ATO Interpretative Decision

ATO ID 2008/134

Superannuation

• This document incorporates revisions made since original publication. View its history and amending notices, if applicable.

Issue

Does the tax-free amount of a genuine redundancy payment proportionally reduce the amounts of a transitional termination payment and another employment termination payment made in consequence of a particular termination of employment?

Decision

No. The tax treatment of payments made on termination of employment is worked out in a logical sequence. First, the amount of any genuine redundancy payment must be determined and then reduced by the tax-free amount of that payment. Any remaining amount is an employment termination payment. The final step in the sequence is to determine the extent to which the employment termination payment gives rise to a transitional termination payment.

Facts

An employee is terminated because of genuine redundancy and receives $200,000 in the 2007-08 income year. The employee would not have been entitled to any of the $200,000 upon resignation.

In an agreement in place as of 9 May 2006, the employee was entitled to receive a redundancy payment of $150,000.

The balance of $50,000 is paid by the employer in consequence of the employee's genuine redundancy but is not made pursuant to an agreement in place as at 9 May 2006.

The employee has 10 years service and is entitled to a tax-free redundancy payment of $42,103.

Reasons for Decision

Section 83-175 of the Income Tax Assessment Act 1997 (ITAA 1997) envisages a collection of payments being made on termination.

The whole of the payment of $200,000 is a genuine redundancy payment under section 83-175 of the ITAA 1997 as the employee would not have received any of the payment on voluntary termination.

The tax-free amount of the genuine redundancy payment is worked out under section 83-170 of the ITAA 1997 and is $42,103. This amount is excluded from being an employment termination payment in accordance with paragraph 82-135(e) of the ITAA 1997.

The balance of $159,297 is an employment termination payment that is a life benefit termination payment, as provided by subsection 82-130(2) of the ITAA 1997. This is because Part 2-40 of the ITAA 1997 deals with all payments made in consequence of the termination of a person's employment cohesively. The treatment of genuine redundancy payments must therefore be considered in this overarching context. As a result, for a genuine redundancy payment to exist, it must firstly be made in consequence of termination of employment. Therefore, to the extent that the $200,000 is not a tax-free genuine redundancy payment, it is an employment termination payment.

Section 82-10 of the Income Tax (Transitional Provisions) Act 1997 (ITTPA 1997) provides that where an agreement is in place just before 10 May 2006 to pay a specified amount of a life benefit termination payment that amount is a transitional termination payment.

Paragraph 82-10(6)(b) of the ITTPA 1997 provides that where Division 82 of the ITTPA 1997 applies to only part of a life benefit termination payment then that part of the payment is the transitional termination payment. As the amount subject to the agreement in place just before 10 May 2006 is $150,000 it is this part of the life benefit termination payment of $159,297 that is the transitional termination payment.

Year of income:  Year ended 30 June 2008 Year ended 30 June 2009 Year ended 30 June 2010 Year ended 30 June 2011 Year ended 30 June 2012

Legislative References:
Income Tax Assessment Act 1997
   section 83-135
   paragraph 82-135(e)
   section 83-165
   section 83-170
   section 83-175

Related ATO Interpretative Decisions
ATO ID 2007/212

Keywords
Redundancy payments
Employment termination

Business Line:  Superannuation

Date of publication:  3 October 2008

ISSN: 1445-2782