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Ruling

Subject: Genuine redundancy payment

Question

Is any part of the payment received by your client on the termination of employment a tax-free part of a genuine redundancy payment, in accordance with section 83-170 of the Income Tax Assessment Act 1997?

Answer: Yes.

This ruling applies for the following period

1 July 2009 to 30 June 2010

The scheme commenced on

1 July 2009

Relevant facts and circumstances

Your client commenced employment with the employer over ten years ago.

Subsequently, the employer issued a statement that provided guidelines on the payment of untaken sick leave on resignation or retirement.

A percentage of accrued sick leave, dependant on the number of completed years of service was to be paid on termination of employment.

Later due to an organisational restructure, your client's position with the employer was made redundant.

Your client agreed to a financial arrangement for terminating of your client's employment.

This arrangement was set out in a Deed of Release (the Deed) made between your client and the employer.

Under the Deed one of the payments your client received was for 100% of your client's accrued sick leave.

A PAYG payment summary - employment termination payment from the employer stated your client was to receive a taxable component from which tax had been withheld.

The taxable component represented 100% of your client's sick leave entitlement.

A PAYG payment summary - individual non-business payment summary from the employer stated your client's other termination payments including:

- gross payments (salary)

- reportable employer superannuation contributions

- lump sum A (annual and long service leave)

- lump sum B (redundancy payment), and

- tax withheld.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 27F.

Income Tax Assessment Act 1997 Section 83-165.

Income Tax Assessment Act 1997 Section 83-170.

Income Tax Assessment Act 1997 Section 83-175.

Income Tax Assessment Act 1997 Subsection 83-175(1).

Income Tax Assessment Act 1997 Subsection 83-175(3).

Reasons for decision

Summary

The termination package received by your client from the Employer comprises:

- an employment termination payment; and

- a tax-free genuine redundancy payment.

The tax-free amount is calculated on the basis that your client completed a number of full years of service with the Employer.

Of the taxable component in the PAYG payment summary, - employment termination payment, a portion of the total payment should be included as assessable income in your client's 2009-10 income tax return.

Detailed reasoning

From 1 July 2007 the taxation treatment of payments, made in consequence of the termination of any employment of a taxpayer have changed. Payments, formerly known as eligible termination payments, are now called employment termination payments.

Genuine redundancy payment

A payment made to an employee, after 30 June 2007, is a genuine redundancy payment (GRP) if it satisfies all criteria set out in section 83-175 of the ITAA 1997. Section 83-175 of the ITAA 1997 replaces former section 27F of the Income Tax Assessment Act 1936 (ITAA 1936), where such payments were previously referred to as bona fide redundancy payments.

Section 83-175 of the ITAA 1997 states:

(1) 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 dismissal.

(2) A genuine redundancy payment must satisfy the following conditions:

(a) the employee is dismissed before the earlier of the following:

(i) the day he or she turned 65;

(ii) if the employee's employment would have terminated when he or she reached a particular age or completed a particular period of service the day he or she would reach the age or complete the period of service (as the case may be);

(b) if the dismissal was not at arm's length the payment does not exceed the amount that could reasonably be expected to be made if the dismissal were at arm's length;

(c) at the time of the dismissal, there was no arrangement between the employee and the employer, or between the employer and another person, to employ the employee after dismissal.

(3) However, a genuine redundancy payment does not include any part of a payment that was received by the employee in lieu of superannuation benefits to which the employee may have become entitled at the time the payment was received or at a later time.

Payments not covered

(4) A payment is not a genuine redundancy payment if it is a payment mentioned in section 82-135 (apart from paragraph 82-135(e)).

Please note that the payment your client received will only be a genuine redundancy payment if all of the following conditions are met:

- your client was 65 years of age or less when they received the payment;

- there is no arrangement between your client and the employer, or between the employer and another person, to employ your client after their dismissal; and

- no part of the payment received by your client was in lieu of superannuation benefits to which your client may have become entitled either at the time the payment was received or at a later time.

The PAYG treatment of the Lump Sum D payment received by your client indicates the employer considered that these conditions were met in respect of the redundancy.

However, subsection 83-175(1) of the ITAA 1997 refers to a genuine redundancy payment as one that exceeds the amount that an employee would normally receive when resigning from employment.

If your client had resigned (or retired) during the normal course of employment your client would have been entitled to only part of their accrued sick leave entitlement under the employer's guidelines on the payment of untaken sick leave.

However, because of the redundancy of your client's position and a clause in the Deed, your client was entitled to payment of 100% of the accrued sick leave.

Consequently the part of the payment that exceeds the sick leave your client was normally entitled to receive on termination of employment will satisfy all of the requirements of Section 83-175 of the ITAA 1997 and is, therefore, a genuine redundancy payment.

Tax-free treatment of this genuine redundancy payment

Section 83-165 of the ITAA 1997 states that any part of a GRP that is not tax free under Subdivision 83 will normally be an employment termination payment.

Section 83-170 applies to determine the tax free treatment of the GRP. This section places a limit on the amount of a GRP that is eligible for concessional tax treatment.

The formula for working out the tax-free amount is:

Base amount + (Service amount Years of service)

For the 2009-10 income year:

Base amount means $7,732;

Service amount means $3,867; and

Years of service means the number of whole years in the period, or sum of periods, of employment to which the payment relates.

This tax-free amount is not assessable income and is not exempt income under subsection 83-170(2) of the ITAA 1997.

In addition to the sick leave amount discussed above, your client received another tax-free amount in respect of their redundancy. When both amounts are totalled, they do not exceed your client's tax-free amount entitlement.

As all the tax-free GRP payments your client received are less than their tax-free amount entitlement, the entire redundancy payment will be tax-free in your client's hands.

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