Private ruling: Genuine Redundancy
Published: September 2012
Ruling period: Year ended 30 June 2011
Date scheme commenced: During 2010-11 income year.

Ruling: Q1: Is any part of the payment received on termination of your employment a tax-free component of a genuine redundancy payment in accordance with section 83-170 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes.

Relevant facts and circumstances: You were employed by the relevant employer (the Employer) on an ongoing (permanent) basis. You had no specified/agreed employment end date. After a review of its management structure, the Employer decided to restructure its business operations. Subsequently, you were advised that a decision had been made to make your position redundant and that your employment will be terminated as a transition to another role was not possible. After some negotiation with the Employer, your employment was formally terminated during the 2010-11 income year after a pre-determined notice period. In a Settlement Agreement (a Deed) it was agreed, amongst other matters, that the Employer will provide you with an amount equal to a proportion of your annual base salary in full payment of all claims you had or may have in relation to the employment and the termination of employment. There were no performance related issues associated with your termination. During your employment with the Employer, you received a number of promotions and significant annual bonuses each year. At the time of termination you were less than 65 years of age and an earlier age of compulsory retirement did not apply to your position. All employment with the employer was severed on the termination date. The Employer did not re-employ you in any capacity after the termination date, and there was no arrangement between the Employer and another person to employ you after the termination of your employment.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 83-170 | Income Tax Assessment Act 1997 Subsection 83-170(1). | 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)(b). | Income Tax Assessment Act 1997 Subsection 83-175(3). | Income Tax Assessment Act 1997 Subsection 83-175(4).

