Restructuring in uncertain times — genuine redundancy payments and ATO scrutiny

In the current economic and global environment, many businesses are undertaking corporate restructures, with consequent changes to operational needs and roles. As a result, redundancies are increasing in frequency.

Against this backdrop, the Australian Taxation Office (ATO) continues to undertake compliance activities, reviewing payments made to terminated employees to ensure they meet the legislative conditions for a genuine redundancy, and that the correct amount of tax has been withheld from these payments.

How is a genuine redundancy payment taxed?

When an employee’s employment is terminated, payments made to the employee in consequence of that termination will typically constitute an employment termination payment (ETP) and may be subject to concessional tax treatment up to the relevant caps.

However, only the component of such a payment that satisfies the requirements of a ‘genuine redundancy payment’ is eligible for a tax-free threshold, with the balance taxed under the ETP regime, on the basis that the ETP is received no later than 12 months after termination.

A genuine redundancy payment is tax-free up to a limit, based on the employee’s years of service. For the 2025-26 income year, the base limit is $13,100 plus $6,552 for each complete year of service. For example, if an employee has completed 10 full years of service prior to becoming redundant, the tax-free component is calculated as $78,620.¹ The balance is taxed as an ETP. Accordingly, there is a significant tax benefit for a payment to be classified as a genuine redundancy payment, particularly for long-term employees who have completed many years of service.

Key legislative conditions for a genuine redundancy payment

Section 83-175 of the Income Tax Assessment Act 1997 (ITAA 1997) states that 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 their employment at the time of dismissal.

In Taxation Ruling TR 2009/2 (Ruling), the ATO states that this definition contains four conditions:

1. the payment must be received in consequence of an employee’s termination;
2. that termination must involve the employee being dismissed from employment;
3. that dismissal must be caused by the redundancy of the employee’s position; and
4. the redundancy payment must be made genuinely because of a redundancy.

It will typically be straightforward to confirm that a payment has been received in consequence of an employee’s termination. However, this termination must involve the employee being dismissed from employment.

Dismissal from employment

The ATO considers that a genuine redundancy payment can only arise where there is no suitable job available for the employee with the employer, meaning that the employee must have been dismissed. ‘Dismissal’ requires a decision to terminate employment at the employer’s initiative, without the consent of the employee (contrasted with a resignation at the employee’s initiative).² The Commissioner of Taxation (Commissioner) accepts that a dismissal can still occur even where an employee has indicated they would be interested in having their employment terminated, provided that the final decision to terminate employment remains solely with the employer. Such a case may arise where expressions of interest in receiving a redundancy package are sought from employees as part of a structured process undertaken by the employer.³

Dismissal caused by redundancy

The employee’s dismissal must be caused by the redundancy of their position, and not for some other reason.

An employee’s position is redundant when an employer determines that it is superfluous to the employer’s needs, and the employer does not want the position to be occupied by anyone.⁴

Where an employer reallocates the duties attached to a particular position to another position within their organisational structure, the former position is typically redundant. However, if the employee who had been working in that position is still employed following the reallocation of duties, there will not be a dismissal. In contrast, if an employer determines after a structural reorganisation to terminate an employee, the former position of the employee is redundant as long as the reorganisation is the prevailing or most influential cause of the termination.

‘Genuine’ redundancy

Whether a redundancy is ‘genuine’ is determined on an objective basis; it is not sufficient that an employer and employee have an understanding that a payment is a redundancy payment. Contrived cases of redundancy will not meet the legislative requirements. The Ruling contains the following scenarios illustrating cases of contrived redundancy:

• where an employing entity is wound-up and some or all of the employees are immediately re-engaged by a new employing entity; and
• where an employer terminates an employee on outsourcing particular duties and functions, and immediately engages that employee to perform those outsourced tasks.⁵

Further conditions for a genuine redundancy payment

A payment will only qualify as a genuine redundancy payment if the following additional conditions are satisfied:

• the dismissal must be made before the person reaches pension age (currently 67);
• the payment must be made before the end of a fixed period of employment — if an employee’s contract is for a set period, their contract would simply terminate at the end of that period; this is not a ‘dismissal’;
• there must be no stipulated arrangement to employ the person after termination — this may include, for example, an arrangement between two related companies at the time of an employee’s dismissal, whereby the employer will commence employment with the second company following dismissal from the first company;
• the payment must not be in lieu of superannuation benefits;
• only where it is established that the employer and employee were not dealing at arm’s length, the payment must not exceed an arm’s length amount.

