Private ruling: Genuine Redundancy
Published: February 2013
Ruling period: Year ending 30 June 2014
Date scheme commenced: 1 July 2012

Ruling: Q1: Is any part of the Employee X's termination payment the tax-free part of a genuine redundancy payment? | A1: Yes.

Relevant facts and circumstances: During the relevant income year, the employer issued an Order which set out the new agency arrangements for the employer. Employee X was employed as a Chief Executive Officer (CEO) for a former department within the Employer's Organisation. Some of their key responsibilities included transport, roads and regional air services and planning, administration and sustainable development of land. In accordance with the Order, the former department was restructured as a new department with a number of Employer's X responsibilities being transferred to other departments. During the relevant income year, Employee X was notified that their services were no longer required as a result of the restructure and ceased duties as CEO of the former department. A peer who was already employed by the organisation was then appointed as the CEO of the new department. Before the restructure, there were a number of employees at the same level as Employee X. After the restructure, that number was reduced by. During the relevant income year, the employer wrote to Employee X, confirming the agreed terms of separation from the Organisation. The terms and conditions of employment of employee X and other CEOs were set out in numerous published documents. In accordance with those documents Employee X's final payment would be calculated with reference to their total years of service with the employer. Employee X argued that their payment should be treated as a genuine redundancy payment. There has been no offer of employment to Employee X at any level of the organisation. Employee X is under 65 years of age.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 82-135 | Income Tax Assessment Act 1997 section 83-170 | Income Tax Assessment Act 1997 section 83-175 | Income Tax Assessment Act 1997 section 960-275

