Edited version of your private ruling

Authorisation Number: 1012512469215

Ruling

Subject: Employment termination payment - genuine redundancy payment

Questions

1. Is any part of the payment you received a genuine redundancy payment in accordance with section 83-175 of the Income Tax Assessment Act 1997 (ITAA 1997)?

2. Is the payment of unused annual leave you received subject to concessional rates of tax?

Advice/Answers

1. No.

2. No.

This ruling applies for the following period

30 June 2014

The scheme commenced on

1 July 2013

Relevant facts and circumstances

In the 200X income year you received an offer of employment to work on a project (the Project).

Your employment was to commence in the 200X income year for a set period, or later depending on the Project requirements.

Your employment ceased in the 20YY income year when the Project ended.

You provide that on completion and fulfilment of contractual obligations your employer quit the Project and your employment was terminated.

An employment separation certificate shows you received a payment comprising of the following components from your employer:

· Redundancy

· In lieu of notice

· Sick leave

· Rostered days off

· Annual leave

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 27F.

Income Tax Assessment Act 1997 Section 82-130.

Income Tax Assessment Act 1997 Section 82-135.

Income Tax Assessment Act 1997 Section 83-10.

Income Tax Assessment Act 1997 Section 83-85.

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:

No part of the payment is a genuine redundancy payment.

The payment for unused annual leave is to be included in your assessable income. You are not entitled to a tax offset for this amount.

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).

For a payment to be a genuine redundancy payment it must satisfy paragraph 83-175(2)(a) of the ITAA 1997 which states:

(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);

The Commissioner has issued Taxation Ruling TR 2009/2 (TR 2009/2), titled Income Tax: genuine redundancy payments, which provides guidance on the factors to be considered in the interpretation of section 83-175 of the ITAA 1997.

Paragraphs 36 and 38 of TR 2009/2 states:

36. Under subparagraph 83-175(2)(a)(ii), a payment made at the end of a fixed period of employment cannot normally be a genuine redundancy payment.
…

38. In some cases, particularly those involving multi-disciplinary project-based work, an employee's period of service may be determined by reference to the achievement of a particular outcome rather than a specified period of time. The employee's period of service in these circumstances concludes on the achievement of that outcome.

In relation to project based work TR 2009/2 provides an example at paragraphs 148 to 154, which states:

148. Buildcorp makes contributions to an industry trust on behalf of its workers to cover the company for future termination payments (other than unused annual leave payments) it might be required to make under industry awards. The workers are all employed on a daily hire basis.

149. Buildcorp has a major construction contract to build an office block. Buildcorp's employees, its subcontractors and their employees have all been advised that they can expect to be employed on the project for at least six months, depending on their trade or other qualifications.

...

152. ... if the workers had all completed their allotted tasks in keeping with the mutual intentions of the parties, any payments accruing on their termination of employment would not be eligible to be genuine redundancy payments. In these circumstances, the employees are terminated at the expiry of a fixed period of employment.

In the 200X income year you received an offer of employment to work on a project (the Project). Your employment was to commence in the 200X income year for a set period, or later depending on the Project requirements.

It was clear from your offer of employment that your position was tied exclusively to the Project and your employment would expire on the completion of the project.

On completion and fulfilment of contractual obligations your employer quit the Project and your employment with them was terminated. Your employment ceased in the 20YY income year.

In this case your payment is a payment made at the end of a fixed period of employment as specified under subparagraph 83-175(2)(a)(ii) of the ITAA 1997. Therefore, no part of the payment is a genuine redundancy payment in accordance with section 83-175 of the ITAA 1997.

Unused annual leave

Section 83-10 of the ITAA 1997 sets out the assessable and tax-free parts of unused long service leave payments and states:

(1) This section applies to leave (annual leave) of the following types (whether it is made available as an entitlement or as a privilege):

(a) leave ordinarily known as annual leave, including recreational leave and annual holidays;

(b) any other leave made available in circumstances similar to those in which the leave mentioned in paragraph (a) is ordinarily made available.

Unused annual leave payments

(2) Your assessable income includes an unused annual leave payment that you receive.

(3) A payment that you receive in consequence of the termination of your employment is an unused annual leave payment if:

(a) it is for annual leave you have not used; or

(b) it is a bonus or other additional payment for annual leave you have not used; or

(c) it is for annual leave, or is a bonus or other additional payment for annual leave, to which you were not entitled just before the employment termination, but that would have been made available to you at a later time if it were not for the employment termination.

Further, section 83-85 of the ITAA 1997 states:

You are entitled to a tax offset to ensure that the rate of tax on an unused annual leave payment does not exceed 30%, to the extent that:

(a) the payment was made in connection with a payment that includes, or consists of, any of the following:

(i) a genuine redundancy payment;

(ii) an early retirement scheme payment;

(iii) the invalidity segment of an employment termination payment or superannuation benefit; or

(b) the payment was made in respect of employment before 18 August 1993.

In this case the payment for unused annual leave is to be included in your assessable income and you are not entitled to a tax offset as no part of the payment is related to:

· a genuine redundancy payment,

· an early retirement scheme payment or

· an invalidity segment of an employment termination payment or a superannuation benefit.

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