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Ruling

Subject: Genuine redundancy payment

Question

Is any part of the payments your client received from the Employer considered to be a genuine redundancy payment in accordance with section 83-175 of the Income Tax Assessment Act 1997?

Advice/Answer

Yes.

This ruling applies for the following period

Year ending 30 June 2012

The scheme commenced on

1 July 2011

Relevant facts

In the relevant income year your client was employed the Employer.

At a meeting your client was notified that their employment with the Employer was to be made redundant due to adverse conditions.

The dismissal was made at arm's length.

At the time of dismissal there was no arrangement (written, verbal or implied) between your client and the Employer or between the Employer and another person, to employ your client after the dismissal.

Your client was dismissed before they were 65 years of age.

Payments were made to your client in the relevant income year.

No part of the payments was received by your client in lieu of superannuation benefits.

The payments is not a payment mentioned in section 82-135 of the Income Tax Assessment Act 1997 (apart from paragraph 82-135(e)).

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 4

Income Tax Assessment Act 1997 Section 82-135

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

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 Subsection 83-175(3)

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

Reasons for decision

Summary of decision

The payments made to your client by the Employer is a genuine redundancy payment.

Detailed reasoning

Genuine redundancy payment

A payment made to an employee 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).

Under subsection 83-175(1) of the ITAA 1997, four criteria must be satisfied:

In the relevant income year your client was employed the Employer.

At a meeting held in the relevant income year your client was notified that their employment with the Employer was to be made redundant due to adverse conditions.

Payments were made to your client in the relevant income year.

On the facts provided, it is considered that your client's position with the Employer had ceased to exist.

The decision to terminate your client's employment was made without their consent.

Therefore, the payments made to your client was made in consequence of the termination of their employment. If not for the termination of employment, the payment would not have been made.

Further, it is considered that your client has been dismissed from their employment because their role with the Employer has been made genuinely redundant.

Further conditions for a genuine redundancy payment

Subsection 83-175(2) of the ITAA 1997 sets out further criteria that must be satisfied for a payment to be regarded as a genuine redundancy payment.

The first condition requires that the taxpayer is dismissed before the earlier of the day the taxpayer turns 65 or the day they reach a particular age or completed a particular period of service that would have terminated the taxpayer's employment.

This condition is satisfied as your client was dismissed before they were 65 years of age.

The second condition requires that if the dismissal were not at arm's length, that the payment does not exceed the amount that could be reasonably expected to be made if the dismissal were at arm's length.

This condition does not apply as the dismissal was made at arm's length.

The third condition is that at the time of 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.

This condition is satisfied as, at the time of dismissal there was no arrangement (written, verbal or implied) between your client and the Employer or between the Employer and another person, to employ your client after the dismissal.

A further requirement, as set out in subsection 83-175(3) of the ITAA 1997, is that no part of the payment 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 date.

In this case, this condition is satisfied as no part of the payments was received by your client in lieu of superannuation benefits.

Not a payment mentioned in section 82-135 of the ITAA 1997

Subsection 83-175(4) of the ITAA 1997 provides that 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 includes (among others):

This condition is satisfied as the payments is not a payment mentioned in section 82-135 of the ITAA 1997 (apart from paragraph 82-135(e)).

Conclusion

In this case all the conditions in section 83-175 of the ITAA 1997 have been satisfied and the payments made to your client are a genuine redundancy payment.

Tax-free amount

Please note a genuine redundancy payment is so much of a payment as exceeds the amount that could reasonably be expected to be received by an employee in consequence of the voluntary termination of his or her employment at the time of the dismissal.

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:

For the relevant income year, the year in which the payment in lieu of notice is received:

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