Private ruling: Genuine redundancy
Date of advice: 7 August 2015
Published: August 2015
Ruling period: The year ended 30 June 2015
Date scheme commenced: 1 July 2014

Ruling: Q1: 1. Are the payments made to your client on termination of employment as a result of a genuine redundancy under section 83-175 of the Income Tax Assessment Act 1997 (ITAA 1997)? 2. Is any part of the lump sum payment made to your client tax-free under section 83-170 of the ITAA 1997? | A1: 1. Yes. 2. Yes.

Relevant facts and circumstances: Your client commenced employment with the Employer during the relevant income year. Your client terminated employment with the Employer during the subsequent income year. Your client is an ongoing employee under an Enterprise Agreement. During the subsequent income year an email from the Employer to your client advised that as a result of higher duties ceasing within the office and a full-time position being removed from the office the duties within the office as a whole would be forced to change. As such, a decision to restructure the office had been made. For this reason, your client's current employment was to cease and your client would be made redundant on a specific date during the subsequent income year. A clause in the Enterprise Agreement refers to a payment in lieu of notice on the termination of employment. A clause in the Enterprise Agreement refers to severance benefits for staff whose employment is terminated under the Act other than through resignation. During the subsequent income year your client received a letter from the Employer which detailed the particulars of their final entitlements and advised that your client was entitled to payment of a severance benefit calculated on the length of continuous service under the Act. Your client was entitled to a number of weeks of salary, and also entitled to payment in lieu of notice. The letter also advised that both the severance benefit and the payment in lieu of notice are classed by the Australian Taxation Office (ATO) as an Employment Termination Payment (ETP) that was not the result of a 'genuine redundancy and to refer to the ATO website for information regarding the tax treatment of ETPs. Your client's employment was covered under the Act prior to their employment with the Employer (which commenced during the relevant income year). You advised that your client's severance benefit was calculated based on their start date in which your client was covered under the Act, which was a few years ago. In a letter dated during the subsequent income year that your client received from the Employer your client was also advised that they would be paid unused annual and unused long service leave. Tax was withheld from the unused annual leave and long service leave payments. The Termination of Employment form dated during the subsequent income year provided by the Employer stated that the termination of your client's employment was due to a restructure within the Employer's office which resulted in the loss of the employee's position. The PAYG payment summary - employment termination payment from the Employer stated that a payment was made to your client during the subsequent income year and comprised wholly of a taxable component. There was an amount of total tax withheld. Your client is under 65 years of age.

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 section 83-10 | Income Tax Assessment Act 1997 section 83-15 | Income Tax Assessment Act 1997 section 83-80 | Income Tax Assessment Act 1997 section 83-85 | Income Tax Assessment Act 1997 section 83-170 | Income Tax Assessment Act 1997 section 83-175 | Income Tax Assessment Act 1997 subsection 995-1(1)

