Edited version of private ruling

Authorisation Number: 1011731950496

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Ruling

Subject: Genuine redundancy payment

Issue

Question

Is a portion of the payment made to your client on termination of employment, a tax-free part of a genuine redundancy payment (GRP) in accordance with section 83-170 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Advice/Answer

Yes.

This ruling applies for the following period

For the year ended 30 June 2010

The scheme commenced on

1 July 2009

Relevant facts

Over 20 years ago, your client commenced full-time employment with an employer (the employer).

The employer advised all employees that the company is implementing several measures in order to manage its cost base, including restructuring its organisation to improve efficiencies.

The employer advised that eligible employees could apply for voluntary redundancy. The effective date of the voluntary redundancy may vary depending on operational requirements.

An offer was made to your client who accepted the employer's offer of voluntary redundancy and entered into a Deed Poll (the Deed) to terminate employment in the first quarter of the 2009-10 income year.

The Deed shows that your client agreed to terminate employment and receive a payment (less applicable taxation as an employment termination payment) which is made in full and final satisfaction of all entitlements.

The payment includes any applicable industrial instrument and relevant legislation including severance payments, payment in respect of accrued and untaken leave entitlements and any payment in lieu of notice.

Your client was entitled to receive accrued annual leave and long service leave on resignation or retirement.

In the first quarter of the 2009-10 income year, your client's employment was terminated when your client's former role was abolished.

An ETP Estimate shows your client is entitled to receive an amount with an amount of tax withheld which includes accrued annual leave, accrued long service leave and an ETP payment.

A PAYG Payment Summary - employment termination payment, made in the first quarter of the 2009-10 income year, was made to your client which showed a taxable component and an amount of tax withheld.

In a letter dated early 2011, the employer has stated that your client ceased employment in the first quarter of the 2009-10 income year and that prior to your client's departure there were a specified number of roles with a specified number of roles being abolished after your client's position was terminated.

Your client had completed a specified number of whole years of service with the employer.

There was no date prior to your client's sixty fifth birthday when your client was required to cease employment.

No part of the employment termination payment was made to your client in lieu of superannuation benefits.

Your client is under 55 years.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 82-10(2)

Income Tax Assessment Act 1997 Section 82-135

Income Tax Assessment Act 1997 Section 83-170

Income Tax Assessment Act 1997 Subsection 83-170(2)

Income Tax Assessment Act 1997 Subsection 83-170(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 83-175(2)(a)

Income Tax Assessment Act 1997 Paragraph 83-175(2)(b)

Income Tax Assessment Act 1997 Paragraph 83-175(2)(c)

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

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

Reasons for decision

Summary

A portion of the payment is considered to be a genuine redundancy payment as all the conditions have been satisfied.

The portion of the payment in excess of the tax-free amount is the taxable component of an employment termination payment and is to be included in your client's assessable income for the 2009-10 income year.

Detailed reasoning

Genuine redundancy payment

To determine if any part of the employment termination payment your client received from an employer (the employer) constitutes a GRP, all the conditions in section 83-175 of the ITAA 1997 will need to be satisfied.

A GRP is defined in subsection 83-175(1) of the ITAA 1997 as:

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 the dismissal.

Subsection 83-175(2) of the ITAA 1997 states that for a payment to qualify as a GRP all of the following conditions must be met:

§ the employee is dismissed before the earlier of the following:

o the day he or she turned 65;

o 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);

§ 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;

§ 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 the dismissal.

In addition, subsection 83-175(3) of the ITAA 1997 provides that a GRP 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 of the payment or at a later time. In addition, subsection 83-175(4) provides that a payment is not a GRP if it is a payment mentioned in section 82-135.

The Commissioner has issued Taxation Ruling TR 2009/2 which outlines the Commissioner's view of the requirements to be satisfied for a payment to qualify as a genuine redundancy payment under section 83-175 of the ITAA 1997.

It is proposed to examine each of these provisions.

The requirement under subsection 83-175(1) of the ITAA 1997

The first requirement which is specified in subsection 83-175(1) of the ITAA 1997 has three criteria:

§ the payment is received by an employee who is dismissed from employment;

§ the employee is dismissed because the employee's position is genuinely redundant; and

§ 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.

