Private ruling: Genuine redundancy
Date of advice: 27 June 2022
Published: October 2022
Ruling period: Income year ended 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Is any part of the payment made to you on the termination of your employment 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: You were employed by your employer for more than X years. Your role and duties were replaced by newly introduced accounting software that made your position redundant. To resolve any dispute, you and your employer entered a Deed of Release (the Deed). A copy of this Deed was provided with your application. The Deed lists the final payment and includes amounts titled Redundancy Pay and Ex-Gratia Payment. Your employer treated the above listed amounts as an Employment Termination Payment (ETP). You also provided pay advise for a relevant pay period. You contend that the ETP amount should be treated as a tax-free genuine redundancy payment. Assumptions In accordance with standard employment contracts, you would have been entitled to receive 4 weeks in lieu of notice upon a voluntary termination of your employment. The Redundancy Pay represents an additional amount that you wouldn't have received had you have left your employment voluntarily.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 82-130 | Income Tax Assessment Act 1997 Section 82-135 | Income Tax Assessment Act 1997 Paragraph 82-135(e) | Income Tax Assessment Act 1997 Section 83-10 | Income Tax Assessment Act 1997 Section 83-85 | Income Tax Assessment Act 1997 Section 83-170 | Income Tax Assessment Act 1997 subsection 83-170(2) | Income Tax Assessment Act 1997 subsection 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 paragraph 83-175(2)(a) | Income Tax Assessment Act 1997 subparagraph 83-175(2)(a)(ii) | Income Tax Assessment Act 1997 paragraph 83-175(2)(c) | Income Tax Assessment Act 1997 subsection 83-175(3) | Income Tax Assessment Act 1997 subsection 83-175(4)

Reasons for decision: Summary: 1. The Redundancy Pay you received upon the termination of your employment constitutes a tax-free part of a genuine redundancy payment under section 83-170 of the Income Tax Assessment Act 1997 (ITAA 1997). 2. The Ex-Gratia Payment representing 4 weeks in lieu of notice has been correctly treated as an ETP for tax purposes. | Detailed Reasoning - Detailed reasoning: 3. A person's assessable income consists of ordinary income and statutory income. An amount is statutory income if it is not ordinary income and is included in assessable income by a provision of the Income Tax Assessment Act 1936 or the ITAA 1997. | Detailed Reasoning - Employment termination payment: 4. A payment is an ETP if it satisfies all the requirements in section 82-130 of ITAA 1997 and is not specifically excluded under section 82-135 of the ITAA 1997. 5. Subsection 82-130(1) of the ITAA 1997 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. 6.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) sets out theCommissioner's views on when a payment is made 'in consequence of' termination of employment. Paragraphs 5 and 6 of TR 2003/13 state: 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. 7. As outlined in the terms of the Deed, the Redundancy Pay and the Ex-Gratia Payment were paid to you because of the termination of your employment. 8. The payment was made 'in consequence of' the termination of your employment. There is a causal connection between your termination and the payment. In other words, but for the termination of your employment, this payment would not have been made to you. 9.Therefore, the payment was made in consequence of the termination of employment as defined in subparagraph 82-130(1)(a)(i) of the ITAA 1997. 10. This amount was paid to you within 12 months of your termination, thereby satisfying paragraph 82-130(1)(b) of the ITAA 1997. 11. Accordingly, consideration needs to be given if this payment is specifically excluded under section 82-135 of the ITAA 1997 (thereby not satisfying paragraph 82-130(1)(c)). | Detailed Reasoning - Genuine redundancy payment: 12. Section 82-135 of the ITAA 1997 provides that certain payments are not employer termination payments. 13. Paragraph 82-135(e) of the ITAA 1997 excludes from ETP the part of a genuine redundancy payment worked out under section 83-170 of the ITAA 1997. 14. The matter of what is a genuine redundancy payment is defined by section 83-175. This section identifies: • the conditions that must be satisfied for at least part of a payment to be treated as a genuine redundancy payment; • how to work out what amount of the payment is a genuine redundancy payment; and • what payments are excluded from being a genuine redundancy payment. 15. A payment made to an employee is a genuine redundancy payment if it satisfies all the conditions set out in section 83-175 of the ITAA 1997. This section 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 and 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. (2) A genuine redundancy payment must satisfy the following conditions: (a) the employee is dismissed before the earlier of the following: (i) the day the employee reached pension age; (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 arm's length the payment does not exceed the amount that could reasonably be expected to be made if the dismissal were at arm's 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. (3) 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. 16. As can be seen above, section 83-175(1) contains two elements to be satisfied for a payment to be considered a genuine redundancy payment: • The payment is received by an employee who is dismissed because their position is genuinely redundant ; and • The payment exceeds the amount that could reasonably be expected to be received by the employee if their employment was terminated voluntarily at that time. 17. For a genuine redundancy payment to exist, both elements need to be satisfied. 18. Taxation Ruling TR 2009/2 Income tax: genuine redundancy payments outlines the Commissioner's view of 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 of the ITAA 1997. 19. Paragraph 11 of TR 2009/2 then states that 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 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' termination: 20. The phrase 'in consequence of' is not defined in the ITAA 1997. 