Reasons for decision: Summary: An amount of the genuine redundancy payment is the tax-free amount which is not assessable income and is not exempt income under subsection 83-170(2) of the ITAA 1997. Accordingly, an amount will be an employment termination payment and should be included as income in your client's tax return for the subsequent income year under subsection 82-10(2) of the ITAA 1997. As the unused annual leave and unused long service payments will be made in connection with a genuine redundancy payment, sections 83-15 and 83-85 of the ITAA 1997 allow tax offsets to ensure that the rate of tax on these amounts do not exceed 30% plus Medicare levy. | Detailed Reasoning - Employment termination payments: By virtue of subsection 995-1(1) of ITAA 1997, employment termination payments are defined in subsection 82-130(1) of the ITAA 1997, which states that 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 that termination (but see subsection (4)); and (c) it is not a payment mentioned in section 82-135. To determine if a payment is an employment termination payment (ETP), all the conditions in subsection 82-130(1) of the ITAA 1997 must be satisfied. Failure to satisfy any of the conditions under subsection 82-130(1) will result in the payment not being considered an employment termination payment. Paid as a 'consequence of' the termination of your employment For a payment to be treated as an ETP, the first condition that must be met is that the payment is made in 'consequence of' the termination of employment of the taxpayer. The phrase 'in consequence of' is not defined in the ITAA 1997. However, the courts have interpreted the phrase in a number of cases. Taking into account the courts decisions on the meaning of the 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). While TR 2003/13 considered the meaning of the phrase 'in consequence of' in the context of the eligible termination payments, TR 2003/13 can still be relied upon 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. In paragraph 5 of TR 2003/13 the Commissioner states: … 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. In this case, your client's employment was terminated during the subsequent income year, and as a result of the termination, your client received the severance payment and the payment in lieu of notice. In other words, but for the termination, your client would not have received those payments. Therefore, it is considered that the severance payment and payment in lieu of notice were received by your client in consequence of the termination of their employment. Payment is received no later than 12 months after termination Your client terminated employment with the Employer during the subsequent income year and the payment was made during the subsequent income year. As this was less than 12 months after your client's termination, this condition will be satisfied. Payment is not a payment mentioned under section 82-135 of the ITAA 1997 Based on the information provided, the payments listed in section 82-135 of the ITAA 1997 which may be relevant in this case and thus require consideration are: • the part of a genuine redundancy or an early retirement scheme payment worked out under section 83-170; • unused annual leave payments (paragraph 82-135(c)); and • unused long service leave payments (paragraph 82-135(d)). | Detailed Reasoning - Genuine redundancy payments: A payment made to an employee is a genuine redundancy payment (GRP) if it satisfies all the conditions set out in section 83-175 of 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 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 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 arms 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)). As mentioned above, section 82-135 of the ITAA 1997 includes (among others): _ unused annual leave payments (paragraph 82-135(c)); and _ unused long service leave payments (paragraph 82-135(d)). Therefore, the payment in lieu of annual leave and payment in lieu of long service leave are not genuine redundancy payments pursuant to subsection 83-175(4) of the ITAA 1997. The taxation treatment of these payments will be addressed in due course. 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 are discussed in Taxation Ruling TR 2009/2 Income tax: genuine redundancy payments (TR 2009/2). With regard to the first requirement set out in subsection 83-175(1) of the ITAA 1997, the Commissioner considers that there are four necessary components within this requirement: • the payment must be received in consequence of an employee's termination; • the termination must involve the employee being dismissed from employment; • 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 - Meaning of received 'in consequence of the termination: For the reasons stated above, it is considered that, in this case, the severance payment and payment in lieu of notice is paid to your client in consequence of the termination of their employment. | Detailed Reasoning - Meaning of 'dismissal' and 'redundancy': The terms 'dismissal' and 'redundancy' are not defined in the ITAA 1997 therefore, consistent with basic principles of statutory interpretation, their meaning must be determined according to the ordinary meaning of the words, having regard to the context in which they appear. Accordingly, the Commissioner's view, as stated in Taxation Ruling 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. A position is redundant when the functions, duties and responsibilities formerly attached to the position are determined by the employer to be unnecessary 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. Contrived cases of redundancy will not meet the conditions in section 83-175 of the ITAA 1997. 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. Applying the above to your client's circumstances, it is considered that your client received the severance payment and payment in lieu of notice because their position was genuinely redundant. This view is based on the following: • Your client's employment was terminated at the Employer's initiative and without your client's consent; • Your client was terminated because their position was no longer needed following a restructure within the Employer's office; • There is nothing to indicate that your client's employment was terminated because of any personal acts or default on their part; and • There is nothing to indicate that the redundancy was in any way contrived. Does the payment e xceed the amount that could reasonably be expected? As it is accepted that there was a dismissal because your client's position was made redundant, part of the condition under subsection 83-175(1) of the ITAA 1997 has been met. However, subsection 83-175(1) also requires that for a payment to be a genuine redundancy payment, it should exceed the amount that would be received by the employee on voluntary termination of employment. That is, only that part of the payment that exceeds the amount that could reasonably be expected to be received by the employee had the employee voluntarily terminated their employment at the time of dismissal is treated as a genuine redundancy payment. To that effect, TR 2009/2, at paragraph 61 states: It would generally be expected that a greater amount would be paid on redundancy than voluntary termination. This recognises the purpose of redundancy payments, being primarily to compensate for loss of non-transferable entitlements (for example accrued sick leave and accrued long service leave prior to 10 years service) and the peculiar hardship associated with being made redundant. In this case, the severance payment and payment in lieu of notice was paid to your client because their employment was terminated by the Employer. This amount would not have been paid to your client had they resigned voluntarily. Therefore, the termination payment is in excess of the amount that would have been reasonably expected if your client voluntarily resigned from their employment with the Employer. However, to qualify as a genuine redundancy payment, in accordance with subsection 83-175(2) of the ITAA 1997, the payment must also meet all of the following conditions: • the employee is dismissed before the earlier of: • the day they turned 65; or • if the employee's employment would have terminated when they reached a particular age or completed a particular period of service - the day they would reach that age or complete the period of service (as applicable); • if the dismissal was not at arm's length - the payment must not exceed the amount that could reasonably be expected to be made if the dismissal was at arm's length; • 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. In addition to the above, subsections 83-175(3) and (4) of the ITAA 1997 provide that 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 of the payment or at a later time. A payment is also not a genuine redundancy payment if it is a payment mentioned in section 82-135 of the ITAA 1997 (apart from paragraph 82-135(e)). Based on the above, the severance payment and payment in lieu of notice is a genuine redundancy payment because: • Your client was dismissed before your client turned 65; • Your client's dismissal was at arm's length; • There is nothing to indicate that at the time of dismissal, there was an arrangement between your client and the employer, or between the employer and another person to employ your client after the dismissal; and • The severance payment and payment in lieu of notice do not include a payment in lieu of superannuation benefits to which your client may have become entitled. | Detailed Reasoning - Taxation of genuine redundancy payments: Section 83-170 of the ITAA 1997 provides that so much of the genuine redundancy payment that does not exceed the amount worked out using the formula in subsection (3) is not assessable income and is not exempt income, that is, it is tax-free. The formula for working out the tax-free amount is: Base amount + (Service amount x Years of service) The Base amount and the Service amount for the 2014-15 income year are: Base amount $9,514 Service amount $4,758 Years of service for the purposes of subsection 83-170(3) of the ITAA 1997 means the number of whole years in the period, or sum of periods, of employment to which the payment relates. It should be noted that six months, eight months or even eleven months do not count as a whole year for the purposes of this calculation. At the time of payment, your client had a few years of completed service in respect of the relevant employment as the Employer calculated the severance payment and payment in lieu of notice on the length of continuous service under the Act. You also advised that your client commenced to be paid under the Act a few years ago. Therefore, the amount of $X is the tax free amount which is not assessable income and is not exempt income under subsection 83-170(2) of the ITAA 1997. The remaining amount of the severance payment and payment in lieu of notice will be an employment termination payment and should be included as income in your client's tax return for the 20XX income year under subsection 82-10(2) of the ITAA 1997. | Detailed Reasoning - Taxation treatment of unused annual leave and unused long service payments: Unused annual leave and unused long service payments would ordinarily be included in assessable income under sections 83-10 and 83-80 of the ITAA 1997 respectively and be subject to marginal rates of tax. However, as these payments will be made in connection with a genuine redundancy payment, sections 83-15 and 83-85 allow tax offsets to ensure that the rate of tax on these amounts (an amount for unused annual leave and an amount for unused long service) do not exceed 30% plus Medicare levy.

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