Private ruling: Genuine redundancy payment
Date of advice: 12 January 2018
Published: May 2018
Ruling period: Year ended 30 June 2017
Date scheme commenced: 1 July 2016

Ruling: Q1: Is the payment received from the Mechanical and Redundancy Trust on termination of employment 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: 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. 1. The Taxpayer is below the age of 65. 2. The Taxpayer was a member of the Mechanical and Electrical Redundancy Trust (MERT). 3. The Taxpayer commenced employment with the Employer in the 2003-04 income year. 4. In the 2016-17 income year the Taxpayer’s employment with the Employer was terminated because their role was no longer required by the Employer. 5. Several days after the termination, the Taxpayer received their benefit from MERT. 6. In accordance with the MERT Annual Report for the year ended 30 June 2016 (the Annual Report) , member benefits are payable in the event of: (a) retirement; (b) redundancy; (c) termination; or (d) death.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 82-10 | Income Tax Assessment Act 1997 subsection 82-10(3) | Income Tax Assessment Act 1997 section 82-130 | Income Tax Assessment Act 1997 section 83-175. | Income Tax Assessment Act 1997 subsection 83-175(1). | Superannuation Industry (Supervision) Regulations 1994 subregulation 6.01(2) Class Ruling CR 2007/ 50 Income tax: tax treatment of payments to members of the Mechanical and Electrical Redundancy Trust | Summary | 1. The payment the Taxpayer received from MERT in consequence of the termination of their employment by reason of redundancy is not a genuine redundancy payment for the purposes of section 83-175 of the ITAA 1997 because it is not in excess of the amount he could have reasonably expected to receive had he terminated their employment voluntarily at that time. | Detailed reasoning | Genuine redundancy | 2. A payment will qualify as a genuine redundancy payment if all the requirements under section 83-175 of the ITAA 1997 are satisfied. | 3. In accordance with subsection 83-175(1) of the ITAA 1997, a genuine redundancy payment is: | a) so much of a payment received by an employee who is dismissed from employment because the employee's position is ‘genuinely redundant’ | b) as 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 the dismissal. | 4. The Commissioner has issued Taxation Ruling TR 2009/2 Income Tax: genuine redundancy payments (TR 2009/2), which provides guidance on the factors to be considered in the interpretation of section 83-175 of the ITAA 1997. | 5. Paragraph 11 of TR 2009/2 specifies four necessary components within the requirements under subsection 83-175(1) of the ITAA 1997: | ● 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. | Payment ‘in consequence of’ an employee’s termination | 6. 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) . | 7. While TR 2003/13 contains references to repealed provisions, some of 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. | 8. 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. | 9. In this case, the Taxpayer’s employment with the Employer was terminated on in the 2016-17 income year and as a result, an amount was paid to the Taxpayer by MERT. As such, it can be said that but for the termination of employment this payment would not have been made to the Taxpayer. | 10. Therefore, it is considered that the above payment was made in consequence of the termination of the Taxpayer’s employment with the Employer. | ‘Dismissal’ and ‘redundancy’ | 11. The Commissioner's view, as stated in paragraph 18 of TR 2009/2, is that dismissal means 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. | 12. A position is redundant when the functions, duties and responsibilities formerly attached to the position are determined by the employer to be superfluous to the current needs and purposes of the organisation. A dismissal is not caused by redundancy where personal acts or default are the cause for termination for example, unsatisfactory performance or behaviour (paragraph 25 of TR 2009/2). | 13. The need for an employee's position to be genuinely redundant means that contrived cases of redundancy will not meet the conditions in section 83-175 of the ITAA 1997. | 14. Applying the above to the Taxpayer’s circumstances, it is considered that they were dismissed from employment with the Employer because their position was genuinely redundant. This view is based on the following: | ● The Taxpayer did not resign voluntarily from their employment with the Employer but were, in fact, terminated by the Employer at the Employer’s initiative; | ● The Taxpayer’s employment was terminated because the Employer determined that the position they held was no longer needed by the Employer; | ● There is nothing to indicate that the termination was caused by any personal acts or default on the Taxpayer’s part; and | ● There is nothing to indicate that the redundancy was in any way contrived. | 15. However, while it is accepted that the Taxpayer was dismissed by the Employer because their position was genuinely redundant, subsection 83-175(1) of the ITAA 1997 also requires that the payment received in consequence of redundancy exceeds the amount that they would have received had they voluntarily resigned from their employment. | 16. Information on the MERT website and the information in the Annual Report detail that the benefit the Taxpayer received from MERT after their employment was terminated by reason of redundancy is not greater that the benefit they would have received had they terminated the employment voluntarily or retired at that time. That is, the payment does not exceed the amount that they could have reasonably expected to receive in consequence of an alternate mode of employment termination. | 17. Class Ruling CR 2007/ 50 Income tax: tax treatment of payments to members of the Mechanical and Electrical Redundancy Trust specifically addresses payments from MERT. | 18. In paragraph 32 of Class Ruling CR 2007/50 payments from MERT are made ‘in consequence of’ the termination of the employment of a member and constitutes an eligible termination payment and therefore do not meet the definition of a genuine redundancy payment. The payment from MERT is ‘in consequence of’ termination, and the payment does not exceed the amount that could reasonably be expected to be received by the Taxpayer in consequence of the voluntary termination of their employment at the time of dismissal. The payment is an employment termination payment and therefore receives the tax treatment of an employment termination payment. | 19. Consequently, subsection 83-175(1) of the ITAA 1997 has not been satisfied in the Taxpayer’s case. | 20. Therefore, the payment received from MERT is not a genuine redundancy payment as defined in section 83-175 of the ITAA 1997.