21. Item 5 of the Deed states that your employment ended on 3 April 2020. Hence, as outlined in paragraph 8 above, it is considered that the payment received by you was made in consequence of the termination of your employment. 22. Component 1 is satisfied. | Detailed Reasoning - Component 2: 'dismissal' from employment: 23. The Commissioner's view is that a genuine redundancy 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. 24. Dismissal requires a decision to terminate employment at the employer's initiative without the consent of the employee. 25. Determining whether an employee has consented to their termination requires an assessment of the facts and circumstances of each case. 26. It is clear the from provided evidence and the Deed that the termination of your employment was at the directive of the employer. 27. Component 2 is satisfied. | Detailed Reasoning - Component 3: dismissal caused by 'redundancy': 28. Section 83-175 further requires that the dismissal be caused by redundancy of the employee's position, and not for some other reason. 29. The reason for a dismissal is to be established in light of the facts and circumstances of each case. The redundancy of the relevant position must be the prevailing or most influential reason for the dismissal if there is more than one contributing cause. 30. 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. 31. You have provided evidence that supports your role and duties were replaced by newly introduced accounting software that made your position redundant. 32. The payment in Item 6 of the Deed's Schedule titled, Redundancy Pay, also supports that that your dismissal was caused by redundancy. 33. Component 3 is satisfied - your dismissal was caused by redundancy. | Detailed Reasoning - Component 4: 'genuine because' of redundancy: 34. Contrived cases of redundancy will not meet the conditions in section 83-175. Whether a redundancy is 'genuine' is determined on an objective basis. 35. The fact that an employer and employee have an understanding that a payment on termination is caused by redundancy or that the employer treats the payment as a redundancy payment for tax purposes does not of itself establish genuine redundancy. 36. In addition to the basic requirement for a genuine redundancy payment found in subsection 83-175(1), the further conditions for genuine redundancy payment treatment in subsections 83-175(2) and (3) require that: • the dismissed employee is not older than the specified age limits; • the termination is not at the end of a fixed period of employment; • the actual 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 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. | Detailed Reasoning - Age-based limits: 37. Under paragraph 83-175(2)(a), an employee must be less than the pension age at the time of dismissal for a redundancy payment to qualify as a genuine redundancy payment. 38. At the time of your dismissal, you were aged XX years. 39. At this time, the pension age (as defined in subsection 23(1) of the Social Security Act 1991 ) was 66 years. 40. You were less than the pension age at the time of dismissal. 41. This condition is satisfied. | Detailed Reasoning - Not the end of a particular period of employment: 42. Under subparagraph 83-175(2)(a)(ii), a payment made at the end of a fixed period of employment cannot normally be a genuine redundancy payment. 43. No evidence had been provided to support that your termination occurred at the end of a fixed period of employment. 44. Accordingly, this condition is satisfied. | Detailed Reasoning - Arm's length amount: 45. This condition only needs to be met if it is established that the employer and employee are not dealing at arm's length in relation to the dismissal. 46. There is no suggestion that yourself and your employer were not dealing at arm's length. 47. Accordingly, this condition does not apply. | Detailed Reasoning - No stipulated arrangement to employ: 48. Under paragraph 83-175(2)(c), an arrangement to employ an employee after his or her termination prevents a dismissal giving rise to a genuine redundancy payment if that arrangement is entered into between either: • the employer and the dismissed employee; or • the employer and another entity. 49. The provided evidence supports there was not a future arrangement to employ you after the termination. 50. This condition is satisfied. | Detailed Reasoning - Payments not in lieu of superannuation benefits: 51. Under subsection 83-175(3), a payment is not a genuine redundancy payment to the extent that it is made in place of superannuation benefits due at the time or in the future. 52. The provided Deed doesn't indicate the Redundancy Pay represents superannuation benefits to be paid to you. Further, Superannuation Guarantee liability is listed separately in the pay advice provided to you for the specified pay period. 53. This condition is satisfied. 54. Hence, it is considered that you received a payment due to your position being genuinely redundant: • you received the payment in consequence of the termination of your employment • you were dismissed from your employment • the dismissal was caused by redundancy • the redundancy was genuine. 55. The other requirement under subsection 83-175(1) is that the payment exceeds the amount that could reasonably be expected to be received by the employee if their employment was terminated voluntarily at that time. 56. Paragraph 64 of the TR 2009/2 states that: A payment in lieu of notice can be a genuine redundancy paymentprovided that such a payment would not be expected on voluntary termination. 57. An assumption had been made that the Ex-Gratia Payment, representing 4 weeks of your salary, would have been payment expected upon a voluntary termination of your employment as similar terms form part of many employment contracts. 58. Further assumption had been made to accept that the Redundancy Pay, representing additional 16 weeks of your salary is an extra amount that you wouldn't have received had you have left your employment voluntarily. 59. As the redundancy amount falls well within your tax-free genuine redundancy limit, the full amount constitutes a tax-free part of a genuine redundancy payment under section 83-170 of the ITAA 1997. 60. The Ex-Gratia payment, representing 4 weeks in lieu of notice, has been correctly treated as an ETP for tax purposes.

This ruling applies for the following period