Private ruling: Genuine redundancy payment
Date of advice: 1 July 2021
Published: September 2021
Ruling period: Year ended 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Were the payments made to you on termination of your employment, the result of a genuine redundancy under Section 83-175 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No | Q2: Is any part of the lump sum payment you received from your employer tax-free under Section 83-170 of the ITAA 1997? | A2: 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. You started working at XYZ and were promoted several times over a period of X years. You were on leave when an email was sent to all staff from the General Manager of XYZ. You contacted your human resources (HR) department via email to ask why your name was on a list and to outline a breach of privacy and defamation of character. You received a phone call from your HR department. You were asked what outcome you wanted as a result of your email. In this conversation you asked your HR department to provide you with an offer for consideration. Your HR department called and made their first formal offer verbally which was a X month voluntary redundancy with X months notice period included. You declined this offer. Your HR department called and you were asked to put forward a figure that you would be happy with so negotiations could be limited and not go back and forth so many times for consideration. Your proposal to your HR department was: A full redundancy (not voluntary) X months plus entitlements. Damages claim for breaching the privacy act $XXX. Damages claim for defamation due to information leaking to recruitment agencies and beyond restricting future work opportunities and loss of credibility in the XXX industry $XXX. Further phone conversations were held with your HR department until the General Manager of your HR department returned from leave. You received an email from the General Manager of your HR department asking you to adjust your expectations and to discuss via phone calls. A phone conversation was held with the General Manager of your HR department in relation to your offer and they stated they would not document your payout as a redundancy as they required someone to fill your position in the future. You asked them if they would fill your current position since the business was winding down. You were advised that any conversation you had with them relating to a redundancy was always "off the record" and was told you would never get a redundancy due to other circumstances relating to this claim. You sent an email to the General Manager of your HR department advising your revised figure for their consideration was $XXX plus entitlements. You accepted the payout figure but not the way it was documented as a termination. You provided a copy of an email from another Manager of XYZ which shows that they have made another employee their new Director for ABC operations. The organisational chart provided shows that this employee was already the Director for ABC operations. On this organisational chart you were shown as the Director for JKL operations. You advised that you cannot locate a copy of your employment contract and position description for your role of Director for JKL operations at XYZ. You requested a copy from XYZ but your request was denied. You advised you are unable to acquire the position description for the employee appointed to the role of Director for ABC operations at XYZ following your termination. You advised your employment with XYZ ceased in 20XX. Your deed of release states that the company must pay you: • $XXX gross termination payment for all entitlements on termination of the employment, including payment in lieu of notice, except leave entitlements (less applicable tax and superannuation), • $XXX gross for accrued and unused annual leave entitlements (less applicable tax and superannuation), • $XXX gross for accrued and unused long service leave entitlements (less applicable tax and superannuation). You received your termination payment in 20XX with a breakdown as follows: Payments: • Normal pay -$XXX, • Term Marginal LSL-acc $XXX, • Term Marginal AL-Ent $XXX, • Term Marginal LSL-Ent $XXX, • Ex Gratia Payment $XXX. • Total payments $XXX. Deductions/Taxes: • Tax Marginal Termination -$XXX, • Tax - Life Benefit ETP $XXX, • Total Tax $XXX. • Total deductions $XXX. Your contentions You always met time frames and completed projects within the budget. You were always a high achiever within the business and recognised by your managers, peers and the CEO of XYZ. In the notes section of the document dated 20XX, several names were written down; yours included. The notes section was confidential and should not have gone out to the whole company. Several redundancies were carried out X weeks prior to the email going out, leaving yourself and one other person. You were completely unaware that your name was on a list prior to the list going out. When you contacted your HR department you were advised to not send further emails to HR but to make phone calls instead. You advised there was verbal mention from your HR department of a redundancy and pay out on numerous occasions via phone calls. You were pressured into a decision to reduce your claim. You state that the newly created Director for ABC operations role was not your role as your role did not manage those operations. They have not changed the title for this role but the role and job description has changed completely. Your role is now being done by the Operations Manager.

