Search 
Mallesons Stephen Jaques
Who does this affect?

Employers that are considering reducing employee numbers based on a downsizing, restructure or reorganisation of part or all of the employer's operations

What do you need to do?

Review the terms of, and the circumstances surrounding, any proposed termination of an employee's employment and consider whether any payments made in consequence of such a termination qualify for concessional tax treatment as genuine redundancy payments

Author
Jason Barnes  
Senior Associate
Phillip Davies  
Partner
T +61 3 9643 4106

Genuine redundancy payments: final Taxation Ruling issued - 24 April 2009

The Commissioner of Taxation has issued Taxation Ruling TR 2009/2 (Ruling), which highlights some important issues to be considered in determining whether payments made to employees on the termination of their employment qualify for treatment as a genuine redundancy payment.

A payment made to an employee will be eligible for concessional tax treatment under the Income Tax Assessment Act 1997 if it qualifies as a “genuine redundancy payment” and certain other conditions are satisfied. The Ruling provides that for a payment to qualify as a genuine redundancy payment:

  • the payment must be received in consequence of the employee’s termination
  • that termination of the employee’s employment must involve the employee being dismissed from employment
  • that dismissal must be caused by the redundancy of the employee’s position (i.e. the position is superfluous to the employer’s needs and the employer does not want the position to be occupied by anyone), and
  • the redundancy payment must be made genuinely because of the redundancy.

‘Dismissal’ from employment

The Commissioner’s view is that a genuine redundancy payment can only arise in circumstances where there is no suitable job available for an employee, with the result that the employee must generally be dismissed from all employment with the employer. The Commissioner acknowledges that dual capacity employees (e.g. a director or other office holder who is also a common law employee) may satisfy this requirement if they are terminated from one of their roles, but nevertheless stay on in their other capacity. However, consideration of all the facts and circumstances is required to determine whether a dual capacity employee has consented to their termination.

The Commissioner states that ‘dismissal’ from employment requires a decision to terminate employment at the employer’s initiative and without the consent of the employee. The Ruling makes it clear that this can still occur in cases where an employee has indicated that they would be interested in having their employment terminated, so long as the final decision to terminate employment remains solely with the employer. Such a case may arise where expressions of interest are sought from employees as part of a downsizing or restructure of part or all of the employer’s operations (e.g. a round of voluntary redundancies).

Dismissal caused by ‘redundancy’

The Ruling also addresses the situation where the dismissal from employment occurs for more than one reason (e.g. where an employer is restructuring its organisation and as part of that process identifies underperforming members of staff for dismissal). In such cases, consideration must be given to whether the redundancy of the employee’s position was the prevailing or most influential reason for the dismissal.

Further conditions

For a payment to qualify as a genuine redundancy payment and thus to be eligible for concessional tax treatment, the following conditions must also be satisfied:

  • the employee must not be older than the specified age limits (65 for most employees)
  • the termination generally must not be at the end of a fixed period of employment (although some ‘rolling’ fixed-term contracts may, as a matter of fact, establish an ongoing employment relationship)
  • if the employer and employee are not dealing at arm’s length in relation to the dismissal, the actual amount paid must not be greater than the amount that could reasonably be expected to have been paid had the parties been dealing at arm’s length
  • there must not be an arrangement between the employer and the employee, or the employer and another entity, to employ the employee after the termination (although there may be an arrangement to engage the former employee as an independent contractor), and
  • the payment must not be in lieu of superannuation benefits.

Tax treatment of genuine redundancy payments

The Ruling also sets out how to work out the tax treatment of payments that are genuine redundancy payments. Of interest is the Commissioner’s view that multiple payments received by an employee in consequence of their dismissal due to redundancy (other than as one amount paid at a single point in time) are treated as a single sum attributable to redundancy when working out the tax treatment of the payments.

Former redundancy provisions

The provisions of the Income Tax Assessment Act 1997 dealing with genuine redundancy payments are a rewrite of the former provisions contained in the Income Tax Assessment Act 1936 that dealt with bona fide redundancy payments. The Commissioner considers that the treatment of genuine redundancy payments and bona fide redundancy payments is the same and, therefore, that the Ruling may be relied on when applying the former provisions.

For more information please contact the Mallesons Tax Team.

This publication is only a general outline. It is not legal advice. You should seek professional advice before taking any action based on its contents.