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Edited version of private ruling

Authorisation Number: 1011600184677

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Ruling

Subject: Genuine redundancy payment

Is any part of the payment received on termination of employment exempt from tax as a genuine redundancy payment in accordance with section 83-175 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes.

This ruling applies for the following period:

Year ending 30 June 2010

The scheme commences on:

1 July 2009

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

Your client commenced employment with the former employer several years after 18 August 1993 and terminated this employment in the 2009-10 income year.

Your client received a letter from the former employer notifying your client of the termination of their employment effective from the date of the letter.

Your client was aged less than 65 at that time.

Your client was not issued with an Employment Separation Statement.

Your client received another letter advising a Liquidator had been appointed for the former employer.

Included in the letter was a claim form for a Scheme (the Scheme) administered by a government department which assesses claims submitted by employees terminated due to insolvency or bankruptcy of their employer during the last twelve months.

The letter advised your client that on assessment of their claim the Scheme may cover unpaid wages and commissions, accrued annual leave, long service leave, payment in lieu of notice and redundancy payments but noted that the Scheme did not cover unpaid superannuation benefits.

The letter also included the details of your client's outstanding entitlements for:

Your client later received another letter from the Liquidator which outlined the details of your client's final distribution payment under the Scheme. In addition, a cheque representing your client's first and final distribution payment under the Scheme was enclosed.

Also enclosed with the letter were:

The PAYG payment summary - employment termination payment for year ending 30 June 2010 included the total amount for pay in lieu of notice and redundancy entitlement as a taxable component with an amount for total tax withheld.

The PAYG payment summary - individual non-business for year ending 30 June 2010 included the details for gross payments, lump sum payments A and total tax withheld.

Relevant legislative provisions

Income Tax Assessment Act 1936 former Section 27F

Income Tax Assessment Act 1997 Section 82-135

Income Tax Assessment Act 1997 Paragraph 82-135(e)

Income Tax Assessment Act 1997 Section 82-170

Income Tax Assessment Act 1997 Subsection 82-170(2)

Income Tax Assessment Act 1997 Subsection 82-170(3)

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(2)

Income Tax Assessment Act 1997 Paragraph 83-75(2)(a)

Income Tax Assessment Act 1997 Paragraph 83-75(2)(b)

Income Tax Assessment Act 1997 Paragraph 83-75(2)(c)

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

Income Tax Assessment Act 1997 Subsection 83-175(4)

Reasons for decision

Summary

The payment representing pay in lieu of notice and redundancy entitlement, was made in consequence of the termination of your client's employment. The entire amount of the payment represents the tax free part of a genuine redundancy payment.

This tax-free amount is not assessable income and is not exempt income in your client's hands.

Detailed reasoning

Taxation of a genuine redundancy payment

Your client's employment was terminated in the 2009-10 income year and the employer was placed into liquidation soon after your client's termination date.

It is evident that the prevailing reason your client was dismissed from employment was because the position held with the former employer was genuinely redundant due to the former employer going into liquidation.

Your client was aged less than 65 at the time of the termination of employment.

Therefore it is accepted that the payment representing pay in lieu of notice and redundancy entitlement, is a genuine redundancy payment under section 83-175 of the ITAA 1997.

Subsection 83-170(2) of the ITAA 1997 provides that so much of the genuine redundancy payment that does not exceed the amount worked out using the formula prescribed in subsection 83-170(3) is not assessable income and is not exempt income. Any amount in excess of the tax-free amount is taxed as an employment termination payment. The formula for working out the tax-free amount is:

Base amount + (Service amount × Years of service)

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

For the 2009-10 income year:

Your client's employment commenced several years after 18 August 1993 and ceased in the 2009-10 income year. Hence, the 'years of service' to which the genuine redundancy payment relates is several whole years of service.

Accordingly, the tax-free part of a genuine redundancy payment your client can receive in the 2009-10 income year has been calculated under subsection 83-175(3) of the ITAA 1997.

As the payment is below the tax-free amount of a genuine redundancy payment, the entire amount of the payment is the tax-free part of a genuine redundancy payment. This tax-free amount is not assessable income and is not exempt income under subsection 83-170(2) of the ITAA 1997.

Consequently, this tax-free amount is not required to be included in your client's income tax return for the 2009-10 income year.

Tax treatment for unused annual leave

Payments for unused annual leave are excluded from being a genuine redundancy payment in accordance with subsection 83-175(4) of the ITAA 1997 as they are payments listed in section 82-135.

Subsection 83-10(2) of the ITAA 1997 provides that a payment for unused annual leave is included in assessable income.

Unused annual leave includes amounts paid on termination for annual leave that have not been used, as well as a bonus or other additional payment for annual leave that have not been used, for example, leave loading.

The taxpayer also received a payment for unused annual leave as a result of the termination of employment. This income is included in the taxpayer's assessable income in accordance with subsection 83-10(2) of the ITAA 1997.

From the facts of the case, your client commenced employment several years after 18 August 1993. Annual leave on normal termination of employment is taxed at a taxpayer's marginal rates for annual leave that accrued on or after 18 August 1993. However, where the termination of employment is the result of genuine redundancy, the maximum rate of tax is 30% plus Medicare Levy.

Your client terminated employment as a result of genuine redundancy. Therefore, the maximum rate of tax on the unused annual leave will be 30% plus Medicare Levy. If your client's marginal rate of tax is below 30%, the unused annual leave will be taxed at that lower rate.

If your client's marginal rate of tax is higher than 30% the taxpayer is entitled to a tax offset to ensure that the rate of tax on this payment amount does not exceed 30% plus Medicare Levy in accordance with section 83-15 of ITAA 1997.

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