Reasons for decision: Summary: The payment made on termination of your employment is considered to be a genuine redundancy payment as all the conditions of section 83-175 of the ITAA 1997 have been satisfied. As such, the payment includes a tax-free component which is not assessable income and is not exempt income. However, as the total amount of the payment exceeds the tax-free amount of a genuine redundancy payment, the remainder of the payment is assessable income and should be included in your assessable income for the 2010-11 income year. | Detailed Reasoning - Genuine redundancy payment (GRP) on or after 1 July 2007: A payment made to an employee, after 30 June 2007, is a GRP if it satisfies all the conditions set out in section 83-175 of the 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 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. (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 arm's length - the payment does not exceed the amount that could reasonably be expected to be made if the dismissal were at arm's 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 the 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. | Detailed Reasoning - 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)). In addition to the basic genuine redundancy requirement that is specified in subsection 83-175(1) of the ITAA 1997, all of the other requirements of section 83-175 of the ITAA 1997 must be satisfied for a payment to qualify as a GRP. Further, the Commissioner has issued Taxation Ruling TR 2009/2 (TR 2009/2) which outlines the requirements to be satisfied before any payment made to a person whose employment is terminated qualifies for treatment as a GRP under section 83-175 of the ITAA 1997. | Detailed Reasoning - The basic requirement for a genuine redundancy payment: Under subsection 83-175(1) of the ITAA 1997, a genuine redundancy payment is one received by an employee who is dismissed from his or her employment because the employee's position is genuinely redundant (paragraph 10 of TR 2009/2). In paragraphs 11 and 234 of TR 2009/2 the Commissioner states that there are four necessary components within the basic genuine redundancy requirement, namely: · the payment must be received by an employee in consequence of the termination of his or her employment; · the termination must involve the employee being dismissed from employment; · that 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 - Payment 'in consequence of' termination: The Commissioner considers that any payment must be made 'in consequence of' the employee's termination before it can be a genuine redundancy payment. Taxation Ruling TR 2003/13 sets out the Commissioner's views on when a payment is made 'in consequence of' termination of employment. The Commissioner considers that 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 accordance with a Settlement Deed executed between you and the Employer, you were to be paid an amount equivalent to a proportion of your annual base salary in full settlement of all claims you have had in relation to the contract of employment and the termination of your employment. Thus, the termination of employment and the payment are intertwined and connected. If not for the termination of employment, the issue of making the payment would not have arisen. The payment followed as an effect of, or a result from, the termination of your employment. As this first component is established, the next thing is to determine whether the remaining components of the basic genuine redundancy requirement are satisfied. | Detailed Reasoning - 'Dismissal' from employment: For a payment to qualify as a genuine redundancy payment, the employee must be dismissed from employment. Dismissal involves an action to terminate employment taken by the employer irrespective of the wishes of the employee. Where an employee is given notice that they will be terminated at a specified time in the future due to genuine redundancy, that employee will be dismissed because of redundancy for the purposes of section 83-175 of the ITAA 1997. You were advised by the Employer that your employment would be terminated. After some negotiation between you and the Employer, your employment was formally terminated during 2010-11 income year. Therefore, the termination of your employment is clearly a dismissal for the purposes of subsection 83-175(1) of the ITAA 1997 | Detailed Reasoning - Dismissal caused by 'redundancy': The concept of redundancy broadly refers to situations where something is superfluous and therefore unnecessary. In subsection 83-175(1) of the ITAA 1997, the thing that must be redundant for the provision to apply is an employee's position. A position is redundant when the functions, duties and responsibilities formerly attached to the position are determined by the employer to be superfluous (unnecessary) to the current needs and purposes of the organisation. You were advised by the Employer that your employment would be terminated as your position was made redundant and a transition to another role was not possible. On the evidence provided, the termination of your employment did not relate to any personal act or default on your part, rather, the Employer no longer required anyone to perform the job you had been doing. Therefore, your dismissal was caused by the redundancy of your position. | Detailed Reasoning - Genuine redundancy: The Commissioner considers that whether a redundancy payment is genuine is to be determined on an objective basis. It is not sufficient that an employer and employee have an understanding that a payment is a redundancy payment or that the employer calls the payment a redundancy payment. The need for the employee's position to be genuinely redundant establishes that contrived cases of redundancy will not meet the conditions in section 83-175 of the ITAA 1997. In your case, there is no evidence to suggest that the redundancy was contrived, therefore, all the components of subsection 83-175(1) of the ITAA 1997 have been met. | 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 section 83-175 must be met. These conditions are: The time of dismissal of an employee receiving a genuine redundancy payment must be before the earlier of: · turning 65 years of age, or · any earlier age of compulsory retirement for the particular position in question. · The payment must be made before the end of a fixed period of employment. · The payment must not exceed an arm's length amount in the event that the employer and employee are not dealing at arm's length. The need to satisfy the arm's length amount condition in paragraph 83-175(2)(b) of the ITAA 1997 arises only where it is established, as a matter of fact, that the employee's dismissal from employment by the employer was other than at arm's length. · There must be no stipulated arrangement to employ the person after the termination; and · the payment must not be in lieu of superannuation benefits. In your case: · at the time of the dismissal you were less than 65 years of age and no younger age of compulsory retirement applied; · there was no fixed period of employment; · it is accepted that the dealings between you and the Employer were at arm's length; · there was no stipulated arrangement to employ you after the termination; and · the payment was not in lieu of superannuation benefits. Consequently, it is considered that the termination of your employment with the Employer is as a result of genuine redundancy. Tax-free treatment of a GRP Subsection 83-170(2) of the ITAA 1997 provides that so much of the GRP that does not exceed the amount worked out using the formula in subsection 83-170(3) of the ITAA 1997 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) For the purposes of subsection 83-170(3) of the ITAA 1997, 'years of service' means the number of whole period, or sum of periods, to which the payment relates. Because the termination payment was made during the 2010-11 income year, the base amount is $8,126 and the service amount is $4,064. In your case, the total payment representing the redundancy payment is more than the tax-free amount calculated under subsection 83-170(3) of the ITAA 1997. Therefore, 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 remainder of the payment is to be included in your assessable income for the 2010-11 income year as an employment termination payment.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet.