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Ruling

Subject: Genuine redundancy payment

Question 1

Is any part of the payment in lieu of notice tax-free as a genuine redundancy payment?

Answer: Yes.

This ruling applies for the following period:

Year ended 30 June 2012.

The scheme commences on:

1 July 2011.

Relevant facts and circumstances

You are under 65 years of age.

You were employed with an entity (the Company).

Your employment agreement with the Company was signed during the 2010-11 income year.

In a letter you were advised your employment with the Company had been terminated effective during the 2011-12 income year, including 4 weeks' notice.

The letter stated your role was made redundant due to structural requirements and workloads in the business.

In the 2011-12 income year were paid the following:

Entitlement	Gross($)	Tax Withheld ($)
Annual Leave (including loading) (taxed at 31.5%)	X	X
Payment in lieu of notice (taxed at 16.5%)	Y	Y
Total	Z	Z (rounded)

The employment agreement provided quotes the following in regards to termination with notice.

Both the Employer and the Employee will be entitled to terminate this agreement as provided in the Fair Work Act 2009. (Clause 26.2(a))

Other than for any period of probation, the Employee may at any time give two weeks' notice in writing to terminate the Agreement or forfeit an equivalent amount of in lieu notice. If payment is by way of forfeiture, the Employee authorises the Company to deduct the payment from any monies payable by it to the Employee. (Clause 26.2(b))

You have stated that at the time of the dismissal, there was no arrangement between you and the Company to re-employ you after your dismissal.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 83-175(1).

Income Tax Assessment Act 1997 Section 83-175.

Income Tax Assessment Act 1997 Paragraph 83-170.

Reasons for decision

Summary

The payment in lieu of notice qualifies as a genuine redundancy as all of the conditions have been satisfied.

Detailed reasoning

A payment made to an employee is a genuine redundancy payment (GRP) if it satisfies all the conditions 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 employees 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 arms length the payment does not exceed the amount that could reasonably be expected to be made if the dismissal were at arms 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)).

In this case the main issue is the requirement in subsection 83-175(1) of ITAA 1997, stated above. The facts show that you were dismissed from your employment because your position was genuinely redundant. What needs to be determined is whether the payment in lieu of notice exceeds the amount you would have received if you had voluntarily resigned.

From the facts, your employer paid you $X for payment in lieu of notice which had tax withheld of 16.5%. The fact that your employer was required to give you notice of the termination of your employment or payment in lieu of such notice, does not mean you were entitled to the payment had you resigned. Accordingly, the payment in lieu of notice is more than you would have reasonably expected to receive had you resigned. As such, the requirements under subsection 83-175(1) of the ITAA 1997 are satisfied.

There is nothing to indicate the other requirements in section 83-175 of the ITAA 1997 are not satisfied in your case or that it is necessary to consider them further for the purpose of this ruling.

As the payment in lieu of notice is below the tax-free amount of a genuine redundancy payment, you do not include the amount of $X as income in your tax return for the 2011-12 income year and if required, you should refer to this ruling.

Refund of tax withheld

We note your concerns regarding the actions taken by your employer; however, we are not able to order them to reimburse the tax withheld from the payment in lieu of notice.

However, this can be rectified when you lodge your tax return for the 2011-12 income year. As stated previously, you do not include the payment in lieu of notice amount of $X in your tax return. This omission will result in an excess of tax withheld for the income year which will be credited to you once the tax return is processed.

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