Edited version of private ruling

Authorisation Number: 1011816317413

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Ruling

Subject: Genuine redundancy - employment after termination

Question:

Will the payment on termination of employment qualify as a genuine redundancy payment if you are subsequently employed by a different entity within the same employer group of companies?

Answer:

Yes

This ruling applies for the following period

30 June 2012

The scheme commenced on

1 July 2010

Relevant facts and circumstances

You are under 55 years of age.

You are employed in a position (the position) by the employer (the current employer), which is a company in a group of companies (the Company Group), on a fixed term agreement for three years which commenced at the beginning of the 2010-11 income year and ceases at the end of the 2012-13 income year.

Although your position was connected with a regional office in another state, you were based and worked remotely in the state in which you are residing.

You employment with the current employer will terminate at the end of the 2010-11 income year as a result of your position being transferred to another state in Australia.

There will not be any agreement, at the time of the termination of employment, an agreement between you and your current employer or your current and the other company to employ you after the termination of your employment with your current employer.

You are considering other employment options within the Company Group in your state, specifically with a particular company (the potential new employer). You advised that you need to apply for the job and go through the normal recruitment process like anyone else. You also advised that there is no guarantee that you will be successful in your application.

You advise that the payment will be made early in the 2011-12 income year and the estimation of your employment termination is as follows:

Description Amount

Annual leave

Employment termination payment

Tax-free portion of redundancy

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 82-10.

Income Tax Assessment Act 1997 Subsection 82-10(2).

Income Tax Assessment Act 1997 Subsection 82-10(3).

Income Tax Assessment Act 1997 Paragraph 82-10(3)(b).

Income Tax Assessment Act 1997 Section 82-135.

Income Tax Assessment Act 1997 Subsection 82-135(e).

Income Tax Assessment Act 1997 Section 83-170.

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

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 82-175(4).

Reasons for decision

Summary

The payment to be received by you from the employer during the 2011-12 income year is a genuine redundancy payment. Of this amount, a portion of the payment represents the tax free part of a genuine redundancy payment.

The remaining balance is an employment termination payment and consists entirely of a taxable component which is to be included in your assessable income for the 2011-12 income year.

You will be entitled to a tax offset that ensures that the rate of income tax on the amount up to the ETP cap amount will not exceed 30% plus Medicare levy. The amount in excess of the ETP cap amount will be subject to tax at the top marginal rate (45% plus Medicare levy).

The ETP cap amount for the 2011-12 income year is $165,000.

Detailed reasoning

Genuine redundancy payment

A payment made to an employee, after 30 June 2007, is a genuine redundancy payment if it satisfies all the criteria set out in section 83-175 of the Income Tax Assessment Act 1997 (ITAA 1997). This section 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 employees 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)).

Section 82-135 of the ITAA 1997 lists payments that are not employment termination payments. Paragraph 82-135(e) provides that the part of a genuine redundancy payment worked out under section 83-170 is not an employment termination payment.

Based on the facts provided it is clear that:

· a dismissal will occur (subsection 83-175(1) of the ITAA 1997);

· the dismissal is because your position is genuinely redundant (subsection 83-175(1)) - in this case, the position is to be relocated interstate;

· you are to be dismissed before you reach age 65 (paragraph 83-175(2)(a)); and

· you and the employer are at arm's length (paragraph 83-175(2)(b)).

The matter at issue is if you obtain employment with another company within the same employer group of companies, will that prevent the payment you will receive on termination of employment with your current employer from being concessionally treated as a genuine redundancy payment.

As noted above, paragraph 83-175(2)(c) of the ITAA 1997 provides 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 dismissal.

You are considering applying for a position with the potential new employer - a company within the Company Group. In applying for the position you will have to go through the normal recruitment process like any other job applicant. You further advise that there is no guarantee that you will be successful in your application.

It is clear from the foregoing that there is no arrangement between yourself and your current employer to employ you after the dismissal. Also, there is no evidence to suggest that there an arrangement between your current employer and the potential new employer to employ you after the dismissal.

In light of this it is considered that the requirement under paragraph 83-175(2)(c) of the ITAA 1997 has been satisfied.

The other requirements to be satisfied under section 83-175 of the ITAA 1997 are that:

· the payment is in excess of the amount that could reasonably be expected to be received by you in consequence of the voluntary termination of your employment at the time of dismissal (subsection 83-175(1));

· the payment is not in lieu of superannuation benefits to which you may have become entitled at the time the payment was received or at a later date (subsection 83-175(3)); and

· the payment is not a payment mentioned in section 82-135 other than paragraph 82-135(e) (subsection 83-175(4)).

From the information you have provided it appears that:

· the payment is in excess of the amount that could reasonably be expected to be received by you in consequence of the voluntary termination of your employment at the time of dismissal; and

· the redundancy payment to be received by you is not in lieu of superannuation benefits.

Section 82-135 of the ITAA 1997 lists payments that are not employment termination payments. These include (among others):

· superannuation benefits;

· the payment of a pension or annuity; and

· unused annual leave or long service leave payments.

Accordingly, subsection 83-175(4) of the ITAA 1997 excludes the entire amount of the unused annual leave payment from being a genuine redundancy payment, because the payment is mentioned in section 82-135. Consequently, the unused annual leave payment is not a genuine redundancy payment in accordance with subsection 83-175(4).

This leaves the remaining amount as being a genuine redundancy payment under section 83-175 of the ITAA 1997. However, paragraph 82-135(e) specifically excludes the tax-free part of part of a genuine redundancy payment from being an employment termination payment.

Tax-free part of a genuine redundancy payment

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 2011-12 income year:

Base amount means $8,435; and

Service amount means $4,218.

The payment worked out from the above formula is the tax-free amount of a genuine redundancy payment and is not required to be included in your income tax return for the 2011-12 income year.

After deducting the tax-free amount of a genuine redundancy payment the remaining amount of is considered to be an employment termination payment.

The employment termination payment will consist entirely of a taxable component which is included in your assessable income under subsection 82-10(2) of the ITAA 1997.

As you are under preservation age you will be entitled to a tax offset under paragraph 82-10(3)(b) of the ITAA 1997 that ensures that the rate of income tax on the amount up to the ETP cap amount will not exceed 30% plus Medicare levy. The amount in excess of the ETP cap amount will be subject to tax at the top marginal rate (45% plus Medicare levy).

Preservation age is the age at which retirees can access their superannuation benefits generally when they retire.

If you were born:

· before 1 July 1960 you can access your superannuation when you are 55.

· after 30 June 1960, your preservation age will be between 55 and 60. This is because the preservation age will gradually increase from 55 to 60 between 2015 and 2025.

For the 2011-12 income year the ETP cap amount is $165,000.

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