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Ruling

Subject:

Genuine redundancy payment

Question

Is the payment made to you on termination of employment due to your position being made redundant, 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 2013

The scheme commenced on

1 July 2012

Relevant facts and circumstances

You commenced employment with a company (the Company) over 20 years ago.

In the 2011-12 income year, the Company went into voluntary administration.

The voluntary administrators appointed (the administrators) for the Company advised that as a consequence of their review, your position in the Company was regrettably terminated.

As a result of your position being made redundant, your employment was terminated on the basis of redundancy in the 2011-12 income year.

In the 2012-13 income year, the administrators of the Company advised that it would pay you an amount representing a full and final payment of your entitlements after deduction of PAYG withholding tax and excluding superannuation.

Your entitlements included annual leave, long service leave, payment in lieu of notice and redundancy with an amount of tax withheld.

A PAYG payment summary - employment termination payment for the year ending 30 June 2013 shows a taxable component and non-taxable component with an amount of tax withheld was made by the Company.

A PAYG payment summary - individual non-business Payment summary for year ending 30 June 2013 shows a lump sum payment at Label A (Type R) and at Label D with an amount of tax withheld.

Within 12 months of the termination of your employment, you received a cheque payment regarding your redundancy payment and entitlements from the Company.

There was no date prior to your 65^th birthday when you were required to cease employment.

There was no arrangement between you and the employer, or the employer and another person, to employ you after the termination date.

No part of the payment was made to you in lieu of superannuation benefits. The Company remitted a separate payment to your superannuation fund.

You are under the age of 65 years.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 82-135.

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

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

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

The payments made in lieu of notice and for redundancy are both considered to be genuine redundancy payments as all the conditions have been satisfied.

As the total of these payments is below your tax-free amount of a GRP it is not assessable income and is not exempt income. Therefore, is not required to be included in your income tax return for the 2012-13 income year.

Detailed reasoning

Genuine redundancy payments

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

As noted in the facts, your employment was terminated in the 2011-12 income year, due to the Company going into voluntary administration and as a result your position being made redundant.

The payment was made on termination of your employment due to your role being abolished. Both the redundancy payment and the payment made in lieu of notice were paid in circumstances of redundancy, and are in excess of the amount that could reasonably be expected to be received by a worker in consequence of voluntary termination.

Therefore, it is accepted that all the conditions in subsection 83-175(1) of the ITAA 1997 have been satisfied.

You were under 65 years of age when your employment was terminated. There is no date prior to you attaining age 65 where you would have had to retire from your employment.

You were dealing with the employer at arm's length and there is no evidence to indicate that there was an arrangement between you and the employer, or the employer and another person, to employ you after the termination date.

Furthermore, you were paid your superannuation entitlements separately, and there is no evidence to indicate that any part of the payment is in lieu of superannuation benefits to which you may have become entitled at the time of the payment or at a later time.

Therefore, it is accepted that all the conditions in subsection 83-175(2) and subsection 83-175(3) of the ITAA 1997 have been satisfied.

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 (apart from paragraph 82-135(e)).

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

Payments for accrued annual leave and long service leave were made to you in addition to the redundancy payment and payment in lieu of notice.

Therefore, the redundancy payment and the payment in lieu of notice does not include unused leave payments.

Hence the requirement in subsection 83-175(4) of the ITAA 1997 has been satisfied.

In light of the above, as all the conditions have been satisfied in accordance with section 83-175 of the ITAA 1997, the redundancy payment and the payment made in lieu of notice are considered to be GRPs.

Tax free amount

Section 83-170 of the ITAA 1997 applies to determine the tax free treatment of a 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. Under subsection 83-170(3) of the ITAA 1997, the formula for working out the tax free amount is:

Base amount + (Service amount × Years of service)

As the payment was made during the 2012-13 income year, the base amount will be $8,806 and the service amount will be $4,404. Therefore the tax-free amount calculated in accordance with subsection 83-170(3) of the ITAA 1997, is the tax-free part of a GRP you can receive in the 2012-13 income year.

As the payments made to you in lieu of notice and redundancy is below your tax-free amount of a GRP these total payments are not assessable income and are not exempt income under subsection 83-170(2) of the ITAA 1997, and therefore they are not required to be included in your income tax return for the 2012-13 income year.

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