There have been two recent cases which consider genuine redundancy payments, being FCT v Baya Casal (Baya Casal) and Hardy v FCT (Hardy), with differing results for each taxpayer. Each decision is considered below.

Baya Casal — payment to taxpayer was a genuine redundancy payment

In this case, the Full Federal Court (Court) held that the taxpayer’s position was genuinely redundant when her workplace was restructured, and accordingly the payment she received was a genuine redundancy payment.

The taxpayer was employed by Ivanhoe Grammar School as an early learning centre assistant, on a part-time basis of 34.56 hours per week. Following an internal restructure, the employer offered her three new roles, with significantly reduced hours and alternate working days. For example, one of the new roles consisted of 28.5 hours to be worked over four days a week, with the other two roles offering 21.5 hours. The new roles were not acceptable to the taxpayer, and she opted to accept a redundancy.

The ATO issued a private ruling stating that the payment of $15,327 received by the taxpayer was not a genuine redundancy payment under section 83-175 of the ITAA 1997. The Federal Court at first instance allowed the taxpayer’s appeal, concluding that the taxpayer’s position had become genuinely redundant given the reduction in her hours.

The Court unanimously dismissed the Commissioner’s appeal. Interestingly, the ATO had argued that “the primary judge erred by incorrectly focussing on a material reduction in remuneration and on a material alteration to the days and hours of work as central in determining whether an employee’s position is genuinely redundant…the primary judge adopted a ‘mathematical’ approach and erred in concluding that material changes to days and hours of work were determinative of whether a position had become redundant”.

The Court, however, concluded that the reduction in hours which had occurred meant that the applicant’s position had become genuinely redundant. The Court accepted that the alternate roles involved approximately either 20% or 40% fewer hours, and hence a material reduction in remuneration. While acknowledging that it was necessary to consider alternate positions offered to an employee, the Court noted that a position involving a material reduction in hours and in remuneration, and with working days changed, was not an appropriate alternative to the pre-restructure position.

Hardy — payment to taxpayer was not a genuine redundancy payment

In the case of Hardy, the Administrative Review Tribunal (Tribunal) held that a payment made to a sprinkler fitter from an industry fund (then known as the Western Australia Construction Industry Redundancy Fund) was not a genuine redundancy payment, as the payment did not exceed the amount that the employee could have reasonably expected to receive in consequence of a voluntary termination of his employment at the time of dismissal.

In February 2013, the taxpayer commenced employment with Firesafe Systems Pty Ltd as a sprinkler fitter. On 24 May 2024, the taxpayer was notified by his employer that his role as a sprinkler fitter had been made redundant, due to operational requirements for less sprinkler fitter roles. The taxpayer received an ETP of $78,188.04, out of which $25,020 was withheld by his industry fund for tax purposes. The ATO issued an income tax assessment to the taxpayer in which the ETP was fully taxable and disallowed the taxpayer’s objection.

The Tribunal affirmed the ATO’s decision. While the Tribunal (and the ATO) agreed that the taxpayer’s position was made genuinely redundant, the relevant deed for the industry fund provided that an employee could be paid the balance in their fund account if they were no longer working for a participating employer; accordingly, the payment could be made upon consequence of an employee’s position being made redundant, or by the employee’s own voluntary termination of employment. In other words, under the relevant rules, it was reasonable to expect that the employee would have received the payment on either redundancy or voluntary resignation.

Unfortunately for the taxpayer, while his position was genuinely redundant, the terms of the governing documents for the industry fund prevented that tax-free treatment.

Contact us

As corporate restructures continue in the current economic environment, careful review of the tax treatment of termination payments is critical. We have experience advising on the structuring of termination payments and representing taxpayers in ATO compliance activities. If you would like to discuss these issues further, please contact Tamara Cardan, Special Counsel in our Tax team, on +61 3 9321 7862.

<sub>References
1. Being $13,100 + ($6,552 x 10) = $78,620.
2. TR 2009/2 at [18].
3. Ibid at [20].
4. TR 2009/2 at [25].
5. TR 2009/2 at [279].
Case references
FCT v Baya Casal [2026] FCAFC 11.
Hardy v FCT [2026] ARTA 528.
4. Sec.284-15(1), Sch 1 to the Taxation Administration Act 1953 (Cth).</sub>