Draft Taxation Determination
TD 93/D121
Income tax: is a payment received under a voluntary redundancy package a bona fide redundancy payment for the purposes of section 27F of the Income Tax Assessment Act 1936 ?
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FOI status:
draft only - for commentPreamble
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1. No. For a payment to be a bona fide redundancy payment under section 27F there must be a dismissal by reason of bona fide redundancy. Paragraph 19 of Taxation Ruling No. IT 2286 states that the term "dismissal" carries with it the concept of the involuntary (on the employee's part) termination of employment . (Refer also to Stroud's Judicial Dictionary.)
2. Payments which fall within the terms of section 27F are treated concessionally. That is, only 5% of the bona fide redundancy payment is included in the taxpayer's assessable income and taxed at the taxpayer's marginal rate of tax.
3. In the case of a voluntary redundancy package, the employee takes advantage of the invitation made by the employer to receive the voluntary redundancy package and has his or her employment terminated. This does not constitute a "dismissal" even though the ultimate decision of whether or not the contract of employment should be terminated, remains with the employer (Birch and Another v. University of Liverpool [1985] IRLR 165). The termination is made by "mutual agreement" and is considered to be voluntary.
4. Payments made under a voluntary redundancy package may fall within the terms of section 27E which deals with early retirement scheme payments. If the requirements of this section are met, the payments are treated concessionally. These early retirement schemes require our approval before payments are made under the scheme. If approval is not granted, then the payments are not treated concessionally.
Example 1
XYZ Pty Ltd needs to reduce its staff numbers from 200 to 100. A redundancy package is offered to all employees. One hundred of the staff accept the offer to receive the redundancy package and their employment is terminated.
As the employees voluntarily take advantage of the employer's offer, the terminations of employment do not constitute dismissals. Therefore, the payments made under the redundancy package are not bona fide redundancy payments under section 27F.
For the payments to be treated concessionally the employer needs our approval of the early retirement scheme under section 27E.
Example 2
ABC Pty Ltd needs to reduce its staff numbers from 200 to 100. As a result 100 employees are laid off and paid a redundancy package.
In this case the terminations of employment are involuntary. Therefore, the payments made under the redundancy package are bona fide redundancy payments under section 27F and are treated concessionally.
Commissioner of Taxation
20 May 1993
References
BO SYD/DTD/92/15
Related Rulings/Determinations:
IT 2286
Subject References:
redundancy
bona fide redundancy payment
retrenchment
dismissal
termination and suspension of employment
voluntary redundancy package
early retirement
approved early retirement scheme payment
Legislative References:
ITAA 27E(1)
ITAA 27F(1)
Case References:
Birch and Another v. University of Liverpool
(1985) IRLR 165