When a redundancy isn’t a redundancy in the taxman’s eyes

The Administrative Appeals Tribunal (AAT) has held that a termination payment made to a senior tax officer whose services could no longer be effectively utilised by the Tax Office was not a “genuine redundancy payment” under the relevant tax laws.

A genuine redundancy attracts the benefit of having part of the payment made tax-free. For the 2010-11 financial year, the tax-free portion is $8,126 plus [$4,064 x the years of service]. An employee with say 25 years of service could therefore receive $109,726 of his or her “genuine redundancy payment” tax-free.

So, where a payment is not a genuine redundancy payment, those tax benefits do not apply. The question that arises is what is a “genuine redundancy payment”?

In essence, there are four necessary components for a payment to qualify as a genuine redundancy payment:

the payment must be received “in consequence of” an employee’s termination;
that termination must involve the 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.

In the AAT case, the taxpayer was an Executive Level 2.1 officer in the Tax Office, and the AAT said she felt under pressure to resign from the Tax Office after experiencing difficulties in dealing with staff. While the officer was on extended leave, the Tax Office appointed another EL2.1 and reorganised the officer’s business line. However, the Tax Office insisted that the officer would have been able to return to work as an EL2.1 (notwithstanding the reorganisation and other difficulties).

The officer raised the possibility of a voluntary redundancy under clause 97 of the ATO (Executive Level 2) Agency Agreement 2009. In March 2010, an Assistant Commissioner offered her a redundancy under that clause on the grounds that her services could not be effectively used by the ATO in her current position and alternative employment within the ATO was not available. Upon accepting the offer of voluntary redundancy, the taxpayer’s employment was terminated.

The former ATO officer sought a private ruling that the voluntary redundancy payment was tax-free on the basis that it was a “genuine redundancy payment”. However, the Commissioner concluded there had not been a genuine redundancy payment.

The AAT upheld the Commissioner’s view that the taxpayer was not “genuinely redundant” under the tax law. The AAT said it was satisfied that the taxpayer was not pushed out of her job and that the Tax Office had made it clear that her job remained and would need to be performed by an EL2.1 officer. If the officer was not available, the AAT accepted that the Tax Office would eventually need to replace her with someone who possessed the same technical skills.

The AAT said that a redundancy occurs where an employer no longer requires that a job be done by anyone. In fact, a 2004 decision of the Federal Court in Dibb’s case considered that an employee becomes redundant when his or her job (described by references to the duties attached to it) is no longer to be performed by any employee of the employer.

The situation where a job effectively disappears must be distinguished from the situation in which the employer no longer wants a job done by the (former) employee in question, the AAT said. Although the job position number had changed in this case, the AAT said the job had not disappeared and a range of functions in the area still had to be performed by someone at the EL2.1 level. Accordingly, the AAT held that the employee’s position was not redundant for the purposes of the tax law, even if the particular employee was no longer able to be utilised in that role.

The AAT said the fact that the officer effectively sought the dismissal was irrelevant as it was ultimately her employer’s decision to make the offer. In any event, the AAT noted that the letter from the Assistant Commissioner put the question beyond doubt by referring to a “voluntary redundancy” on the basis that the taxpayer’s services could no longer be utilised. Furthermore, the AAT noted that the redundancy was made under clause 97 of the Agency Agreement which only applied where an employee’s job was still required and the EL2 employee would be replaced.

The consequence of the AAT decision would be that the entire payment would be taxed as an employment termination payment.

This issue of genuine redundancy payments can cause problems when the law surrounding these payments is not understood. There are a number of cases from the courts and the AAT which clearly set out the requirements. When someone is made “redundant”, is does not automatically follow that the payment they receive from their employer as a result is a “genuine redundancy payment”. The recent AAT case is a good illustration of this.

The message to take from this is that not all redundancy payments are “genuine redundancy payments” for purposes of the tax law. As such, not all redundancy payments attract the tax-free concession.

Terry Hayes is the senior tax writer at Thomson Reuters, a leading Australian provider of tax, accounting and legal information solutions .