Edited version of your private ruling

Authorisation Number: 1012568938989

Ruling

Subject: Genuine redundancy payment

Questions

1. Is any part of the termination payments received from the employer the tax-free part of a genuine redundancy payment?

2. Is any part of the payment received from the redundancy trust the tax-free part of a genuine redundancy payment?

Answers

1. Yes

2. No

This ruling applies for the following period

Year ended 30 June 2013.

The scheme commenced on

1 July 2012

Relevant facts and circumstances

1. Your client is under 55 years of age.

2. Your client commenced employment with the employer several yeas ago.

3. In the 2012-13 income year, the employer offered a voluntary redundancy to your client.

4. A letter from the employer to your client confirmed:

· your client's position will be made redundant effective close of business on a specific date (the termination date);

· your client's decision to accept the Company's offer of voluntary redundancy is final and cannot be withdrawn;

· a redundancy benefit in accordance with the provisions of your client's enterprise agreement will be provided to your client;

· a copy of a redundancy trust claim form was provided to your client to make a claim under the redundancy trust; and

· a long service leave payment may be claimed by contacting the state Long Service Leave Corporation.

5. The PAYG Payment Summary in relation to your client, which was prepared by the employer for the 2012-13 income year, shows:

(i) Gross payments

(ii) Reportable employer superannuation contributions

(iii) Total allowances

(iv) Lump sum A

(v) Lump sum D

(vi) Tax withheld

6. A copy of the PAYG payment summary - employment termination payment for rostered days off in relation to the 2012-13 income year has been provided. The summary was prepared by the employer and shows:

(i) the payment was made on a specific date;

(ii) the taxable component;

(iii) the tax-free component; and

(iii) tax withheld.

7. A copy of the PAYG payment summary - employment termination payment in relation to the 2012-13 income year has been provided. The summary was prepared by the redundancy trust and shows:

(i) the payment was made on a specific date;

(ii) the taxable component;

(iii) tax-free component $Nil; and

(iii) tax withheld

8. Your client's employment with the employer is covered under the Company Employees Enterprise Agreement 2010 (the Agreement). This Agreement incorporates the terms of the other associate Award 2010, as varied from time to time.

9. The Commissioner requested a copy of the currently trust deed of the redundancy trust. You have provided a link on the redundancy trust's website.

10. In the employer booklet under the heading 'Tax & Tax file number' states:

All payments made by the redundancy trust to Members are classified as Employment Termination Payments (ETP's) under the Income Tax Act and are therefore taxed accordingly.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 82-135.

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).

Anti-avoidance rules

The ruling is limited to the questions raised in the application.

Reasons for decision

Issue 1

Summary

11. The total voluntary redundancy payments (consisting of a payment of in lieu of notice, redundancy payment and payment for unused sick leave) received by your client is considered to be a genuine redundancy payment (GRP).

12. 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 2012-13 income year.

13. The payment received by your client from the redundancy trust is an employment termination payment.

14. 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 2012-13 income year, but will be taxed concessionally.

Detailed reasoning

Genuine redundancy payments

Payment made by the employer

15. 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)).

16. 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.

17. There are four necessary components within this termination requirement:

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

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

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

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

18. Each of the components will be discussed individually.

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

19. Based on the information provided, the payments were made to your client in consequence of the termination of your client's employment.

20. Consequently, because the payments (consisting of a payment in lieu of notice, redundancy payment and payment for unused sick leave) 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.

21. TR 2009/2 at paragraph 20 states:

A dismissal can still occur even where an employee has indicated that they would be interested in having their employment terminated, provided that the final decision to terminate employment remains solely with the employer. Such a case may arise where expressions of interest in receiving a redundancy package are sought from employees as part of a structured process undertaken by the employer as a means of promoting industrial harmony.

22. On the basis of the facts as presented in this case, the employer made a voluntary redundancy offer to your client. Your client accepted the offer made by employer. The offer of the voluntary redundancy and the final decision to accept and terminate your client's employment was solely with the employer. Accordingly, it is considered that your client was dismissed from employment at the initiative of the employer.

23. 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.

24. As noted in the facts, the employer made an offer to your client for a voluntary redundancy. Your client accepted the offer made by the employer. As a result, your client's position was abolished and a redundancy payment was made to your client in the 2012-13 income year.

25. 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.

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

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

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

27. 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

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

Tax-free treatment of this genuine redundancy payment

29. 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.

30. 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)

31. Your client's dismissal occurred prior to 30 June 2013 and the payment was made was made in the 2012-13 income year, the base amount will be $8,806 and the service amount will be $4,404.

32. From the details of your client's employment service period, the limit for the tax-amount of your client's GRP can be calculated in accordance to the above formula.

33. As the payment made to your client is below the 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.

34. Therefore your client's income tax return for the 2012-13 income year will not include any part of the total GRP paid to your client.

Payment made by the redundancy trust

35. In order to determine whether the payment is a genuine redundancy payment, the Commissioner has requested a copy of the currently trust deed of the redundancy trust. However, you are unable to provide a copy of the trust deed.

36. Without a copy of the currently trust deed, the Commissioner has relied on the information appears on their website (the link was provided by you). In the employer booklet under the heading Tax & Tax file number it state that all payments made by the redundancy trust to Members are classified as employment termination payment under the Income Tax Act and are therefore taxed accordingly.

37. In addition, the PAYG payment summary - employment termination payment prepared by the redundancy trust show the whole payment was treated as an employment termination payment.

38. The Commissioner accepts the whole payment is an employment termination payment as determined by the redundancy trust. The payment is therefore subject to the relevant employment termination payment tax rates (including Medicare levy).

Payments excluded from being employment termination payments

39. 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.

40. In this case, because the payments your client received on termination of employment from the employer 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.

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

41. 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 2012-13 income year in accordance with subdivision 83-A of the ITAA 1997.

42. 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.

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