A Taxing Question: Are You Really Redundant or Merely Excess?

Part one of this article looked at the distinction between being found to be ”excess to requirements” under the Public Service Act and the meaning of ”genuine redundancy” or “redundant” under the Fair Work Act. A case recently decided by the Federal Court’s full bench, Weeks v Commissioner of Taxation, shows these distinctions can have very real-world consequences in relation to the taxation of payments made to an employee who has left their employer.

Before looking at the decision in Weeks, it is worthwhile setting out the central provision of the Income Tax Assessment Act, section 83-175(1), which is written in the following terms:

What is a genuine redundancy payment?

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.

The questions arise: is a termination of employment on the ground of being ”excess to requirements” a ”genuine redundancy” under tax law? Is a ”directed retirement”, as per section 37 of the Public Service Act, a real ”retirement” at all?

Taxation ruling TR 2009/2 is quite detailed but it relevantly provides the following:

The commissioner’s view is that a genuine redundancy payment can only arise where there is no suitable job available for the employee with the employer, meaning that he or she must therefore be dismissed.

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.

… Consent in this context refers to the employee freely choosing to agree to or approve the act or decision to terminate employment in circumstances where the employee has the capacity to make such a choice. Determining whether an employee has consented to their termination requires an assessment of the facts and circumstances of each case. Consent may be either expressly stated by the employee or implied by their behaviour or conduct.

If we turn now to the Weeks decision, the full bench of the Federal Court found no inconsistency between a public sector executive being ”excess to requirements” under the Public Service Act and her position not being genuinely redundant.

A former Australian Taxation Office executive, Cheryl Weeks, failed in her argument that the termination of her employment was a genuine redundancy under tax law.

The full court upheld an earlier ruling that her termination payout did not amount to a genuine redundancy payment under the Income Tax Assessment Act.

The Tax Office terminated Weeks’s employment under s29(3)(a) of the Public Service Act. That is, the reason for her termination was that she was ”excess to requirements”.

In response to a submission by Weeks, her manager had agreed to her termination being treated as a ”voluntary redundancy” under clause 97 of the ATO (Executive Level 2) Agreement 2009.

The full court rejected her argument that the payment be treated in a tax-advantaged manner as a genuine redundancy payment. The court saw no inconsistency between the employee being excess to the requirements of the agency and the employee’s position not being (genuinely) redundant. In the reasons for judgment, the court observed that the ”important question for present purposes is whether she was genuinely redundant”, and went on to note that case law had established that ”redundancy occurs where an employer no longer requires that a job be done by anyone. That 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 court found that, in this case, the job had not disappeared, even if the position number had changed.

Weeks was therefore liable for a substantially increased tax bill.

Thus, you can be excess to requirements, terminated from your employment by way of an offer of redundancy, but not actually have that payment treated under tax law as a genuine redundancy payment.

When one assesses the definitions of ”excess to requirements” and the kind of effort that would need to be put into redeployment before such a determination being made, it seems clear that a properly founded case of ”excess to requirements” would also satisfy the requirements for a ”genuine redundancy” under the Fair Work Act. However, as discussed above, this does not mean payments received as a result of being found excess to requirements will attract the tax benefits applicable to a ”genuine redundancy” under tax law.

All this seems to suggest that, if a public servant is notified that they are ”excess to requirements”, they should first ascertain what steps their employer has taken to find them ”suitable employment” elsewhere within the Australian Public Service. That is, what efforts have been made for their ”redeployment”.

If, on its face, it seems that the agency has made a genuine effort to redeploy them, then the public servant should get a statement from their employer saying that not only are they excess to requirements but their position has been made redundant. Additionally, the public servant should specifically ask their employer if theirs is a case where the employer no longer wants the job done by them specifically or, rather, if it is a case where the job has effectively disappeared.

If the job has effectively disappeared, the public servant should be able to access the tax benefits that are attracted by a ”genuine redundancy payment” under the Income Tax Assessment Act. However, if the employer has decided that they do not wish for the public servant to specifically do the job in question, the public servant should seek answers as to why this may be the case. He or she may find that they have redress because of:

  • a breach by their employer of their enterprise agreement;
  • a breach by their employer of applicable anti-discrimination legislation; or
  • a breach by their employer of the general protection provisions under the Fair Work Act.

First published in the Canberra Times’ Public Sector Informant.

By John Wilson, Legal Director, Employment Law.