Edited version of your written advice

Authorisation Number: 1051342100364

Date of advice: 1 March 2018

Ruling

Subject: Genuine redundancy payments

Question

Is any part of the payment to be received genuine redundancy payment under section 83-175 of the Income Tax Assessment Act 1997?

Answer

Yes, only the redundancy payment is a genuine redundancy payment.

This ruling applies for the following period:

Year ended 30 June 2015

The scheme commences on:

1 July 2014

Relevant facts and circumstances

1. You were employed by your former employer.

2. In your application for a private ruling, you advised that:

● You were terminated from your employment.

● You received a part payment from your former employer.

3. Attached to your private ruling application was:

● A copy of your contract for employment

● Your payment summary from your former employer listing the .entitlements and the amounts deducted for PAYG:

4. You supplied the following information via email:

● Your position was made redundant and ceased to exist due to your former employer experiencing financial difficulties.

5. You were terminated before you reached the age of 65.

6. Your contract does not indicate that you would have been entitled to the payment in lieu of notice had you voluntarily resigned.

7. None of the payments received were for payment in lieu of superannuation.

8. At the time of dismissal there was no arrangement between you and the Employer or between the Employer and another person, to employ you after the dismissal.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 82-135

Income Tax Assessment Act 1997 Paragraph 82-135(a)

Income Tax Assessment Act 1997 Paragraph 82-135(b)

Income Tax Assessment Act 1997 Paragraph 82-135(c)

Income Tax Assessment Act 1997 Paragraph 82-135(d)

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

These reasons for decision accompany the Notice of private ruling.

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

Summary

Your redundancy payment is considered to be a genuine redundancy payment in accordance with section 83-175 of the Income Tax Assessment Act 1997 (ITAA 1997) and hence this amount is tax free.

However, the payment in lieu of notice is not considered to be a genuine redundancy payment and hence this amount has to be included in your 2015 income year tax return.

Detailed reasoning

Genuine redundancy

1. Section 83-175 of the Income Tax Assessment Act 1997 (ITAA 1997) sets out all the conditions which needs to be satisfied in order for a payment made to an employee to be classed as a genuine redundancy payment (GRP). The conditions are stated as follows:

a) 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.

b) A genuine redundancy must satisfy the following conditions:

i. the employee is dismissed before the earlier of the following:

● the day he or she turned 65;

● 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);

ii. 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;

iii. at the time of dismissal, there was no arrangement between the employee and employer, or between the employer and another person, to employ the employee after the dismissal.

2. 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

3. A payment is not a genuine redundancy payment if it is a payment mentioned in section 82-135 (apart from paragraph 82-135(e)).

4. Payments which aren’t considered to be genuine redundancy payments include the following as mentioned in section 82-135 of the ITAA 1997:

● superannuation benefits;

● payments of pensions or annuities;

● unused annual leave payments; and

● unused long service leave payments

5. The redundancy payment and payment in lieu of notice will be discussed below.

6. Taxation Ruling (TR) 2009/2 outlines the requirements set out in section 83-175 of the ITAA 1997 which need to be satisfied in order for a payment made to an employee to be considered as a genuine redundancy payment.

7. Firstly, for the payment to be considered as a genuine redundancy payment, you must satisfy subsection 83-175(1) of the ITAA 1997. TR 2009/2 paragraph 11 states four requirements which need to be met under subsection 83-175(1). These requirements are as follows:

● 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.

8. Also, for the payment to be considered as a genuine redundancy payment we would need to see if you satisfy the three conditions pertaining to subsection 83-175(2) of the ITAA 1997. Paragraph 33 of TR 2009/2 outlines these conditions as follows:

● The dismissed employee is not older than 65 years old at the time of dismissal.

● The termination doesn’t occur at the end of a fixed period of employment.

● In the case of a non-arm’s length dismissal, the actual amount paid doesn’t exceed the amount that could reasonably be expected had the parties been dealing at arm’s length.

● No arrangement exists between the employer and the employee or the employer and another entity to employ the dismissed employee after the termination.

9. A further requirement to determine whether your payment is considered to be a genuine redundancy payment is set out in subsection 83-175(3) of the ITAA 1997. Paragraph 33 of TR 2009/2 states that the payment should not be in lieu of superannuation benefits.

10. The last requirement which needs to be satisfied in order for your payment to be classified as a genuine redundancy payment is that set out in subsection 83-175(4) of the ITAA 1997. Paragraph 188 of TR 2009/2 states that any types of payments mentioned in section 82-135 of the ITAA 1997 are not deemed to be genuine redundancy payments.

Redundancy Payment

11. In relation to the redundancy payment is considered that this payment is a genuine redundancy payment as your employment your position was made redundant.

12. The three conditions pertaining to subsection 83-175(2) of the ITAA 1997 have been satisfied as:

● you were dismissed before you reached 65 years of age;

● the dismissal was made at arm’s length; and

● at the time of dismissal, there was no arrangement between yourself and the employer, or between the employer and another person, to employ you after the dismissal.

13. As this redundancy payment does not include any payments received in lieu of superannuation, you also satisfy subsection 83-175(3) of the ITAA 1997.

14. Lastly, as the redundancy payment you received from your employer is not one of the payment types mentioned in section 82-135 of the ITAA 1997, you also satisfy the requirement of subsection 83-175(4).

Payment in Lieu of Notice

15. In relation to the payment in lieu of notice it is considered that this payment is not a genuine redundancy payment as your employment contract states that your employer may make a payment in lieu of notice.

16. Therefore, it is considered that this payment in lieu of notice is not deemed to be a genuine redundancy payment as it does not exceed the amount which you could have reasonably expected to receive if you were to voluntarily resign from your position.

Tax-free amount

17. Subsection 83-170(2) of the ITAA 1997 states that the extent of the genuine redundancy payment that doesn’t exceed the amount worked out in subsection 83-170(3) of the ITAA 1997 is non-assessable and non-exempt income.

18. However, any amount in excess of the tax-free amount is taxed as an employment termination payment. The formula prescribed in subsection 83-170(3) of the ITAA 1997 for working out the tax free amount has been advised.

19. For the 2014-2015 income year:

Base amount means $9,514;

Service amount means $4,758; and

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

20. As your payment is below the tax-free amount of a genuine redundancy payment, the entire amount is tax-free as a genuine redundancy payment. Therefore, this amount is deemed to be non-assessable, non-exempt income.

21. However, the payment in lieu of should be included in your tax return for the 2014-2015 income year as it doesn’t meet the definition of a genuine redundancy payment.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).