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Ruling

Subject: Genuine redundancy payment

Question

Is any part of the loyalty bonus payment and redundancy pay received on termination of employment the tax-free part of a genuine redundancy payment?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 2013.

The scheme commenced on:

1 July 2012.

Relevant facts and circumstances

You are under 40 years of age.

During the 2006-07 income year, you commenced full-time employment with an entity (the employer). During 2011, the employer announced it was undergoing a restructure.

In a letter dated during the 2011-12 income year you were advised that due to the company restructure, the employer's main priority was to retain key staff over approximately the next 12 months. The letter continued by offering you a one-off loyalty payment with the desire to retain your continued employment up until an estimated completion date. The payment was equivalent to three months salary and was payable to you on a certain date.

The payment was contingent upon your continued employment with the company until that time. The letter stated that upon reaching this date it was the employer's intention to present you with a new employment agreement.

It was also stated in the letter that should circumstances change and your role is no longer required before a specified date then you will have the entitlement to the three month loyalty payment in addition to regulatory redundancy entitlements.

During the 2012-13 income year, you were issued a redundancy notice confirming your last day of employment to be on a specified date. It stated your entitlements as follows:

The HR and Logistics Manager of the employer has confirmed you were made redundant due to the company restructure as services were transferred overseas.

On voluntary resignation or retirement you are entitled to receive unused accrued long service leave and unused annual leave.

There was no date prior to your sixty fifth birthday when you were required to cease employment.

At the time of termination there were no arrangements between yourself and the employer or any other person to employ you after your termination of employment.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 82-130.

Income Tax Assessment Act 1997 Subsection 82-130(4).

Income Tax Assessment Act 1997 Section 82-135.

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

Income Tax Assessment Act 1997 Paragraph 82-135(d).

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

Income Tax Assessment Act 1997 Section 83-10.

Income Tax Assessment Act 1997 Section 83-15.

Income Tax Assessment Act 1997 Section 83-80.

Income Tax Assessment Act 1997 Section 83-85.

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 Subsection 83-175(3).

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

Reasons for decision

Summary

The sum of the loyalty bonus payment and redundancy pay, C, is a genuine redundancy payment.

Of this amount, D is not assessable income and not exempt income as it is below the tax-free amount in respect of the genuine redundancy of this employment for the 2012-13 income year. The excess, being E, will be taxed as an employment termination payment.

Detailed reasoning

A payment made to an employee, after 30 June 2007, 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 and 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)).

Subsection 82-135 includes (among others):

· superannuation benefits;

· the payment of a pension or annuity; and

· unused annual leave (paragraph 82-135(c)) or long service leave payments (paragraph 82-135(d)).

As such, the payments you received for unused annual leave (X) and unused long service leave (Y) do not form part of a genuine redundancy payment pursuant to subsection 82-135(4) of the ITAA 1997. The taxation treatment of these payments will be discussed in due course.

The loyalty payment and the redundancy payment will be addressed below.

In order to satisfy the definition of a genuine redundancy payment under subsection 83-175(1) of the ITAA 1997 we must establish a dismissal of employment and whether the position was made genuinely redundant. Your dismissal from employment is confirmed in the letter you received from your employer dated during the 2012-13 income year where it stipulates your last day of employment.

Further, the HR and Logistics Manager of the employer has confirmed you were made redundant due to the company restructure as services were transferred overseas. Consequently, your position within the organisation ceased to exist and we can deduce that your employment was terminated due to genuine redundancy.

The definition also states that the payment must exceed what you would have received in consequence of the voluntary termination of your employment at the time of your dismissal.

In the letter dated during the 2011-12 income year you were advised of the company restructure and the employer's priority to retain key staff members over the transition period of approximately 12 months. In order to do achieve this they were offering you a one-off loyalty payment payable on a specified completion date.

The letter also states that at completion date, it was the employer's intention to present you with a new employment contract, however, should your services no longer be required before a specified date you will be entitled to the loyalty payment in addition to regulatory redundancy entitlements.

To satisfy eligibility to this payment, you were required to continue your employment for this set period. Should you have voluntarily resigned prior to or on this date, you would lose eligibility to the loyalty payment and the redundancy entitlements. As such both the loyalty payment and the redundancy entitlements exceed what you would have received had you voluntarily resigned and the definition of a GRP has been satisfied.

Subsection 83-175(2) of the ITAA 1997 lists three further conditions that need to be satisfied in order for the loyalty payment and redundancy payment to be treated as GRPs. These conditions have been satisfied as:

· You were dismissed before you reached 65 years of age;

· The dismissal was made at arm's length; and

· At the time of dismissal, there was no arrangement between yourself and the employer, or between the employer and another person, to employ you after the dismissal.

A further requirement, as set out in subsection 83-175(3) of the ITAA 1997, requires 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. As none of the payments received were for payment in lieu of superannuation, this requirement is satisfied.

Lastly, as the loyalty payment and the redundancy payment are not excluded from the definition of a GRP, subsection 83-175(4) of the ITAA 1997 has been satisfied.

As all the conditions under section 83-175 of the ITAA 1997 have been satisfied, it is accepted that the loyalty payment and the redundancy payment totalling C is a genuine redundancy payment.

Tax-free amount

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)

Your loyalty payment and redundancy payment totals C. Of this amount, D will be not assessable income and not exempt income. The excess, being E, will be taxed as an employment termination payment.

Taxation treatment of unused annual leave and unused long service payments

Unused annual leave would ordinarily be included in assessable income under section 83-10 of the ITAA 1997 and subject to marginal rates of tax. However, as this payment was made in connection with a genuine redundancy payment, section 83-15 allows a tax offset to ensure that the rate of tax on this amount does not exceed 30%.

Similarly, unused long service leave would ordinarily be included in assessable income under section 83-80 of the ITAA 1997. However, as this payment was made in connection to a genuine redundancy payment, section 83-85 allows a tax offset to ensure that the rate of tax on this amount does not exceed 30%.

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