are not ETPs. Relevantly, these include (among others): · unused annual leave or long service leave payments; and · the tax-free part of a genuine redundancy payment or an early retirement scheme payment. | Detailed Reasoning - Payment representing salary, unused annual leave payment and unused long service leave payment: 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) states, at paragraphs 5 and 6, that: 5. ...the Commissioner considers that a payment is received by a taxpayer in consequence of the termination of the taxpayer's employment 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 received by 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 received in consequence of the termination of employment will be determined by the relevant facts and circumstances of each case. While TR 2003/13 contains references to repealed provisions, some of which may have been rewritten, the ruling still has effect. You resigned from employment with the Former Employer and as a result, a payment representing salary, unused annual leave and unused long service leave was paid to you by the Former Employer in the same income year. There is a clear causal connection between the termination of your employment and the payment of these amounts. In other words, but for the termination of employment these payments would not have been made to you. Therefore, the latter payments representing salary, unused long service leave and unused annual leave were made in consequence of the termination of employment as defined in subparagraph 82-130(1)(a)(i). Further, these amounts were paid to you within 12 months of your termination (thereby satisfying paragraph 82-130(1)(b)). However, it is important to note, that unused annual leave payments and unused long service leave payments are specifically excluded from being ETPs under section 82-135. Consequently, the amounts representing unused annual leave and unused long service leave are not ETPs. Unused annual leave payments and unused long service leave payments are also excluded from being genuine redundancy payments by subsection 83-175(4). Further, the tax-free part of a genuine redundancy payment is also excluded from being an ETP under section 82-135. | Detailed Reasoning - Genuine redundancy payment: Under subsection 83-175(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 the dismissal. In Taxation Ruling 2009/2 Income tax: genuine redundancy payments (TR 2009/2), the Commissioner of Taxation (the Commissioner) outlines 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 - Component 1: Payment 'in consequence of' an employee's termination: As stated above, it is considered that the termination payment you received comprising salary, unused annual leave and long service leave was in consequence of the termination of your employment. Therefore, the first component of subsection 83-175(1) has been satisfied. | Detailed Reasoning - Component 2: Dismissal from employment: At paragraphs 18 and 19 of TR 2009/2, the Commissioner states: 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. 19. Consent in this context refers to the employee freely choosing to agree to or approve the act or decision to terminate employment in circumstances where the employee has the capacity to make such a choice. Determining whether the employee has consented to their termination requires an assessment of the facts and circumstances of each case. Consent may be either expressly stated by the employee or implied by their behaviour or conduct. On the facts in your case, you resigned from employment with the Former Employer. Your employment ceased at your own initiative. You 'agreed' to the end date of your employment. The Deed also stipulates your resignation date. Further, the letter from the Former Employer confirms that you resigned and that they require your former position. There is no evidence to suggest that you were dismissed from your employment at the initiative of the Former Employer. The Commissioner also acknowledges that in certain cases where an employee resigns, it may be necessary to consider whether cases of 'constructive dismissal' are a dismissal for the purposes of subsection 83-175(1). At paragraph 22 of TR 2009/2, the Commissioner states: ...Constructive dismissal is currently recognised to occur where the actions or behaviour of the employer in relation to the employment relationship effectively curtails the element of consent on the employee's behalf. The simplest example of constructive dismissal is where an employee resigns under threat (explicit or implicit) of dismissal. Another example is where the employee resigns after the employer offers work in an alternative position which is inappropriate given the employee's particular circumstances (for example, their skills or experience). There is no evidence to show that you may have resigned under threat (explicit or implicit). Your separation from the Former Employer as presented by the facts appears to be on clear, agreeable and amicable terms. You contend that substantial elements of your former position had changed, along with reporting lines. It is noted that your employment arrangements were to change. Whilst the Former Employer may have restructured elements of their organisation, the Former Employer has confirmed that you resigned and that they still require your former positon, acknowledging that it still exists and that reporting arrangements had changed. Even if you could demonstrate your role had changed significantly you were offered an employment arrangement. There is no evidence in your case to show that the termination of your employment amounted to a constructive dismissal. As there was no dismissal from employment, the second component of subsection 83-175(1) has not been satisfied. Therefore, the termination payment you received from the Former Employer representing salary does not qualify for treatment as a genuine redundancy payment and is to be treated as an ETP. | Detailed Reasoning - Other relevant comments: As there was no dismissal in this case, it is not necessary to consider whether the third and fourth component within the termination has been satisfied. However, it is important to note, that even if you were able to show that there was a dismissal, based on the facts of this case, you would fail to satisfy the third component, that is, that the dismissal was actually caused by the redundancy of your position. As per paragraphs 25 and 26 of TR 2009/2: 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. 26. In some circumstances, an employer may reallocate the duties and functions attached to a particular position to another position within the employer's organisational structure. In such cases, the former position is redundant. However, if the employee who had been working in that position is still employed by the employer following the reallocation of duties and functions, there will not be a dismissal. Following on from the latter, as per paragraph.16 of TR 2009/2, 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. Based on the facts of the case, your position with the Former Employer still exists. There is no evidence to show you're your former position is superfluous to the Former Employer's needs and that they do not want the position to be occupied by anyone. Accordingly, as it is fundamentally the employer's decision that a position is redundant, it is accepted that as stated by the Former Employer, that you resigned and your former position still exists. Based on the information provided there is no evidence to show that your Former Employer made the ultimate decision that your position was redundant, and that was the prevailing reason your employment ceased. | Detailed Reasoning - Further conditions for a genuine redundancy payment: Before a payment that meets the basic redundancy requirement in subsection 83-175(1) qualifies as a genuine redundancy payment, all other conditions in subsections 83-175(2) and (3) 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; · the amount that was paid was in excess of what a person would have been entitled to receive if they had voluntarily resigned; · 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. Relevantly in your case, subsection 83-175(1) also requires that for a payment to be a genuine redundancy payment, it should exceed the amount that you would receive on voluntary termination of employment. Accordingly, an amount (if any), representing what you would normally have been paid on voluntary termination of employment would have to be deducted from the payment representing salary you received and would not form part of the tax-free part of any genuine redundancy payment calculations, if the payment had in fact qualified as a genuine redundancy payment. Only the amount in excess of what a person would have been entitled to receive on voluntary resignation can receive tax-free treatment.