Dismissal from employment

The first criterion is that there has been a dismissal from employment, which usually means that the termination of employment is involuntary on the part of the employee concerned and is instigated by the employer.

According to the facts, your client's employment was terminated by your client's employer in the first quarter of the 2009-10 income year as your client's position was no longer required due to a restructuring of the organisation.

To assist in facilitating the restructure the employer provided opportunities to eligible employees to apply for voluntary redundancy.

Your client's offer of voluntary redundancy was accepted by the employer and your client's employment was terminated in the first quarter of the 2009-10 income year.

The termination of your client's employment is clearly a dismissal for the purposes of subsection 83-175(1) of the ITAA 1997, because your client's employment was terminated at the instigation of the employer due to a restructuring of the organisation. Therefore, it is considered that your client has satisfied the first criterion under subsection 83-175(1) of the ITAA 1997 in this instance.

Genuine redundancy

Having established that there was a dismissal from employment for the purposes of subsection 83-175(1) of the ITAA 1997, the next criterion that needs to be considered is whether your client was dismissed because your client's position is genuinely redundant.

Redundancy is a situation where the dismissal of an employee is not caused by any consideration peculiar to the employee. Redundancy does not extend to a situation where an employee is dismissed for personal or disciplinary reasons or because the employee was inefficient, but rather because an employer no longer requires employees to carry out work of a particular kind or to carry out work of a particular kind at the same location.

At paragraph 27 of TR 2009/2 it states:

… if an employer decides after downsizing or some other structural reorganisation to terminate an employee, the former position of the employee is redundant as long as the downsizing or reorganisation is the prevailing or most influential cause of the termination.

The employer advised all employees that the company is implementing several measures in order to manage its cost base, including restructuring its organisation.

Your client made an application for voluntary redundancy which was accepted by the employer.

Furthermore, in a letter dated early 2011, the employer has confirmed that a specified number of roles were abolished when your client's employment was terminated.

The termination of your client's employment was not on account of any personal act or default on your client's part, and was not due to the ordinary and customary turnover of labour. Rather the employer no longer required anyone to perform the job your client had been doing. Therefore the employer's decision to terminate your client's employment is due to a redundancy.

Accordingly, it is considered that you have also satisfied the second criterion under subsection 83-175(1) of the ITAA 1997 in this instance.

The payment exceeds what your client would have received in consequence of the voluntary termination of your client's employment at the time of your client's dismissal

The third criterion that needs to be considered is whether the payment exceeds the amount that your client could reasonably be expected to receive in consequence of the voluntary termination of your client's employment will be treated as a genuine redundancy payment.

The Commissioner considers that it is necessary to show how the amount an employee is entitled to be paid exceeds the amount that is payable to employees who voluntarily terminate their employment.

Paragraphs 61 to 63 of TR 2009/2 state:

61. It would generally be expected that a greater amount would be paid on redundancy than voluntary termination. This recognises the purpose of redundancy payments, being primarily to compensate for loss of non-transferable entitlements (for example accrued sick leave and accrued long service leave prior to 10 years service) and the peculiar hardship associated with being made redundant.

62. Contractual or other entitlements payable by an employee on voluntary termination are generally a sound guide as to what might reasonably be expected …

63. There may be industry norms that could be used as a guide as to what payments would be made on voluntary termination …

As stated in the Deed your client agreed to voluntarily terminate employment and receive a redundancy payment. Your client was entitled to only an amount of accrued annual leave and long service leave had your client resigned or retired from employment.

The payment was made on termination of your client's employment due to your client's role being abolished. The payment is paid in circumstances of genuine redundancy, and is in excess of the amount that could reasonably be expected to be received by a worker in consequence of voluntary termination.

According to the facts, your client received an employment termination payment. It is accepted that this payment exceeds the amount your client could reasonably expect to receive if your client had resigned or retired from employment in the position your client held at the time of the dismissal. Therefore, it is considered that your client has satisfied the third criterion under subsection 83-175(1) of the ITAA 1997 in this instance.

Conclusion

All the criteria stipulated in subsection 83-175(1) of the ITAA 1997 have been satisfied.

Consequently it is considered that part of the payment constitutes a GRP within the meaning of subsection 83-175(1) of the ITAA 1997. However, a GRP must also satisfy the conditions in subsections 83-175(2) to 83-175(4).

