Private ruling: Genuine redundancy
Date of advice: 1 November 2021
Published: January 2022
Ruling period: Income year ended 30 June 202
Date scheme commenced: 1 July 2019

Ruling: Q1: Is any part of the payment made to you on the termination of your employment contract a tax-free part of a genuine redundancy payment under section 83-170 of the Income Tax Assessment Act 1997 ? | A1: No.

Relevant facts and circumstances: • You commenced employment with your former employer several years ago. • You were employed on a full-time basis on a fixed-term contract. • Your former employer terminated your employment prior to the end of your contract. • You received a lump sum payment from your employer, including a separation payment and unused leave.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 82-130 | 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: The termination of your employment from your former employer does not constitute a genuine redundancy under section 83-175 of the Income Tax Assessment Act 1997 (ITAA 1997). No part of the payment you received upon the termination of your employment contract constitutes a tax-free part of a genuine redundancy payment under section 83-170 of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: Genuine redundancy payments are tax-free up to a limit worked out under section 83-170 of the ITAA 1997). The matter of what is a genuine redundancy payment is defined by section 83-175. The 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 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 he or she turned 65; (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. 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. Paragraph 10 of the TR 2009/2 states that under subsection 83-175(1), a genuine redundancy payment is one 'received by an employee who is dismissed from employment because the employee's position is genuinely redundant'. 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: The phrase 'in consequence of' is not defined in the ITAA 1997. Taxation Ruling TR 2003/13 Income tax: employment termination payments (ETP): payments made in consequence of the termination of any employment: meaning of the phrase 'in consequence of' 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 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. 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. Division 82 of the ITAA 1997 contains the substantive rules governing the taxation of employment termination payments (ETPs). The term 'employment termination payment' as defined in section 82-130, includes any payment made in respect of a taxpayer 'in consequence of the termination of their employment', other than certain specified payments. Common examples of ETPs include golden handshakes, contractual termination payments and payments for wrongful dismissal. A severance payment that is made in respect of a taxpayer by a former employer after the termination of the taxpayer's employment, such as a golden handshake, is a payment that follows as an effect or result of the termination. Accordingly, the payment is made in consequence of the termination of employment. In such circumstances there is a causal connection between the payment and the termination of employment in that the payment would not have been made to the taxpayer but for the termination of the employment. You received a payment of a specified value from your employer upon the termination of your employment. This payment was made up mostly of a severance/separation payment, along with payments for unused recreation and long service leave. It is clear that this payment was made to you in consequence of the termination of your employment: • There is a causal connection between the termination and the payment • But for the termination of your employment, you would not have received the payment • The termination and the payment are intertwined The amount of this payment was stipulated under the relevant clause of your contract and it would not have been paid to you but for the early termination of your employment contract. Component 1 is satisfied - the payment you received was in consequence of your termination. Note: Some other payments, such as unused annual leave and unused long service leave, may also be made in consequence of termination. However, any such payments that receive a more specific tax treatment are excluded from being genuine redundancy payments by subsection 83-175 (4). Unused annual leave would ordinarily be included in assessable income under section 83-10 of the ITAA 1997 and subject to marginal rates of tax. Similarly, unused long service leave would ordinarily be included in assessable income under section 83--80 of the ITAA 1997. Though, if this payment is made in connection with a genuine redundancy payment, section 83-85 allows a tax offset to ensure that the rate of tax on this amount does not exceed 30%. | Detailed Reasoning - Component 2: 'dismissal' from employment: 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. 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. 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 an 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. Where an employee is given notice from their employer 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. It is clear from the language used by your employer in the correspondence provided to you that the termination of your employment was at the directive of the employer. You were not provided with a choice as to whether you wished to continue your employment. You were provided with notice from your employer that your employment would end on a specified date, determined by them. Component 2 is satisfied - you were dismissed from employment. | Detailed Reasoning - Component 3: dismissal caused by 'redundancy': Section 83-175 further requires that the dismissal be caused by redundancy of the employee's position, and not for some other reason. 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. 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. 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. In a letter from the employer, it was confirmed that your employment was terminated under a particular clause of your contract that allows for 'Termination with - No Reason Given'. This is also supported by the amount and the components of the payment you received, as the other relevant sections of the Contract either contained no reference to payment amounts, or to lesser payments amounts. Your employer also confirmed that the position you occupied is not made redundant. Accordingly, component 3 is not satisfied as your dismissal was not caused by a redundancy. For this reason, there is no need for us to consider if the payment that was paid to you on your termination met component 4: being a 'genuine' redundancy.

This ruling applies for the following period