Private ruling: Genuine redundancy
Date of advice: 29 August 2019
Published: October 2019
Ruling period: Year ending 30 June 2019
Date scheme commenced: 1 July 2018

Ruling: Q1: Is any part of the payment received on termination of your employment a tax free component of a genuine redundancy payment in accordance with section 83-170 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. Your date of birth is early 1978 You were employed by the Employer. You were employed by a series of contracts and then a final appointment of continued employment. A copy of your Letters of Engagement dated late 2016, early 2017, late 2017, which you have provided, confirms a start date of late 2016 (Start Date). A clause relating to termination of employment stats the employer can terminate you at any time by providing you with notice in writing in accordance with the following table: Length of continuous service with the employer Period of notice Not more than 1 year 4 weeks More than 1 year but less than 3 years 4 weeks You have provided a copy of a letter (the Letter) from the Employer dated late 2018 advising that your position is no longer required and will be made redundant. You were also advised in the Letter that as part of this process, the Employer reviewed alternative solutions to redundancy including redeployment within the Employer and across the wider Employer Group but unfortunately none were available. The Letter advises: · that in accordance with the Fair Work Act 2009 , your final termination payment will consist of outstanding wages worked in that pay period, including all superannuation entitlements. · Your annual leave balance will be paid out up to your termination date of late 2018. · Due to your employment ending because of genuine redundancy, you will also receive 6 weeks severance pay in accordance with National Employment Standards and 4 weeks' notice in accordance with your employment contract. This is based on your 2 years of service. You have advised the date you ceased employment with the employer was a date in late 2018 You received the termination payment from the employer shortly after the date in late 2018 You have provided copies of your Payslip Payment on Termination and STP Summary 2018-19.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 82 - 10 | 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 - 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 Subsection 83-175(3) | Income Tax Assessment Act 1997 Subsection 83-175(4)

Reasons for decision: Summary: The payment made on termination of your employment is considered to be a genuine redundancy payment as all the conditions of section 83-175 of the ITAA 1997 have been satisfied. As such, the payment includes a tax-free component which is not assessable income and is not exempt income . | Detailed Reasoning - Genuine redundancy payment (GRP) on or after 1 July 2007: A payment made to an employee, after 30June2007, is a GRP if it satisfies all the conditions set out in section83 - 175 of the ITAA1997. 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 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. (2)A genuine redundancy payment must satisfy the following conditions: (a) the employee is dismissed before the earlier of the following: (i) the day he or she turned 65; (ii) if the employees 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 the 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. Payments not covered (4)A payment is not a genuine redundancy payment if it is a payment mentioned in section 82-135 (apart from paragraph 82-135(e)). In addition to the basic genuine redundancy requirement that is specified in subsection 83-175(1) of the ITAA 1997, all of the other requirements of section 83-175 of the ITAA 1997 must be satisfied for a payment to qualify as a GRP. Further, the Commissioner has issued Taxation Ruling TR 2009/2 (TR 2009/2) which outlines the requirements to be satisfied before any payment made to a person whose employment is terminated qualifies for treatment as a GRP under section 83-175 of the ITAA 1997. | Detailed Reasoning - The basic requirement for a genuine redundancy payment: Under subsection 83-175(1) of the ITAA 1997, a genuine redundancy payment is one received by an employee who is dismissed from his or her employment because the employee's position is genuinely redundant (paragraph 10 of TR 2009/2). In paragraphs 11 and 234 of TR 2009/2 the Commissioner states that there are four necessary components within the basic genuine redundancy requirement, namely: · the payment must be received by an employee in consequence of the termination of his or her employment; · the termination must involve the employee being dismissed from employment; · that dismissal must be caused by the redundancy of the employee's position; and · the redundancy payment must be made genuinely because of a redundancy. | Detailed Reasoning - Payment 'in consequence of' termination: The Commissioner considers that any payment must be made 'in consequence of' the employee's termination before it can be a genuine redundancy payment. Taxation Ruling TR 2003/13 sets out the Commissioner's views on when a payment is made 'in consequence of' termination of employment. 