Private ruling: Genuine redundancy payment
Date of advice: 11 September 2017
Published: January 2018

Ruling: Q1: Is any part of the redundancy payment received by you a genuine redundancy payment for the purposes of section 83-175 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No

Relevant facts and circumstances: You are below the age of 65. You commenced employment with your Employer in the 2013-14 income year. Your employment was governed by an Enterprise Agreement (the Agreement). You were employed under an ongoing employment arrangement. There was no fixed period of employment. In the 2016-17 income year your employment with the Employer was terminated because your role was no longer required by the Employer. Consequently you received an Employment Separation Certificate specifying your termination entitlements. Assumptions No assumptions have been made.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 83-175 Summary | Any payment where the amount accrues during the period of employment but is only payable on termination of employment regardless of the reason for termination of employment is not considered to be a genuine redundancy payment (GRP) for the purposes of section 83-175 of the Income Tax Assessment Act 1997 . Therefore, no part of the payments made to you by your Employer represents a genuine redundancy payment. | Detailed reasoning | Genuine redundancy payment | A payment is a genuine redundancy payment if it satisfies all of the criteria set out in section 83-175 of the TAA 1997 which 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 employee’s 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. | (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)). | Subsection 83-175(1) of the ITAA 1997 | In discussing what constitutes a GRP in accordance with subsection 83-175(1) of the ITAA 1997, paragraph 11 of TR 2009/2 states that there are four necessary components that must be satisfied: | ● the payment must be received in consequence o f 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. | Payment is made ‘in consequence’ of the termination of employment | The phrase 'in consequence of' is not defined in the ITAA 1997. However, the courts have interpreted the phrase in a number of cases. Whilst the courts have divergent views on the meaning of this 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 contains references to repealed provisions, some of which may have been rewritten, the ruling still has effect 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. | As further stated by the Commissioner in paragraph 6 of TR 2003/13, there must be: | … a causal connection between the termination and the payment, although the termination need not be the dominant cause of the payment. The question of whether a payment is made in consequence of the termination of employment will be determined by the relevant facts and circumstances of each case. | In this case, your employment with the Employer was terminated and as a result of the termination you received the payment from the Employer. If your employment was not terminated, you would not have received the payment. Therefore, the payment you received was made in consequence of the termination of your employment. | Dismissal and Redundancy | The Commissioner has issued Taxation Ruling TR 2009/2 (TR 2009/2), 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. | The Commissioner’s view, as stated at paragraphs 18 and 25 of TR 2009/2, is that | 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... | At paragraph 28 of TR 2009/2, the Commissioner adds: | 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. | Applying the above to your case, it is considered that your employment with the Employer was terminated by reason of genuine redundancy. This view is based on the following: | ● You did not resign voluntarily from employment but was dismissed by the Employer; | ● You were dismissed by the Employer because the position they occupied was no longer needed by the Employer. | However, while it is accepted that you were dismissed from your employment because your position was genuinely redundant, subsection 83-175(1) of the ITAA 1997 also requires that the payment received in consequence of redundancy to exceed the amount that you would have received had you had voluntarily resigned from your employment. | In this instance the Agreement states that you, as an Employee, will accrue a redundancy payment of two hours pay at the ordinary hourly rate of pay for each completed week of service and that any accrued redundancy payment will be paid on termination of your employment. Furthermore, the amount representing payment in lieu of notice and special leave would have also been made had you made the decision to voluntarily resign from your employment. The redundancy payment, the payment in lieu of notice and special leave would have occurred if you had voluntarily terminated your employment. | Therefore, it is considered that the redundancy payment, payment in lieu of notice and special leave do not satisfy the conditions of a genuine redundancy payment.