Edited version of your written advice

Authorisation Number: 1051303091611

Ruling

Subject: Genuine redundancy

Question

Is the severance amount paid as a result of the employer’s separation scheme considered a bona fide redundancy and therefore tax-free?

Answer

Yes

This ruling applies for the following periods:

Income year ended 30 June 2018

The scheme commences on:

1 July 2017

Relevant facts and circumstances

Your date of birth is in May 195X.

You are currently considering accepting severance under a scheme offered by your Employer.

You commenced employment with the Employer in 198Y and have a total of over 35 years of service.

Under the scheme you would be entitled to the maximum of 52 weeks redundancy amount plus up to a maximum of 12 weeks Incentive Payment.

Your position will be abolished however you are required to resign from your position.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 83-175.

Reasons for decision

Summary

The Employer Scheme is considered to be a bona fide redundancy.

The severance component of your final payment will therefore be tax-free up to the tax-free limit which in this case is calculated to be $xxxxxx.

Detailed reasoning

Genuine redundancy payments

A payment made to an employee is a genuine redundancy payment if it satisfies all the criteria set out in subsection 83-175(1) of the Income Tax Assessment Act 1997 (ITAA 1997).

Under subsection 83-175(1) of the ITAA 1997 four criteria must be satisfied:

● The payment must be received in consequence of a termination.

● That termination must involve an 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.

Payment ‘in consequence’ of a termination

As to whether or not a payment is made in consequence of termination, paragraph 13 of Taxation Ruling TR 2009/2 Income tax: genuine redundancy repayments requires consideration be given to the Commissioners view set out in Taxation Ruling TR 2003/13 Income tax: eligible termination payments (ETP): payments made in consequence of the termination of any employment: meaning of the phrase 'in consequence of'. Paragraph 5 of TR 2003/13 considers that a payment is made in respect of a taxpayer in consequence of the termination of the employment of the taxpayer if the payment 'follows as an effect or result of the termination'.

In your case, the redundancy payment will be made upon termination and for no other reason.

‘Dismissal’ from employment

The second condition of a genuine redundancy is that the termination be made as a result of dismissal. In considering this, paragraph 18 of TR 2009/2 requires a decision to terminate employment at the employer's initiative without the consent of the employee.

Further paragraph 19 stipulates in determining whether an employee has consented to their termination requires an assessment of the facts and circumstances of each case.

Paragraph 20 also provides that a dismissal can still occur where the employee has indicated that they would be interested in having their employment terminated. However, this is in the case where the final decision rests solely with the employer.

In your case, whilst you expressed your interest in the scheme, acceptance of your expression of interest is up to the Employer hence the final decision lays solely with your employer. Under the terms of the scheme, the offer of voluntary severance is also subject to you resigning from your employment with the Employer and an employee who accepts an offer and exits under this scheme will be subject to a restriction on employment.

Therefore, it is accepted that you will be dismissed from employment by the employer and consequently, the second requirement of a genuine redundancy has been met.

Dismissal caused by the ‘redundancy’

Section 83-175 of the ITAA 1997 requires that the dismissal be caused by redundancy of the employee’s position and not for some other reason. Redundancy must be the primary reason for termination of employment by way of dismissal.

Paragraphs 25 and 28 of TR 2009/2, the Commissioner makes the following comments:

25. An employee’s position is redundant when an employer determines that it is superfluous to the employer’s needs and the employer does not want the position to be occupied by anyone. Accordingly, it is fundamentally the employer’s decision that a position is redundant. On occasion the decision may be unavoidable due to the circumstances of the employer’s operations.

28. A dismissal is not caused by redundancy where personal acts or default are the prevailing or most influential cause for the termination. For example, a person may be dismissed due to unsatisfactory performance or behaviour.

Based on the information provided, it is evident that the Employer makes the ultimate decision that your position will be redundant and that is the prevailing reason you will be dismissed from your employment. In addition, there is nothing to indicate that the redundancy will be caused by personal acts or default on your part.

Therefore, the third requirement of a genuine redundancy has been satisfied.

Further conditions for a genuine redundancy payment

Before a payment that meets the basic redundancy requirement in subsection 83-175(1) of the ITAA 1997 qualifies as a genuine redundancy payment, all other conditions in subsections 83-175(2) and (3) of the ITAA 1997 must be met. These conditions include:

● the payment must be made before a person turns 65 or an earlier mandatory age;

● the termination was 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 was no arrangement for re-employment with the employer or a related party after the termination date; and

● the payment was not in lieu of superannuation benefits.

Based on the terms of the scheme, it is considered that all the conditions of subsection 83-175(2) and 83-175(3) of the ITAA 1997 are also satisfied.

As it is accepted that your employment will be terminated because your position will be genuinely redundant, part of the condition under subsection 83-175(1) of the ITAA has been met. Subsection 83-175 (1) also requires that for the payment to be a genuine redundancy payment, it should exceed what you would have received had you voluntarily resigned from your employment (in this case not under the scheme). That is, only that part of the payment that exceeds the amount that could reasonably be expected to be received had you voluntarily terminated if treated as a genuine redundancy.

In accordance with the scheme, you will be entitled to the maximum of 52 weeks redundancy amount plus up to a maximum of 12 weeks additional Incentive Payment. Based on the conditions it is clear that these redundancy payments are in excess of what you would receive upon voluntary resignation. Therefore, subsection 83-175 (1) of the ITAA 1997 has been satisfied.

Tax-free amount of a genuine redundancy payment

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) of the ITAA 1997 is non-assessable, non-exempt income.

Therefore, in accordance with sub section 83-170 (3) of the ITAA 1997, the formula for working out the tax-free amount is:

Base amount + (Service amount × Years of service)

Where Years of service is the number of whole years in the period, or sum of periods, of employment to which the payment relates.

For the 2017-18 income year the tax-free part of your severance component will be up to $xxxx.

Any amount in excess of the tax-free amount is an employment termination payment and will be taxed accordingly.

Taxation treatment of unused annual leave and unused long service payments

Any unused annual leave and leave loading 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 of the ITAA 1997 allows a tax offset to ensure that the rate of tax on this amount does not exceed 30%.

Conclusion

The payment made to you under the employer scheme is considered a genuine redundancy payment as it satisfies all criteria set out in section 83-175 of the ITAA 1997

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