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Edited version of your private ruling
Authorisation Number: 1012516500351
Ruling
Subject: Employment Termination Payment
Question 1
Is any part of a payment received on termination of employment the tax-free part of a genuine redundancy payment?
Answer
No.
Question 2
Is the payment of unused annual leave received on termination of employment subject to concessional rates of tax?
Answer
No.
This ruling applies for the following periods:
Year ending 30 June 2013.
The scheme commences on:
1 July 2012
Relevant facts and circumstances
You were employed full time with the Employer.
You ceased employment with the Employer during the 2012-13 financial year.
Your employment ceased due to the outsourcing of some of your duties and as a result your position became redundant.
You received an employment termination payment for redundancy pay an employment termination payment for notice in lieu.
You received a payment for unused annual leave on termination of employment.
You were over 65 years of age when your employment ceased with the employer.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 82-135.
Income Tax Assessment Act 1997 Paragraph 82-135(e).
Income Tax Assessment Act 1997 Paragraph 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
No part of the payments made to you by your Employer are genuine redundancy payments. This is because you were over the age of 65 on the day your employment with the Employer ceased, resulting in you not satisfying all of the conditions set out in section 83-175 of the Income Tax Assessment Act 1997 (ITAA 1997). These payments will be included as assessable income as an employment termination payment for the 2012-13 income year.
The payment for unused annual leave is not subject to concessional tax treatment as it does not meet the criteria listed under section 83-15 of the ITAA. Instead the unused annual leave payment is subject to tax at your marginal rate of tax.
Detailed reasoning
A payment made to an employee is a genuine redundancy payment if it satisfies all criteria 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 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 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)).
Section 82-135 of the ITAA 1997 lists payments that are not employment termination payments. Paragraph 82-135(e) provides that the part of a genuine redundancy payment worked out under section 83-170 is not an employment termination payment.
Dismissed before the day he or she turns 65
Under subparagraph 83-175(a)(i) of the ITAA 1997 a genuine redundancy will not be satisfied if the employee is dismissed before the day he or she turns 65. Your employment with the Employer was terminated during the 2012-13 financial year. You were more than 65 years of age when your employment was terminated with the Employer. You have not met the condition under subsection 83-175(2) of the ITAA 1997.
As mentioned all of the criteria set out in section 83-175 of the ITAA 1997 must be met for a payment to be a genuine redundancy payment. As you have not met one of the conditions under section 83-175 of the ITAA 1997, it is not necessary to discuss whether you will meet the other conditions under section 83-175 of the ITAA 1997. Therefore the payment you received from your employer is not a genuine redundancy payment under section 83-175 of the ITAA 1997.
Tax offset for unused annual leave payment
An employee will be entitled to a tax offset to ensure that the rate of tax on an unused annual leave payment does not exceed 30% if the criterion listed in Section 83-15 of the ITAA 1997 is met.
Section 83-15 of the ITAA 1997 states that:
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.
You received a payment for unused annual leave upon the termination of your employment with your employer. Because the termination payment you received was not a genuine redundancy payment as outlined above, the unused annual leave payment you received was not made in connection with a genuine redundancy payment. As well, the payment was not made in connection with either an early retirement scheme payment or the invalidity segment of either an employment termination payment or a superannuation benefit.
Further, you have not indicated that the payment was made in respect of employment commenced before 18 August 1993.
Consequently, you are not entitled to a tax offset in respect of the unused annual leave payment under section 83-15 of the ITAA 1997. Instead the unused annual leave payment is subject to tax at your marginal rate of tax.
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