Edited version of private ruling

Authorisation Number: 1011602127078

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Ruling

Subject: Genuine redundancy

Questions

Is a payment in lieu of notice tax-free when the termination of employment is due to a genuine redundancy?

What is the threshold of a genuine redundancy payment for the 2010-2011 income year?

Does the genuine redundancy payment have to be declared in your income tax return?

Advice/Answers:

Yes.

The genuine redundancy payment threshold for the 2010-11 income year is a base amount of $8,126 plus $4,064 for each complete year of service.

Yes.

This ruling applies for the following period:

1 July 2010 to 30 June 2011

The scheme commenced on:

1 July 2010

Relevant facts:

You commenced working for a company (the employer).

In the income year you were made redundant and were given a notice of termination of employment by the employer.

According to your employment contract, the notice period is a number of weeks.

Your employment with the employer was terminated due to genuine redundancy.

The employer paid you your entitlements and PAYG tax was withheld.

You did not receive a PAYG payment summary within 14 days of the termination of your employment.

Relevant legislative provisions:

Income Tax Assessment Act 1936 Section 27F

Income Tax Assessment Act 1997 Section 82-10

Income Tax Assessment Act 1997 Section 82-130.

Income Tax Assessment Act 1997 Section 82-135.

Income Tax Assessment Act 1997 Section 82-145.

Income Tax Assessment Act 1997 Section 82-150

Income Tax Assessment Act 1997 Section 82-155

Income Tax Assessment Act 1997 Section 83-170.

Income Tax Assessment Act 1997 Section 83-175.

Reasons for decision

Summary

A payment in lieu of notice (the payment) made on termination of employment on account of genuine redundancy is tax-free up to the amount calculated in accordance with a prescribed formula. However, it is only tax-free to the extent that the payment received in lieu of notice exceeds what you would have received on voluntary termination of employment.

The genuine redundancy payment threshold for the 2010-11 income year is a base amount of $8,126 plus $4,064 for each complete year of service.

Any amount of your genuine redundancy payment remaining after deducting the tax-free amount from the payment must be included in your tax return for the income year.

Detailed reasoning

Based on the information provided, the payment in lieu of notice is an employment termination payment under section 82-130 of the ITAA 1997.

Tax-free part of a genuine redundancy payment

Genuine redundancy payment

An employment termination payment made to an employee, after 30 June 2007 is a genuine redundancy payment (GRP) if it satisfies all the criteria set out in section 83-175 of the Income Tax Assessment Act 1997 (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 referred to as bona fide redundancy payments.

The first criteria to be satisfied (subsection 83-175(1) of the ITAA 1997) is:

· that the payment is received by an employee who is dismissed from employment because the employee's position is genuinely redundant; and

· that the payment 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.

A payment in lieu of notice is made when, rather than having a person work out the period of their notice, the employer no longer requires an employee to perform work for them and pays them what they would otherwise have received as salary and wages during that notice period. Where a person works out all or part their notice period, any payment they receive for days actually worked would simply be salary and wages.

As your employment was terminated by reason of genuine redundancy, in order to be a GRP, the condition that must be satisfied is that the payment you received in lieu of notice is above what you would have received on voluntary termination of employment such as resignation.

Section 83-170 of the ITAA 1997 applies to determine the tax-free treatment of a genuine redundancy payment (GRP). Section 83-170 places a limit on the amount of a GRP that is eligible for concessional tax treatment.

So much of the GRP that does not exceed the amount worked out using the prescribed formula is not assessable income and is not exempt income. The formula for working out the tax free amount (subsection 83-170(3) of the ITAA 1997) is:

Base amount + [ Service amount × Years of service ]

For the 2010-11 income year:

Base amount means $8,126;

Service amount means $4,064; and

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

An amount of GRP received up to the amount calculated in the above formula, is the tax-free amount of a GRP and is not required to be included in your income tax return for the 2010-11 income year.

After deducting the tax-free component of a GRP, the remaining amount is considered to be a life benefit employment termination payment.

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