The requirements under paragraphs 83-175(2)(a) and (b) of the ITAA 1997

As already noted previously, paragraph 83-175(2)(a) of the ITAA 1997 prescribes that the employee must be dismissed before the earlier of:

§ the day he or she turned 65; or

§ 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 applicable).

It is accepted that there was no date prior to your client's 65^th birthday on which your client was required to terminate employment, and that your client was not required to terminate employment before your client was dismissed on the effective date. Also given that your client was under 65 years of age at the time of your client's dismissal, your client has satisfied the requirements of paragraph 83-175(2)(a) of the ITAA 1997.

Additionally it is accepted that all dealings between your client and the employer were at arm's length. Therefore it follows that your client has also satisfied the requirement under paragraph 83-175(2)(b) of the ITAA 1997.

The requirement under paragraph 83-175(2)(c) of the ITAA 1997

Also as noted previously, paragraph 83-175(2)(c) of the ITAA 1997 requires that 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 the dismissal.

In the present case, there was no re-employment by your client's employer or evidence of any re-employment arrangement with another entity, so it is accepted that your client has satisfied the requirement under paragraph 83-175(2)(c) of the ITAA 1997 in this case.

The requirements under subsections 83-175(3) and 83-175(4) of the ITAA 1997

Subsection 83-175(3) of the ITAA 1997 provides that a GRP does not include any part of a payment that is received in lieu of superannuation benefits. No part of your client's payment was made to your client in lieu of superannuation benefits. Therefore it is accepted that the requirement under subsection 83-175(3) is satisfied.

Also as noted previously, subsection 83-175(4) of the ITAA 1997 provides that a payment is not a GRP if it is a payment mentioned in section 82-135 (other than a GRP or early retirement scheme payment).

Section 82-135 of the ITAA 1997 includes payments such as pensions, foreign termination payments, unused annual leave and unused long service leave.

An examination of the payment made to your client shows that the requirement in subsection 83-175(4) of the ITAA 1997 has been satisfied.

A GRP under sections 83-170 and 83-175 of the ITAA 1997

Your client has satisfied all the criteria set out in section 83-175 of the ITAA 1997 and consequently it is considered that the amount constitutes a GRP for the purposes of section 83-170.

Tax-free treatment of a GRP

Subsection 83-170(2) of the ITAA 1997 provides that so much of the GRP 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)

Your client was employed over 20 years ago and was made redundant in the first quarter of the 2009-10 income year after a period of employment of over 20 years. Consequently the 'years of service' to which the GRP relates is a specified number of whole years of service.

Because your client's dismissal occurred during the 2009-10 income year, the base amount will be $X and the service amount will be $Y. Therefore in accordance with subsection 83-175(3) of the ITAA 1997, the tax-free part of a GRP your client can receive in the 2009-10 income year equals:

$X + ($Y x the specified number of whole years of service).

Therefore the amount calculated in accordance with subsection 83-175(3) of the ITAA 1997 is the tax-free amount which is not assessable income and is not exempt income under subsection 83-170(2).

The remaining amount is a taxable component of an employment termination payment.

Tax Treatment of the employment termination payment

An employment termination payment made on or after 1 July 2007 will be comprised of the following components:

Tax free component this includes the pre-July 83 segment (if any) and/or the invalidity segment (if any); and

Taxable component the amount remaining after deducting the tax free component from the total payment.

In your client's case, there is no tax free component.

The amount in excess of the tax-free part of the GRP is the taxable component of the employment termination payment and is to be included in your client's assessable income for the 2009-10 income year (subsection 82-10(2) of the ITAA 1997).

As this amount is under the employment termination payment cap of $150,000 for the 2009-10 income year, and your client is under preservation age, it will be taxed at 30% plus Medicare levy.

The taxable components of all life benefit employment termination payments received in an income year are counted towards this cap. Any tax-free amounts are not counted towards the cap.

Conclusion

The portion of the payment in excess of the tax-free amount is the taxable component of the employment termination payment and is to be included in your client's assessable income for the 2009-10 income year.

You should request an amendment of your client's income tax return based on the figures in this ruling. Please refer to this ruling 'Authorisation number' in your request.

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