Edited version of your private ruling

Authorisation Number: 1012133254058

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Ruling

Subject: concessional tax rates

Questions:

1. Will your payout of unused annual leave and unused long service leave receive concessional tax treatment?

Answer: No.

2. Will your payout of unused annual leave and unused long service leave be taxed at your marginal rate?

Answer: Yes.

This ruling applies for the following period

Year ending 30 June 2012

The scheme commenced on

1 July 2011

Relevant facts

You were employed by a government department.

The department has been restructured to a new authority, under a different name.

Due to the restructure, all positions with the department were made redundant and employees were advised the following:

Where there is a position created within the new organisation that has no or only minor change to an existing role within the portfolio, the substantive occupant may be assigned initially and later appointed.

Where there are a number of people carrying out a function moving into a new organisation and there are fewer positions available, these positions will be advertised internally and filled through an expression of interest process for affected staff. Unsuccessful applicants may apply for other positions.

Where entirely new positions have been created these positions will be advertised internally and/or externally.

Where a position is no longer required in the new organisation or the operating agency, the substantive occupant of that position can apply for other positions.

You were offered a position in the new authority and could accept the offer or apply for other positions.

You have now accepted the offer and have been appointed to the position that was created in the new authority, with had little or no change to the duties you performed in your previous role.

You were advised that you may be entitled to receive a payout of unused long service leave and unused recreation leave as a result of the change.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 83-15.

Income Tax Assessment Act 1997 Subsection 83-85(1).

Income Tax Assessment Act 1997 Subsection 83-85(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 Subsection 83-175(3).

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

Reasons for decision

If your employment is terminated, certain payments for unused annual leave and long service leave maybe entitled to concessional tax treatment where the payment is made as a result of a genuine redundancy.

Genuine redundancy payment

A payment made to an employee is a genuine redundancy payment (GRP) if it satisfies all the criteria set out in section 83-175 of the ITAA 1997.

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 the 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)).

Taxation Ruling TR 2009/2, Income Tax: genuine redundancy payments, provides guidance on the factors to be considered in the interpretation of section 83-175 of the ITAA 1997.

In discussing what constitutes a GRP in accordance with subsection 83-175(1) of the ITAA 1997, paragraph 11 of TR 2009/2 states:

There are four necessary components within this requirement:

· The payment being tested must be received in consequence of an employee's termination.

· That termination must involve an employee being dismissed from employment.

· That dismissal must be caused by the redundancy of the employee's position.

· The redundancy payment must be made genuinely because of a redundancy.

Therefore, the Commissioner considers that any payment must be made 'in consequence of' the employee's termination of employment before it can be a GRP.

In your case, you were employed by a government department. Due to a restructure, the department advised that all positions have been made redundant and that where there is a position created within the new authority that has no or only minor change to an existing role, the substantive occupant may be offered the position.

You were offered and accepted a new position, in the public sector service with the new authority, which was similar to your existing role and you have been appointed to that position.

Having accepted the offer of the position with the new authority, your employment with the public sector service has not been terminated.

From the information provided there has been no valid termination of employment. It is noted that the department's name is changed to the new authority however, your employment with the public sector service continues in the new position.

In this instance, there is not genuine redundancy as all the conditions under section 83-175 of the ITAA 1997 have not been satisfied.

Therefore, your entitlement to receive a cash payment for unused annual leave and unused long service leave is not being made in connection with a genuine redundancy payment. In addition, the payment is not being made in connection with either an early retirement scheme payment or the invalidity segment of either an employment termination payment or a superannuation benefit.

As a result, a cash payment made for unused annual leave and unused long service leave would not be entitled to concessional tax treatment. Instead, the cash payment would be subject to tax at your marginal rate of tax.

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