Edited version of your private ruling

Authorisation Number: 1012471847433

Ruling

Subject: Genuine redundancy payment

Questions

1. Are payments made to the taxpayer in lieu of notice and redundancy are considered to be genuine redundancy payments in accordance with section 83-170 of the Income Tax Assessment Act 1997 (ITAA 1997)?

2. Is the taxpayer's unused annual leave and leave loading, and long service leave subject to a tax offset due to being made redundant?

3. Is any part of the termination payments received by the taxpayer an employment termination payment?

Answers

1. Yes.

2. Yes

3. No

This ruling applies for the following period:

For the year ended 30 June 2012

The scheme commenced on

1 July 2011

Relevant facts and circumstances

Your client commenced employment with a private company (the Company) a number of years ago.

The Company went into voluntary administration, and subsequently Liquidators were appointed.

As a result, your client's employment was terminated in the 2011-12 income year.

In a letter, the Liquidators advised that your client was eligible to a gross payment and tax was withheld on this payment.

In the same letter, the Liquidators also advised your client with respect to completing their income tax return, a PAYG payment summary for a specific period will not be issued by them and your client was advised to use their previous payslips and/or a statutory declaration form in place of any missing payslips for the tax purposes.

Your client's entitlements included:

· Unpaid wages

· Annual Leave

· Annual Leave Loading

· Payment in Lieu of Notice

· Redundancy

· Long Service Leave

A PAYG payment summary - employment termination payment, issued by the Company for the year ending 30 June 2012, shows a taxable component and non-taxable component with tax withheld.

A PAYG payment summary - individual non-business payment summary for year ending 30 June 2012 shows the Gross payments and an amount at Label D. Tax was withheld on the payment.

In a letter to your client, the Liquidator stated that the net payment was recently deposited into your client's bank account.

Your client lodged their 2012 income tax return based on the information from the PAYG payment summaries and the income tax assessment was issued.

Your client is under 55 years of age.

Relevant legislative provisions

Income Tax Assessment Act 1997 Paragraph 82-130(1)(c)

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 83-170.

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 payments made to your client in lieu of notice and redundancy are considered to be genuine redundancy payments (GRP). As this total is below your client's tax-free amount of a GRP, no part of these payments is required to be included in your client's income tax return for the 2011-12 income year.

This tax-free amount is not assessable income and is not exempt income.

The payments received by your client for unused annual leave, annual leave loading and long service leave are to be included in your client's assessable income for the 2011-12 income year, but will be taxed concessionally.

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)).

In Taxation Ruling 2009/2 Income tax: genuine redundancy payments, the Commissioner has outlined the requirements to be satisfied before any payment made to a person whose employment is terminated qualifies for treatment as a genuine redundancy payment under section 83-175 of the ITAA 1997.

There are four necessary components within this termination requirement:

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

2. That termination must involve the employee being dismissed from employment.

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

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

Each of the components will be discussed individually.

Component 1: Payment being tested must be received in consequence of an employee's termination.

Based on the information provided, the payments were made to your client in consequence of the termination of their employment (i.e. the Company was placed in liquidation).

Consequently, because the payments in lieu of notice and redundancy have been received in consequence of that termination, the requirement of the first component of subsection 83-175(1) of the ITAA 1997 has been satisfied.

Component 2: That termination must involve the employee being dismissed from employment.

On the basis of the facts as presented in this case, it is considered your client was dismissed from employment at the initiative of the employer (i.e. Company in liquidation). Therefore, this second component of subsection 83-175(1) of the ITAA 1997 has been satisfied.

Component 3: That dismissal must be caused by the redundancy of the employee's position.

As noted in the facts, your client's employment was terminated in the 2011-12 income year, due to the Company going into liquidation and the Liquidator was appointed to manage the affairs of your client's former employer. As a result, your client's position was abolished and a payment in lieu of notice and a redundancy amount was made to your client 2011-12 income year.

As it is considered that the dismissal was caused by the redundancy of your client's position, this third component has been satisfied.

Component 4: The redundancy payment must be made genuinely because of a redundancy.

It is considered the condition for this fourth component has been satisfied as, based on the information provided:

· the amount that was paid was in excess of what your client would have been entitled to receive if they had voluntarily resigned;

· there is nothing to suggest that the redundancy is contrived, or is not genuinely made.

On the basis of the information provided, it is also considered the conditions of subsections 83-175(2) and 83-175(3) of the ITAA 1997 are satisfied because:

· your client is not older than specified age limits;

· the termination is not at the end of a fixed period of employment;

· the actual amount that was paid is not greater than the amount that could reasonably be expected to be paid had the parties been dealing at arm's length;

· there is no arrangement to employ your client after the termination; and

· the payment is not in lieu of superannuation benefits.

The payment is a genuine redundancy payment

In light of the above, as all the conditions have been satisfied in accordance with section 83-175 of the ITAA 1997, the payment is considered to be a GRP.

Tax-free treatment of this genuine redundancy payment

Section 83-170 of the ITAA 1997 applies to treat so much of the GRP (that does not exceed the amount worked out under a specified formula) as tax-free. That is, the tax-free part 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)

You client's 'years of service' have been determined. As the payment was made in the 2011-12 income year, the base amount will be $8,435 and the service amount will be $4,218

As the payment made to your client in lieu of notice and redundancy is below their tax-free amount of a GRP, the entire amount is not assessable income and is not exempt income under subsection 83-170(2) of the ITAA 1997.

Therefore your client's income tax return for the 2011-12 income year will not include any part of the total GRP paid to your client.

Unused annual leave and annual leave loading payments, and long service leave

On termination of employment your client received a payment of unused annual leave, leave loading and long service leave. These payments are to be included in your client's assessable income for the 2011-12 income year in accordance with subdivision 83-A of the ITAA 1997.

As these payments were made in connection with a genuine redundancy your client is entitled to a tax offset to ensure that the rate of tax for unused leave, leave loading and long service leave does not exceed 30% plus Medicare Levy.

Payments excluded from being employment termination payments

Certain payments are specifically excluded under section 82-135 of the ITAA 1997 from being employment termination payments. These include (among others):

· superannuation benefits;

· unused annual leave or long service leave payments;

· foreign termination payments covered under Subdivision 83-D of the ITAA 1997; and

· the tax free part of a genuine redundancy payment or an early retirement scheme payment.

In this case, because the payments your client received on termination of employment wholly comprise unused annual and long service leave and the tax-free part of a genuine redundancy payment, none of these payments is an employment termination payment.

Conclusion

The payment made to your client in lieu of notice and redundancy is considered to be GRP.

As the payment is below your client's tax-free amount of a GRP it is not assessable income and is not exempt income. Therefore, no part of this payment is to be included in your client's income tax return for the 2011-12 income year.

The payments of unused annual leave, annual leave loading and long service leave received by your client is to be included in your client assessable income for the 2011-12 income year and will be subject to concessional tax treatment.

You may wish to add a note and refer to this private ruling when you lodge an amendment request for your client's income tax return for the 2011-12 income year.

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