ATO Interpretative Decision

ATO ID 2002/135 (Withdrawn)

Superannuation

• This ATO ID is withdrawn as it is superseded by TR 2009/2: Income Tax: Genuine redundancy payments and Taxation Ruling IT 2255: Income Tax: Assessment of eligible termination payment - certain payments where no entitlement to long service leave exists.
  This document incorporates revisions made since original publication. View its history and amending notices, if applicable.

Issue

Is the payment of an amount for pro rata long service leave, as part of a 'bona fide redundancy' payment, subject to concessional tax treatment?

Decision

Yes. Where an employee is paid an amount for unused long service leave on termination of employment due to 'bona fide redundancy', the payment will be included in the employee's assessable income in full and subject to a tax rate not exceeding 30% plus Medicare levy.

Facts

As a result of a restructure an employer had made a number of positions redundant. The employer's usual practice was that employees did not receive a pro rata payment for long service leave if they resigned before the age of 55. To encourage employees to take redundancy packages an amount for pro rata long service leave was included in the redundancy payment.

Reasons for Decision:

Taxation Ruling IT 2255 deals with a case where a pro rata payment for long service leave was made to employees who would normally not been entitled to such a payment. Taxation Ruling IT 2255 states that the payment of pro rata long service leave in such circumstances is not a payment to which section 26AD of the Income Tax Assessment Act 1936 (ITAA 1936), that is, lump sum termination payments in lieu of long service leave, applies. Such an amount under these circumstances would instead correctly be regarded as an eligible termination payment (ETP) within the meaning of subsection 27A(1) of the ITAA 1936.

To qualify for concessional taxation treatment the ETP must also be either an 'approved early retirement scheme' payment or a 'bona fide redundancy' payment (as outlined in Taxation Ruling TR 94/12). To be regarded as such, the payment must meet the requirements of either section 27E or section 27F of the ITAA 1936 respectively. The requirements of these provisions are outlined further in Taxation Ruling 94/12.

In this case the payment of pro rata long service leave qualified for concessional taxation treatment as essentially the payment was:

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an ETP;

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met the requirements of section 27F (ITAA 1936); and

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was in excess of an amount that could reasonably be expected to have been received on ordinary termination of employment.

Legislative References:
Income Tax Assessment Act 1936
   section 26AD
   section 27A
   subsection 27A(1)
   section 27E
   section 27F

Related Public Rulings (including Determinations)
IT 2255
TR 94/12

Other References:
Previously released as CDS10144

Keywords
Bona fide redundancy payments
Approved early retirement scheme payments

Business Line:  Superannuation

Date of publication:  8 February 2002

ISSN: 1445-2782