Reasons for decision: Detailed Reasoning - Summary of decision: The payment for termination of Employee X's employment with the organisation will be a genuine redundancy payment if all conditions under section 83-175 of the ITAA 1997 are satisfied. Provided that all conditions under section 83-175 are satisfied, the tax-free amount is not assessable income and is not exempt income. The remaining part of the payment for termination of Employee X's employment will be assessable as an employment termination payment which is to be included in their income tax return for the subsequent income year. | Detailed Reasoning - Genuine redundancy payment: A payment made to an employee is a GRP if it satisfies all criteria set out in section 83-175 of the Income Tax Assessment Act 1997 (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 employees position is genuinely redundant as it 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)). [Bold emphasis added] Section 82-135 of the ITAA 1997 lists payments that are not employment termination payments. Paragraph 82-135(e) provides that the part of a GPR worked out under section 83-170 is not an ETP. In Taxation Ruling 2009/2 Income tax: genuine redundancy payments , the Commissioner has outlined 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. There are four necessary components within this termination requirement: 1. The payment being tested must be received in consequence of an employee's termination. 2. That termination must involve the employee being dismissed from employment. 3. That dismissal must be caused by the redundancy of the employee's position. 4. The redundancy payment must be made genuinely because of a redundancy. | Detailed Reasoning - Component 1: Payment being tested must be received in consequence of an employee's termination.: As mentioned in the facts, the proposed payment will be received upon termination of Employee X's employment with the organisation during the subsequent income year. Therefore the first component of subsection 83-175(1) of the ITAA 1997 will be satisfied. | Detailed Reasoning - Component 2: That termination must involve the employee being dismissed from employment.: In this case, employee X was dismissed from employment as a CEO at the initiative of their employer. This was confirmed in a letter from the employer during the relevant income year stating that a new agenda has been set and adjustments have been made to the structure and machinery of the departments necessitating changes in chief executive arrangements. Furthermore, a letter from the employer to Employee X stated that Employee X will be terminated in accordance with the relevant published employment documents used by the employer. Therefore, the second component of subsection 83-175(1) of the ITAA 1997 will be satisfied. | Detailed Reasoning - Component 3: That dismissal must be caused by the redundancy of the employee's position.: Section 83-175 also requires that the dismissal be caused by redundancy of the employee's position, and not for some other reason. Paragraph 25 of TR 2009/2 provides that 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. In addition, paragraph 26 of TR 2009/2 states: 26. In some circumstances, an employer may reallocate the duties and functions attached to a particular position to another position within the employer's organisational structure. In such cases, the former position is redundant. However, if the employee who had been working in that position is still employed by the employer following the reallocation of duties and functions, there will not be a dismissal. As mentioned in the facts, Employee X's position as a CEO for the former department was made redundant during the relevant income year when several of the duties and functions attached to the role were transferred to other positions within the organisation. In addition, the number of positions at the same level as Employee X was reduced under the restructure which also indicates that the position was redundant under the new structure. Therefore, the third component of a genuine redundancy will be satisfied. | Detailed Reasoning - Component 4: The redundancy payment must be made genuinely because of a redundancy.: The need for an employee's position to be genuinely redundant establishes that contrived cases of redundancy will not meet the conditions under section 83-175 of the ITAA 1997. In this case, there is nothing to indicate that the redundancy is not genuine. Therefore, the fourth component of a genuine redundancy has been satisfied. | Detailed Reasoning - Further conditions for a genuine redundancy payment: Before a payment that meets the basic redundancy requirement in subsection 83-175(1) of the ITAA 1997 qualifies as a genuine redundancy payment, all other conditions in subsections 83-175(2) and (3) must be met. These conditions include: · The payment must be made before a person turns 65 or an earlier mandatory age; · The termination was not at the end of a fixed period of employment; · the actual amount that was paid is not greater than the amount that could reasonably be expected to be paid had the parties been dealing at arm's length; · the amount that was paid was in excess of what a person would have been entitled to receive if they had voluntarily resigned; · there was no arrangement for re-employment with the employer or a related party after the termination date; and · the payment was not in lieu of superannuation benefits. | Detailed Reasoning - Termination occurred before age 65 or expiration of fixed term: Subparagraph 83-175(2)(a)(i) of ITAA 1997 indicates that in order for a payment to qualify as a GRP, an employee must be dismissed before the date that he or she turned age 65 or such earlier date on which his or her employment would have necessarily terminated under the terms of employment because of the employee attaining a certain age or completing a certain period of service. As Employee X will be under 65 years of age on the date of termination payment, therefore this condition will be satisfied. | Detailed Reasoning - The termination was not at the end of a fixed period of employment: The organisation's relevant Contract of Employment states that a contract of employment was made on a particular date during the prior income year between the organisation and Employee X. Clause 2 of the Contract of Employment states that Employee X's contract will end on a particular date during the 2015-16 income year. As the termination of Employee X's employment will occur prior to the contracted employment, therefore, this condition will be satisfied. | Detailed Reasoning - Actual amount that was paid is not greater than the amount that could reasonably be expected to be paid had the parties been dealing at arm's length: The organisation will be making the payment to Employee X in accordance with the relevant published employment terms and conditions therefore, this condition will be satisfied. | Detailed Reasoning - Amount that was paid was in excess of what a person would have been entitled to receive if they had voluntarily resigned: Since the payment for termination of employment when initiated by the employer is greater than the payment for termination when initiated by an employee this condition will be satisfied. | Detailed Reasoning - No arrangement for re-employment with the employer or a related party after the termination date: As has been no offer of employment being made to Employee X at any level of the organisation after termination date, therefore, this condition is satisfied. | Detailed Reasoning - Payment was not in lieu of superannuation benefits: As the payment for termination of employment is not a payment in lieu of superannuation benefits, therefore, this condition is satisfied. | Detailed Reasoning - Taxation of a genuine redundancy payment: Subsection 83-170(2) of the ITAA 1997 provides that so much of the genuine redundancy payment that does not exceed the amount worked out using the formula prescribed in subsection 83-170(3) is not assessable income and is not exempt income. Any amount in excess of the tax-free amount is taxed as an employment termination payment. The formula for working out the tax-free amount is: Base amount + ( Service amount × Years of service ) Years of service means the number of whole years in the period, or sum of periods, of employment to which the payment relates. In accordance with section 960-275 of the Income Tax Assessment Act 1997 , the base limit and service amount is indexed in line with average weekly ordinary time earnings (AWOTE) each income year. The new indexed amount is generally available each May. Employee X's period to which the payment relates commenced prior to 1985 and will cease during the subsequent income year. Under the terms of payment for the termination, the final payment will be calculated with reference to the total years of service with the employer. It should be noted that years of service refers to each whole year of completed employment service to which the redundancy payment relates and that 6 months, 8 months or even 11 months do not count as a whole year for the purposes of this calculation. The tax-free amount is not assessable income and is not exempt income in accordance with subsection 83-170(2) of the ITAA 1997. The remaining part of the payment for termination of Employee X's employment will be assessable as an employment termination payment which is to be included in their income tax return for the subsequent income year. | Detailed Reasoning - Conclusion: The payment for termination of Employee X's employment with the organisation is a genuine redundancy payment provided that all conditions under section 83-175 of the ITAA 1997 are satisfied. Provided that all conditions under section 83-175 are satisfied, the tax-free amount is not assessable income and is not exempt income in accordance with subsection 83-170 (2) of the ITAA 1997. The remaining part of the payment for termination of Employee X's employment will be assessable as an employment termination payment which is to be included in their income tax return for the subsequent income year.

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