Reduced Hours and Genuine Redundancy: A Broader Interpretation?

A recent Full Federal Court decision raises the possibility that the scope of genuine redundancy for income tax purposes may be broader than previously thought. In particular, the Court considered whether a substantial reduction in the hours, and scale of an employee’s role, in certain circumstances, could result in the former position being regarded as becoming redundant even though broadly similar duties continue to exist within the organisation.

What is a genuine redundancy payment?

Section 83-175 ITAA 1997 provides amongst other things 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 his or her employment at the time of the dismissal.

As noted above, the focus is on the redundancy of the position rather than the employee. In the context of a reorganisation or restructure, the fact that an employee’s employment is terminated is not the determinative factor to establish that the employee’s position has become redundant. Rather it is necessary to examine the nature and extent of any changes made to the position previously held by the employee, and whether those changes are sufficiently significant that, for all practical purposes, the former position can be said to no longer exist. This issue was considered by the Full Federal Court in Deputy Commissioner of Taxation v Baya Casal (2026) FCAFC 11, where the Court examined whether as a result of a restructure, a material reduction in hours (and hence remuneration) of an hourly rate paid position can constitute genuine redundancy.

Why does it matter?

A payment is classified as an eligible termination payment (ETP) if it is received in consequence of termination of employment, not later than 12 months after termination, and it is not a payment mentioned in section 82-135 ITAA97 (one such payment being a genuine redundancy payment).

ETPs are taxed differently from genuine redundancy payments, and do not receive the benefit of the same tax-free concession as genuine redundancy payments (although there can potentially be some concessional tax treatment).

The tax-free amount of a genuine redundancy payment is a type of payment mentioned in section 82-135 ITAA97, so that the amount is not treated as an ETP. The remainder of a genuine redundancy payment is treated as an ETP.

The Facts

The facts before the Court were limited to those set out in the taxpayer’s private ruling application, in summary:

• The taxpayer, Ms Casal was employed as an early learning centre (ELC) assistant since early 2014 on a part time basis of 34.56 hours per week.
• In late 2021, the employer notified the taxpayer that the ELC position was to be remodelled with the part-time hours to decrease and working days changed. The skills and duties for the ongoing role would be similar.
• The employer was proposing three new ELC roles. As an example, Role 1 consisted of 28.5 hours to be worked over four days a week.
• The employer also advised that the taxpayer was eligible to be redeployed to the remodelled ELC role or could take a redundancy.
• The days and number of hours offered to the taxpayer were not acceptable to her and she opted to accept a redundancy.

The Decision

The Court considered the duties and functions of the position, as well as the role of the position within the organisation, to determine whether a reduction in hours (and therefore remuneration) for an employee paid on an hourly rate basis meant that the employee’s position was no longer the same, and therefore, had become redundant.

A significant factor was that the taxpayer was employed on an hourly basis, meaning the scope of the taxpayer’s role was closely linked to the number of hours worked. While the duties themselves remained broadly similar, the Court concluded that the scale of the role had materially diminished (by way of hours). As a result, the reduction in hours was sufficient to conclude that the former position had effectively ceased to exist in its previous form.

As stated in the joint decision of Hespe and Button JJ:

47 The question of redundancy is a question of fact and degree, which is to be determined having regard to the particular circumstances. In the present case, Ms Casal was employed to perform duties and tasks as an assistant in an early learning centre. Ms Casal was not engaged to discharge responsibilities and perform a role for which she was paid a fixed salary. Having regard to the nature of an early learning centre, the running of such a centre will necessarily involve somebody performing tasks and duties relating to the care of children. The issue of whether Ms Casal was dismissed because her position had become redundant is not determined by whether other employees continued to perform similar tasks involving similar skills to those of Ms Casal, or that Ms Casal would have continued to perform similar tasks involving similar skills had she accepted one of the alternate positions.

48 In the circumstances of this case, the primary attributes of Ms Casal’s role were not limited to the precise tasks she was to carry out but extended to the scope and scale of her tasks and duties. Ms Casal’s position was to perform duties and tasks on an hourly basis and she was remunerated according to her hours worked. The changes made to Ms Casal’s role involved a reduction of 20% or 40% in her working hours…In Ms Casal’s case,…the Court is satisfied that the scope of Ms Casal’s part time role had diminished to a degree to which her position had become redundant.

49 This conclusion does not rest on the fact that Ms Casal’s remuneration would have been reduced had she accepted one of the new positions but the fact that, having regard to the nature of her employment, her total hours of work had diminished to a point where for practical purposes it may be said that the reason for her dismissal was because her position had become redundant. As a worker being remunerated based on hours worked, the reduction in Ms Casal’s remuneration flowed from a reduction in her working hours. The reduction in Ms Casal’s remuneration was not a consequence of the same job being performed at a lower cost to the employer, as may occur, for example if an employer terminated one employee and then engaged a replacement to perform the same tasks, functions and duties over the same hours at a lower hourly rate. Rather, the reduction in Ms Casal’s remuneration was a consequence of a reduction in the scope of her position to a point at which it is to be concluded that her former position had become redundant.

50 In reaching this conclusion, we have had regard as part of the holistic analysis to the fact that the new positions offered to Ms Casal would have involved similar tasks that are necessarily associated with caring for children in an early learning centre. We also treated the fact that the scheme involved a change to Ms Casal’s working days as a neutral factor because the nature and extent of those changes are unknown. As we have explained above, given the nature of Ms Casal’s position, the reduction to Ms Casal’s working hours (and, consequently, her remuneration) was such as to show that her former position had become redundant.

Implications

The decision suggests that the Court may be more open to recognising that a position could be made redundant (by way of hours) and replaced by a different (albeit diminished) role, notwithstanding that the new position involved broadly similar functions.

Potentially this may cause employers and former employees to revisit the tax treatment applied to termination scenarios that exhibit characteristics similar to the one considered in the decision.

The advantageous tax treatment of a genuine redundancy payments may also encourage other employees to seek a similar outcome in future termination scenarios.

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