Relevant legislative provisions: 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 83-80 | 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: While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision . The payments made to you on termination of your employment are not considered to be a result of a genuine redundancy under Section 83-175 of the Income Tax Assessment Act 1997 (ITAA 1997). No part of the lump sum payment of $XXX made to you in the 20XX-XX income year is tax free under Section 83-170 of the ITAA 1997. The payment of $XXX you received in the 20XX-XX income year is an employment termination payment as it was made in consequence of the termination of your employment and is not a payment which is excluded from being an employment termination payment. As the unused annual leave and unused long service payments were not made in connection with a genuine redundancy payment, these payments will be included in your assessable income under Sections 83-10 and 83-80 of the ITAA 1997 respectively and be subject to marginal rates of tax. | Detailed Reasoning - Employment termination payments: An employment termination, where the payment is made during the life of a taxpayer, is known as a life benefit termination payment (subsection 82-130(2) of the ITAA 1997). 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 employment was terminated in 20XX, and as a result of the termination, you received the termination payment. In other words, but for the termination, you would not have received that payment. Therefore, it is considered that the termination payment was received by you in consequence of the termination of your employment. Payment is received no later than 12 months after termination Your employment was terminated with the Employer in November 20XX and the payment was made in Month 20XX. As this is less than 12 months after your 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 (paragraph 82-135(c)); • 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 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 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 arms 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 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)). 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 (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 termination payment is paid to you in consequence of the termination of your employment. | Detailed Reasoning - Meaning of 'dismissal' and 'redundancy': The terms 'dismissal' and 'redundancy' are not defined in the ITAA 1997 and are 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 circumstances, it is considered that you did not receive the termination payment because your position was genuinely redundant as the facts of the case do not provide evidence that the duties and responsibilities formerly attached to your position as xxxx are determined by the Employer to be unnecessary to the current needs and purposes of the organisation. There is no evidence provided from the Employer to advise that your position has been abolished. Therefore this component has not been satisfied. The payment advice does not reflect a genuine redundancy payment. It is not necessary to examine if the remaining criteria set out under section 83-75 of the ITAA 1997 have been met. The failure of one criterion is sufficient to exclude the payment from being treated as a genuine redundancy payment and accorded the concessional taxation treatment under section 83-175 of the ITAA 1997. Therefore, the termination payment of $XXX is an ETP, as it satisfies all the conditions in subsection 82-130 (1) of the ITAA 1997. | Detailed Reasoning - Unused annual leave and unused long service leave: Payments that are not employment termination payments are specified under section 82-135 of ITAA. This section states that following payments are not employment termination payments: (a) a *superannuation benefit (see Divisions 301 to 307 ); (b) a payment of a pension or an *annuity (whether or not the payment is a superannuation benefit); and (c) an *unused annual leave payment (see Subdivision 83-A ); (d) an *unused long service leave payment (see Subdivision 83-B ); ... Therefore the payment for unused annual leave ($XXX) and payment for unused long service leave ($XXX Team Marginal LSL-acc and $XXX Team Marginal LSL-Ent) are not employment termination payments pursuant to section 82-135 of the ITAA 1997. | Detailed Reasoning - Unused annual leave payments: Subdivision 83-A of the ITAA 1997 provides details regarding the taxation treatment of unused annual leave payments. Section 83-5 of the ITAA 1997 states that you are entitled to a tax offset for a payment that you receive in consequence of the termination of your employment that is for unused annual leave. Pursuant to section 83-10(2) of the ITAA 1997 your assessable income includes an unused annual leave payment that you receive. Section 83-10(3) states that a payment that you receive in consequence of the termination of your employment is an unused annual leave payment if: (a) it is for annual leave you have not used; or (b) it is a bonus or other additional payment for annual leave you have not used; or (c) it is for annual leave, or is a bonus or other additional payment for annual leave, to which you were not entitled just before the employment termination, but that would have been made available to you at a later time if it were not for the employment termination. Section 83-15 of the ITAA 1997 states that you are entitled to a tax offset to ensure that the rate of tax on an unused annual leave payment does not exceed 30%, to the extent that: (a) the payment was made in connection with a payment that includes, or consists of, any of the following: (i) a genuine redundancy payment; (ii) an early retirement scheme payment; (iii) the invalidity segment of an employment termination payment or superannuation benefit; or (b) the payment was made in respect of employment before 18 August 1993. As the unused annual leave payment is not considered to be made in connection with any of the above conditions, the payment is included in your assessable income under section 83-10 of the ITAA 1997 and is subject to your marginal rate of tax. | Detailed Reasoning - Unused long service leave payments: Subdivision 83-B of the ITAA 1997 provides details regarding the taxation treatment of unused long service leave payments. Section 83-65 of the ITAA 1997 states that you are entitled to a tax offset for a payment that you receive in consequence of the termination of your employment that is for unused long service leave. Section 83-70 states that this subdivision applies to leave (long service leave) of the following types (whether it is made available as an entitlement or as a privilege), other than annual leave to which section 83-10 applies: (a) leave ordinarily known as long service leave, including long leave, furlough and extended leave; (b) any other leave made available in circumstances similar to those in which the leave mentioned in paragraph (a) is ordinarily made available; (c) if your employer has entered into a scheme or arrangement for leave and, because of the existence and nature of the scheme or arrangement, the employer does not have to comply with the requirements of a law of the Commonwealth, or of a State or Territory, relating to leave mentioned in paragraph (a) or (b) - leave made available under the scheme or arrangement. Pursuant to section 83-75 of the ITAA 1997 a payment that you receive in consequence of the termination of your employment is an unused long service leave payment if: (a) it is for long service leave you have not used; or (b) it is for long service leave to which you were not entitled just before the employment termination, but that would have been made available to you at a later time if it were not for the employment termination. Section 83-80 to section 83-115 of the ITAA 1997 provides guidance on how to calculate the taxation of unused long service leave payments as this varies according to the type of employment and the dates of employment. The unused long service leave payment is not considered to be made in connection with a genuine redundancy and this will be included in your assessable income under section 83-80 of the ITAA 1997.

This ruling applies for the following period : | Reasons for decision: These reasons for decision accompany the Notice of private ruling for the applicant.