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. The Letter you received late 2018 from the Employer advised that it has been determined that your position was no longer required and will be made redundant. The Letter further noted that you were not required to work out your notice period and this would be paid out. In addition the Letter stated that in accordance with the Fair Work Act 2009 , your final termination payment will consist of outstanding wages worked in that pay period, including all superannuation entitlements. Your annual leave balance will be paid out up to your termination date of 9 November 2018. Due to your employment ending because of genuine redundancy, you will also receive 6 weeks' severance pay in accordance with National Employment Standards and 4 weeks' notice in accordance with your employment contract. This is based on your 2 years of service. Thus, the termination of employment and the payment are intertwined and connected. If not for the termination of employment, the issue of making the payment would not have arisen. The payment followed as an effect of, or a result from, the termination of your employment. As this first component is established, the next thing is to determine whether the remaining components of the basic genuine redundancy requirement are satisfied. | Detailed Reasoning - 'Dismissal' from employment: For a payment to qualify as a genuine redundancy payment, the employee must be 'dismissed' from employment. Dismissal involves an action to terminate employment taken by the employer irrespective of the wishes of the employee. Where an employee is given notice that they will be terminated at a specified time in the future due to genuine redundancy, that employee will be dismissed because of redundancy for the purposes of section 83-175 of the ITAA 1997. Once an employee has been notified of their termination in these circumstances, any negotiation between the employee and employer or nomination by the employee to end the employee's employment at an earlier time does not bear on whether the employee has been dismissed. This is because dismissal is a particular mode of employment termination, which is concerned with the character of the decision to terminate employment. You were advised by the Employer in late 2018 that your employment will be terminated. Therefore, the termination of your employment is clearly a dismissal for the purposes of subsection 83-175(1) of the ITAA 1997. | Detailed Reasoning - Dismissal caused by 'redundancy': The concept of redundancy broadly refers to situations where something is superfluous and therefore unnecessary. In subsection 83-175(1) of the ITAA 1997, the thing that must be redundant for the provision to apply is an employee's position. A position is redundant when the functions, duties and responsibilities formerly attached to the position are determined by the employer to be superfluous (unnecessary) to the current needs and purposes of the organisation. You were advised by the Employer that your employment would be terminated as your position was made redundant and a transition to another role was not possible. On the evidence provided, the termination of your employment did not relate to any personal act or default on your part, rather, the Employer no longer required anyone to perform the job you had been doing. Therefore, your dismissal was caused by the redundancyof your position. | Detailed Reasoning - Genuine redundancy: The Commissioner considers that whether a redundancy payment is genuine is to be determined on an objective basis. It is not sufficient that an employer and employee have an understanding that a payment is a redundancy payment or that the employer calls the payment a redundancy payment. The need for the employee's position to be genuinely redundant establishes that contrived cases of redundancy will not meet the conditions in section 83-175 of the ITAA 1997. In your case, there is no evidence to suggest that the redundancy was contrived, therefore, all the components of subsection 83-175(1) of the ITAA 1997 have been met. | 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 section 83-175 must be met. These conditions are: · The time of dismissal of an employee receiving a genuine redundancy payment must be before the earlier of: turning 65 years of age or any earlier age of compulsory retirement for the particular position in question. · The payment must be made before the end of a fixed period of employment. · The payment must not exceed an arm's length amount in the event that the employer and employee are not dealing at arm's length. The need to satisfy the arm's length amount condition in paragraph 83-175(2)(b) of the ITAA 1997 arises only where it is established, as a matter of fact, that the employee's dismissal from employment by the employer was other than at arm's length. · There must be no stipulated arrangement to employ the person after the termination; and · The payment must not be in lieu of superannuation benefits. In your case: · at the time of the dismissal you were less than 50 years of age and no younger age of compulsory retirement applied; · there was no fixed period of employment, your latest letter of engagement dated late 2017 confirmed your employment was on a full time basis. · it is accepted that the dealings between you and the Employer were at arm's length; · there was no stipulated arrangement to employ you after the termination; and · the payment was not in lieu of superannuation benefits. Consequently, it is considered that the termination of your employment with the Employer is as a result of genuine redundancy. | Detailed Reasoning - Tax-free treatment of a GRP: 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 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 × Years of service) For the purposes of subsection 83-170(3) of the ITAA 1997, 'years of service' means the number of whole period, or sum of periods, to which the payment relates. The portion of the payment representing the redundancy payment that is equal to the tax-free amount determined under subsection 83-170(3) of the ITAA 1997 is not assessable income and is not exempt income in accordance with subsection 83-170(2) of the ITAA 1997. Any remainder of the payment in excess of the tax-free amount determined under subsection 83-170(3) of the ITAA 1997 is to be included in your assessable income for the 2018-19 income year as an employment termination payment.