Private ruling: Genuine redundancy payment
Date of advice: 4 August 2022
Published: October 2022
Ruling period: Years ended 30 June 20xx to 20xx
Date scheme commenced: 1 July 20xx

Ruling: Q1: Will a payment made by a redundancy trust to an employee who is dismissed due to genuine redundancy, exceed the amount that would be paid to that employee under voluntary termination? | A1: Yes.

Relevant facts and circumstances: The Applicant is the trustee of a worker entitlement fund (the Fund), to which certain construction industry employers make payments on behalf of their employees, in satisfaction of their obligations under relevant awards and enterprise agreements. An Employee of a Participating Employer may become a Member. Participating Employers make minimum monthly contributions for each Employee who is a Member of the Fund. The Applicant, as trustee of the Fund, keeps an account for each Member, which includes contributions made on the Member's behalf. The contributions are held in the Member's account until such a time as the Member meets a condition of release, as follows: • Retires from the work force on or after attaining the age of 55 years; • Suffers financial hardship and provides documentary evidence satisfactory to the Trustee; • Dies; • Becomes Totally and Permanently Disabled; • Is made Redundant; • Permanently leaves the Construction Industry for a period of at least 12 months; or • Permanently leaves Australia. The amount received in each of the above circumstances by the Member from the Fund is the amount left in the Member's account. A member becomes redundant for the purposes of payment from the Fund where their employment is terminated in circumstances where the work the Member has been performing is no longer required to be done by anyone. An amount in the Member's account can only be lost in very specific circumstances, for example, bankruptcy, disability, or assignment of benefit, and even when lost the amount is held for the Member, their beneficiary, of their dependants (whichever is relevant) until it becomes payable. An amount in the Member's account can only be forfeited if the amount is very small or the Member cannot be located within a specific period of time. All forfeited, and not otherwise dealt with benefits, are transferred to the reserve account of the Fund.

Relevant legislative provisions: 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: 1. A payment made by the Fund to an employee who is dismissed due to being made genuinely redundant, will exceed the amount that could reasonably be expected to be received by that employee upon voluntary termination. 2. The payment in excess of this voluntary termination element will be tax-free, up to the amount worked out under section 83-170 ITAA 1997. | Detailed Reasoning - Detailed reasoning: 3. Subsection 83-175(1) of the ITAA 1997 provides that: 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. 4. In order therefore for subsection 83-175(1) to apply, it must be demonstrated that the payment is, or includes, an amount which exceeds what an employee could reasonably be expected to receive in consequence of the voluntary termination of their employment at the time of dismissal. 5. The Commissioner considers the application of subsection 83-175(1) of the ITAA 97 in Taxation Ruling TR 2009/2 'Income tax: genuine redundancy payments' (TR 2009/2). 6. Paragraphs 58 to 63 and 319 to 320 of TR 2009/2 state: 58. Subsection 83-175(1) identifies the amount attributable to redundancy by deducting the amount that could reasonably be expected to be received by the employee if he or she had voluntarily terminated employment at the time of being dismissed. In this Ruling, this is referred to as the voluntary termination element of a redundancy payment. 59. Apart from this hypothetical change in circumstances to a voluntary termination instead of a dismissal caused by redundancy, all other circumstances surrounding the termination are assumed to be the same. 60. Accordingly, if the employer and the employee were not dealing with each other at arm's length in relation to the dismissal, this must form part of the circumstances for the purposes of working out the voluntary termination element. 61. 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. 62. Contractual or other entitlements payable by an employer on voluntary termination are generally a sound guide as to what might reasonably be expected. However, this would be less so if the employer and employee are not dealing at arm's length. 63. There may be industry norms that could be used as a guide to what payments would be made on voluntary termination. It may also be appropriate to compare standard payments made on voluntary termination within a particular company. However, these comparisons must take account of the actual nature of the dealings as influenced by the relationship between the parties. ....... 319. The voluntary termination element is an integral part of working out the amount of a genuine redundancy payment. The apparent purpose of deducting this element from the payments otherwise made in consequence of the employee's termination is to identify the extent to which those payments are specifically attributable to termination because of redundancy. 320. For example, some employers make contributions to trust arrangements to cover an employee's termination entitlements in a variety of circumstances, including redundancy. If an employee is entitled to a payment from such a trust, it is likely the case that the voluntary termination amount reduces the genuine redundancy payment to zero. This would be because the same payment would be made to the employee had he or she voluntarily resigned. 7. Subsection 83-175(1) was also considered in Class Ruling 2012/117 and it was noted that no part of payments made to members by a trust equal to their account balances with that trust, in the case of genuine redundancy, were considered genuine redundancy payments as under the terms of the trust a member would receive the same payment if they resigned or retired from the workforce. As a result, it could not be said that any part of such a payment was in excess of what the member could reasonably expect to have received had they voluntarily terminated their employment at the time of their dismissal. 8. The term 'voluntary termination' as utilised in subsection 83-175(1) is not defined in the ITAA 1997. The terms 'dismissal' and 'redundancy' in the context of the subsection are discussed in TR 2009/2 at paragraphs 18 and 25, however, where it is stated: 18. 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. ..... 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. 9. Having regard to the ordinary definitions of 'voluntary' and 'termination', and the above discussion in TR 2009/2, it could be said that 'voluntary termination' refers to a member ending their employment because of their own choice or on their own accord. Most notably, this would include resignation and retirement. 10. Accordingly, what must be determined in this case is whether a payment, or part thereof, made to a Member, under the age of 55, due to genuine redundancy, is in excess of what would be paid under voluntary termination at the time of dismissal, such that the payment or part thereof should be treated as a genuine redundancy payment under subsection 83-175(1) of the ITAA 1997. 11. The calculation of the amount payable under voluntary termination needs to have regard to the terms of the relevant trust deed, any relevant industrial award, any relevant workplace agreement or any other terms or conditions which could provide a basis for a payment under a voluntary termination. 12. On voluntary termination, under the Deed, a Member under the age of 55 is not entitled to a payment of an amount equal to their Member's account as they would not satisfy any of the conditions necessary for such a payment to be made. This is because, at the time of dismissal, the Member would not be: • Retiring from the workforce on or after attaining the age of 55 years; • Suffering financial hardship; • Dead; • Totally and permanently disabled; • Made redundant; • Permanently leaving the construction industry for a period of at least 12 months; or • Permanently leaving Australia. 13. The action of leaving the country or the construction industry (for example) will not constitute a voluntary termination, but will rather follow the voluntary termination, (likely by resignation), such that for the purposes of section 83-175(1) of the ITAA 1997, any payment from the Fund in such circumstances will be as a consequence of leaving the country or leaving the construction industry, and not as a consequence of a voluntary termination. 14. While it is noted that the amount paid from the Member's account is in no way dependant on the particular condition of release being satisfied by the Member, (the Member's entitlement always being linked to the balance of the account) and therefore there is no additional amount paid to the Member in the case of a genuine redundancy, it is considered that such an amount would not be paid in the event of voluntary termination. 15. As such, in the event of a genuine redundancy, the payment should be viewed as one contemplated by paragraphs 61 to 63 of TR 2009/2, as being in excess of the amount the Member would receive if they voluntarily terminated their employment.