Private ruling: Genuine Redundancy
Published: September 2012
Ruling period: For the year ending 30 June 2012
Date scheme commenced: 1 July 2011

Ruling: Q1: 1. Is any part of the employment termination payment a tax-free part of a genuine redundancy payment? 2. Are you entitled to a deduction for legal expenses incurred in pursuing payment of the employment termination payment? Advice/Answers 1. No. 2. No.


Relevant legislative provisions: Income Tax Assessment Act 1997 Section 8-1 | Income Tax Assessment Act 1997 Section 82-10(2) | Income Tax Assessment Act 1997 Section 82-135 | Income Tax Assessment Act 1997 Section 83-170 | Income Tax Assessment Act 1997 Subsection 83-170(2) | Income Tax Assessment Act 1997 Section 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 Paragraph 83-175(2)(b) | 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: Detailed Reasoning - Summary of decision: Based on the information provided, your client's termination of employment does not meet the requirements of a genuine redundancy payment. As such, the payment to be received upon the termination of employment should be included as assessable income in your client's income tax return in the 2011-12 income year. | Detailed Reasoning - Genuine redundancy payment: A payment made to an employee is a genuine redundancy payment if it satisfies all the criteria set out in section 83-175 of the ITAA 1997. Subsection 83-175(1) states: 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. As can be seen there are four criteria that must be satisfied in order for subsection 83-175(1) of the ITAA 1997 to apply: · The payment must be received in consequence of a termination. · That termination must involve an 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 - Dismissal and Redundancy: The Explanatory Memorandum to the Income Tax Assessment Amendment Act (No.3) 1984 which inserted former section 27F, which dealt with bona fide redundancy payments, into the Income Tax Assessment Act 1936 (ITAA 1936) states at page 91: The terms "dismissal" and "redundancy" are not defined in the legislation and, therefore, should be given their ordinary meanings. "Dismissal" carries with it the concept of the involuntary (on the taxpayer's part) termination of employment. "Redundancy" carries the concept that the requirements of the employer for employees to carry out work of a particular kind, or for employees to carry out work of a particular kind in the place where they were so employed, have ceased or diminished or are expected to cease or diminish. Redundancy, however, would not extend to the dismissal of an employee for personal or disciplinary reasons or for reasons that the employee was inefficient.' Consequently, it is necessary to consider the ordinary meaning of the terms 'dismissal' and 'redundancy' and the meaning the judicial authorities have ascribed to them. The Commissioner has issued Taxation Ruling TR 2009/2, titled Income Tax: genuine redundancy payments which provides guidance on the factors to be considered in the interpretation of section 83-175 of the ITAA 1997. Paragraph 18 of TR 2009/2 discusses what constitutes a dismissal: 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. In addition, dismissal also includes the notion of 'constructive dismissal' which occurs when an employee is placed in a situation where he or she has little choice other than to tender their resignation. The Commissioner has outlined his view in relation to constructive dismissal in paragraph 22 of TR 2009/2: Cases of 'constructive dismissal' are a dismissal for the purposes of subsection 83-175(1). Constructive dismissal is currently recognised to occur where the actions or behaviour of the employer in relation to the employment relationship effectively curtails the element of consent on the employee's behalf. The simplest example of constructive dismissal is where an employee resigns under threat (explicit or implicit) of dismissal. Another example is where the employee resigns after the employer offers work in an alternative position which is inappropriate given the employee's particular circumstances (for example, their skills or experience). Further, paragraphs 257 and 258 of TR 2009/2 provide specific examples of constructive dismissal: 257. For example, if an employer is reorganising or downsizing their business or company, an employee may be offered alternative employment that is not appropriate given the employee's qualifications or experience, or is in a particularly inconvenient location for the employee. 258. An employee who chooses to resign in these circumstances may not be considered to freely consent to their resignation as they had no other option other than to resign. This would be an instance of constructive dismissal. A payment is classified as a genuine redundancy payment only upon meeting all of the requirements set under section 83-175 of the ITAA 1997 and dismissal only forms part of those requirements. Paragraphs 24, 25 and 28 of TR 2009/2 provide the following in relation to the meaning of redundancy: 24. As is the case in determining if there is a dismissal, 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. 25. 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. … 28. A dismissal is not caused by redundancy where personal acts or default are the prevailing or most influential cause for the termination. For example, a person may be dismissed due to unsatisfactory performance or behaviour. With reference to your client's circumstances, it is accepted that in an earlier income year the Employer was undergoing a restructure and offered a number of voluntary redundancy packages to its employees in an attempt to reduce the size of its workforce. You state that your client had applied for a voluntary redundancy package which was rejected by the Employer. It is also noted that your client had continued their employment in the same position for several months following the failed application and throughout this period, there were no indications from the Employer that your client's position was to be made redundant. You have stated that your client claims that they were bullied and harassed into leaving the Employer. However, you have not provided any evidence to substantiate this. Even if it is accepted that you client's termination of employment was a 'constructive dismissal', there has been no evidence provided to indicate that, once your client terminated employment, their position with the Employer no longer existed. Therefore, it is considered that not all four of the criterion under subsection 83-175(1) of the ITAA 1997 have been satisfied. Accordingly, the payment made under the settlement agreement is an employment termination payment, no part of which is the tax-free part of a genuine redundancy payment. | Detailed Reasoning - Summary of decision: The advantage your client was seeking in incurring the legal expenses is considered to be of a capital nature. As the nature or character of the legal expenses follows the advantage that is sought to be gained by incurring the expenses, the legal expenses your client has incurred are also of a capital nature and are not deductible. | Detailed Reasoning - Detailed reasoning: Section 8-1 of the ITAA 1997 allows a deduction for a loss or an outgoing to the extent to which it is incurred in gaining or producing assessable income, except where the loss or outgoing is of a capital, private or domestic nature. In determining whether a deduction for legal expenses is allowable under section 8-1 of the ITAA 1997, the nature of the expenditure must be considered (Hallstroms Pty Ltd v. Federal Commissioner of Taxation 1 ). The nature or character of the legal expenses follows the advantage that is sought to be gained by incurring the expenses. If the advantage to be gained is of a capital nature, then the expenses incurred in gaining the advantage will also be of a capital nature. Taxation Determination TD 93/29 states: If the legal action goes beyond a claim for a revenue item such as wages, and constitutes an action for breach of the contract of employment where the essential character of the advantage sought relates to an enduring advantage that is of a capital nature, the legal costs would not be deductible. For example, legal expenses relating to an action for damages for wrongful dismissal are not deductible. Although your client's legal expenses do not relate to damages for wrongful dismissal, they relate to your client's employment termination payment and not salary or wages. A payment, being compensation for the loss of the expectation of continuity of service, is a payment that is not of an income nature. Such a payment is made to compensate the taxpayer for the loss of their employment position and is regarded as a capital payment (Case No NT 90/113 2 ). Such payments are treated as employment termination payments and subject to special tax treatment that may result in some or the entire amount being included in your income. However the fact that a capital payment is specifically brought to account as assessable income will not change the nature of the payment. An amount that is capital in nature will remain capital notwithstanding that it is specifically included in your client's assessable income. Therefore as the payment is capital in nature, the legal expenses incurred in obtaining a better payment on termination of employment will also be capital in nature. 1 (1946) 72 CLR 634; (1946) 20 ALJ 277; (1946) 8 ATD 190; [1946] ALR 434; [1946] HCA 34 2 (1991) 22 ATR 3184; (1991) 91 ATC 268

Relevant facts: Your client is under 65 years of age. | Your client was an employee of the Employer. | During an earlier income year, your client was asked to apply for a voluntary redundancy. Your client made an application which was subsequently rejected. | Your client claims that they were bullied and harassed into leaving the Employer. Your client's situation was that rather than making your client's position redundant, the Employer was attempting to achieve cost savings by making your client's employment unbearable and thus, coaxing your client to leave. | Your client resigned in the 2010-11 income year after a significant period of service. | Legal action was commenced on claims of harassment. Claims were settled out of court. A settlement agreement was provided by your client. | An employment termination payment less tax withheld was made early in the 2011-12 income year. This was paid directly to your client's lawyer. A fee was taken out of the payment and the balance was paid to your client. | Your client requested the Employer to reissue the employment termination payment as a genuine redundancy payment. However, the Employer refused to do so.