Private ruling: Genuine redundancy payment
Published: August 2014
Ruling period: Year ended 30 June 2014.
Date scheme commenced: 1 July 2013.

Ruling: Q1: Will any part of the payment received on termination of employment under a deed of release be a tax-free part of a genuine redundancy payment under section 83-170 of the Income Tax Assessment Act 1997? | A1: Yes.

Relevant facts and circumstances: You are less than 65 years of age. From the 1994-95 income year to the 2013-14 income year you were employed by an employer (the Employer) as a full time musician with a State Government organisation. You have stated that this position had no operational components and therefore no operational training was received. During the 2013-14 income year, the decision to close the band unit to reduce non-operational sworn staff was announced. The Employer offered options to redeploy impacted staff. Those who accepted one of the options were required to agree not to seek or accept re-employment of any other fee for service from any State Government organisation for a period of either three calendar years or one calendar year depending on the employer. You accepted this option and resigned your position. The effective date of resignation being during the 2013-14 income year. Shortly after, you received your payment which comprised of the following: Accrued long service leave A Accrued annual leave B Normal salary C Uniform allowance D Life benefit ETP E Total F From the above, X was withheld as tax. Your superable salary as at release date was Y.

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

Reasons for decision: Summary: The amount that you received as a life benefit employment termination payment is a genuine redundancy payment. As the payment is below the tax-free amount of a genuine redundancy payment, the entire amount is non-assessable, non-exempt income. | Detailed Reasoning - Genuine redundancy payment: A payment made to an employee is a genuine redundancy payment (GRP) if it satisfies all the conditions 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 and 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)). Subsection 82-135 includes (among others): superannuation benefits; the payment of a pension or annuity; and unused annual leave (paragraph 82-135(c)) or long service leave payments (paragraph 82-135(d)). As such, the payment you received for unused long service leave cannot be a GRP pursuant to subsection 82-135(4) of the ITAA 1997. The taxation treatment of this payment will be discussed in due course. Similarly, your normal salary and uniform allowance payments are not a GRP. These are taxable on an assessment basis at your marginal tax rate. Whether the life benefit ETP you received will constitute a GRP will be addressed below. In order to satisfy the definition of a GRP under subsection 83-175(1) of the ITAA 1997 there must be a dismissal from employment and the dismissal must result from the positions being made genuinely redundant. The term dismissal is not defined in the ITAA 1997. Therefore, it is necessary to consider the common law or ordinary meaning of the term and the meaning the judicial authorities have ascribed to it. | Detailed Reasoning - Dismissal from employment: Taxation Ruling TR 2009/2, titled Income Tax: genuine redundancy payments , which outlines the Commissioners view of the requirements for a payment to qualify as a GRP under section 83-175 of the ITAA 1992, discusses what constitutes a 'dismissal'. In particular: 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. 22. 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). While in form this appears to be a termination at the employee's initiative, it is recognised at law to be a dismissal. 30. In circumstances where an employee resigns after being offered alternative employment with an employer following an organisational restructure, it will be necessary to assess whether the termination of employment amounts to a constructive dismissal In your case, the Employer decided to close the Band Unit of which you were employed to reduce the number of non-operational sworn staff by offering a number of options. The facts state that you accepted one of the options on offer and resigned your position, effective during the 2013-14 income year. As you resigned after being offered alternative options, it is necessary to determine whether a constructive dismissal took place. The Commissioner expands on the issue of a constructive dismissal at paragraphs 256 to 258 of TR 2009/2: 256. As recognised in Smith , the concept of dismissal extends to 'constructive dismissal'. This refers to a termination that gives the appearance of employee consent, but in substance reflects the same circumstances as would have been the case if the employee had been dismissed - that is, an employer initiated termination without the employee's consent. In Blaikie v. South Australian Superannuation Board , Olsson J, quoting his own decision in R v. Prince Alfred College stated: The fact that the act of resignation subsumed the act of dismissal does not alter the essential character of the transactions between the parties. By virtue of the implicit waiver of the original act of formal dismissal by the employer, the applicant was, in reality, in a position in which he had resigned because he had been given virtually no option but to do so ... 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. It would appear that as the Employer offered you four different redeployment options, a constructive dismissal has not taken place. However, it is necessary to first analyse the intention of the Employer and second, assess the appropriateness of each option offered to you with reference to your qualifications and experience. According to the facts the employer took steps to reduce the number non-operational sworn staff. In doing so, the Employer closed the band unit of which you were employed as a musician, rendering your position redundant. As the overall intention was to reduce the number of non-operational sworn staff, it is feasible to argue that had there been a redundancy provision available for your employment type, your employment would have been terminated under that provision. In the absence of such provision however, the Employer offered you various redeployment options. As you accepted one of the options and subsequently resigned from your employment, it gives the appearance of employee consent. However on the whole, the substance of the arrangement more appropriately reflects an employer initiated termination without employee consent. This is especially the case if the redeployment options offered to you are considered inappropriate based on your qualifications and experience. When considering the Employer's intention together with the redeployment options offered to you it is clear the substance of the employment termination more accurately reflects a dismissal. That is, the Employer initiated the termination of your employment without your consent. It is feasible to conclude that the redeployment options were only offered to you as there was no redundancy provision available to the Employer. It is concluded that the termination of your employment constitutes a constructive dismissal and therefore a 'dismissal' for the purposes of subsection 83-175(1) of the ITAA 1997. The remaining conditions under section 83-175 of the ITAA 1997 are satisfied as: • Your position was made redundant following the closure of the band unit of which you were employed; • The amount you received exceeds what you would have received had you voluntarily resigned outside the redeployment process; • You are less than 65 years of age; • There was no arrangement between you and the Employer or between the employer and another person, to employ you following the termination of your employment; and • According to the payment advice, no amount was received by you in lieu of superannuation. | Detailed Reasoning - Tax-free amount of a genuine redundancy payment: 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 prescribed in subsection 83-170(3) is non-assessable, non-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 2013-14 income year: Base amount is $ Service amount is $ and Years of service is the number of whole years in the period, or sum of periods, of employment to which the payment relates. Your employment commenced during the 1994-95 income year and ceased during the 2013-14 income year. Hence the 'years of service' to which the GRP relates is whole years of service. Accordingly, the tax-free part of a GRP you can receive in the 2013-124 income year under subsection 83-175(3) of the ITAA 1997 has been formulated. As the payment of $E is below the tax-free amount of a GRP, the entire amount of the payment is the tax-free part of a GRP. This tax-free amount is non-assessable, non-exempt income under subsection 83-170(2) of the ITAA 1997. Consequently the amount of $E is not required to be included in your income tax return for the 2013-14 income year. | Detailed Reasoning - Taxation treatment of unused long service payments: Unused long service leave would ordinarily be included in assessable income under section 83-80 of the ITAA 1997 and subject to marginal rates of tax. However, as this payment is made in connection with a GRP, section 83-85 allows a tax offset to ensure that the rate of tax on this amount does not exceed 30%. | Detailed Reasoning - Refund of tax withheld: We note $X was withheld as tax from your total payment of $F. As you do not include the GRP of $E in your income tax return and the tax on your unused long service leave is capped at 30%, the excess of tax withheld for the income year will be credited to you once the tax return is processed.