Edited version of private advice

Authorisation Number: 1051662013504

Date of advice: 24 April 2020

Ruling

Subject: Eligible termination payment - leave in lieu

Ruling

Question

Is any part of unused leave accrual paid on the termination of employment an eligible termination payment under section 82-130 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

This ruling applies for the following period:

1 July 2019 to 30 June 2020

The scheme commences on:

The scheme has not yet commenced

Relevant facts and circumstances

·        You are an employee of the Employer and serve on a maritime vessel (the Vessel).

·        The Vessel is to be withdrawn from service.

·        You have been advised by the Employer that all seagoing positions on board the Vessel will become redundant. As a result, your position is no longer required and your employment will be terminated with 90 days' notice.

·        You have stated that you will be working on the Vessel during the 90 day notice period due to the requirement of ongoing maintenance. Subsequently, no payment in lieu of notice is expected.

·        You expect to receive a genuine redundancy payment of four week's pay for each year of service. Your termination benefits will also include:

-        Unused annual and long service leave

-        Unused leave accrual

·        Your employment contract is governed by the terms of a collectively negotiated enterprise agreement (Agreement). Leave entitlements are outlined in the Agreement.

·        Leave shall accrue on the basis of one day's leave for each day on duty on board the Vessel. Leave will give effect to weekends and public holidays worked, annual leave of 35 days, sick leave, carer's leave and leave in lieu of a 35 hour working week.

·        Employees will accrue leave during their period of service and the accrued entitlements will be reduced by the leave taken by the employee.

·        In accordance with the Agreement and as per the Seagoing Industry Award 2010, the ordinary hours for maintenance and operational duties is 8 hours per day, 7 days per week. To meet the operational requirements of the Vessel an employee may be required to work in excess of 8 hours.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 82-130

Income Tax Assessment Act 1997 section 83-10

Income Tax Assessment Act 1997 section 83-15

Income Tax Assessment Act 1997 section 83-85

Income Tax Assessment Act 1997 section 83-170

Income Tax Assessment Act 1997 section 83-175

Reasons for Decision

Genuine redundancy

You have been given 90 days' notice of termination of employment due to your position being made redundant. You expect to receive a genuine redundancy payment of four week's pay for each year of completed service.

A payment made to an employee is a genuine redundancy payment if it satisfies all of the criteria set out in section 83-175 of the ITAA 1997.

In accordance with subsection 83-175(1) of the ITAA 1997, 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 the dismissal.

Paragraph 11 of Taxation Ruling TR 2009/2: Income tax: genuine redundancy payments (TR 2009/2), outlines the requirements to be satisfied under subsection 83-175(1) of the ITAA 1997. There are four necessary components within this requirement:

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

Where the essential components of subsection 83-175(1) of the ITAA 1997 are satisfied, there are further conditions that must be met before the payment can be treated as a genuine redundancy. Conditions in subsections 83-175(2) and (3) of the ITAA 1997 require that:

·        the dismissed employee is not older than specified age limits

·        the termination is not at the end of a fixed period of employment

·        the actual amount paid is not greater than the amount that could reasonably be expected had the parties been dealing at arm's length, in the event that the employer and employee are in fact not dealing at arm's length in relation to the dismissal

·        there is no arrangement entered into between the employer and the employee or the employer and another entity to employ the dismissed employee after the termination (paragraph 83-175(2)(c)); and

·        the payment is not in lieu of superannuation benefits.

In accordance with section 83-170 of the ITAA 1997 a genuine redundancy payments is tax-free up to a limit that is determined by reference to a base amount plus an amount per completed year of service. If the genuine redundancy payment exceeds the available tax-free amount then the remaining part of the payment will qualify as an ETP.

For the 2019-20 year of income the base amount is $10,638 plus $5,320 x 5 completed years of service.

Employer termination payments

Section 82-130 of the ITAA 1997 defines an ETP as a lump sum payment made in relation to the termination of a person's employment, which can include:

·        payments for unused sick leave

·        payments in lieu of notice

·        genuine redundancy payments that exceed the tax-free limit

·        unused rostered days off

Lump sum payments excluded from being an ETP under section 82-135 of the ITAA 1997 include:

·        lump sum payments for unused annual or long service leave

·        the tax-free part of a genuine redundancy payment

To receive concessional tax treatment an ETP must generally be paid within 12 months of termination.

A payment made in lieu of notice on a termination of employment, which is additional to what the person would have received from voluntary retirement, is treated as a genuine redundancy payment. If any part of the payment in lieu of notice payment exceeds the available genuine redundancy tax-free amount then the remaining part of the payment will qualify as an ETP.

Leave accrual

Working on rest days and public holidays can be compensated via Commonwealth laws or enterprise agreements by equivalent time off duty or additional leave in lieu of remuneration.

When stationed on the Vessel you are expected to:

·        work 7 days a week

·        work on public holidays and weekends

·        not have access to sick leave

·        be available for work 24/7

·        work up to 12 hour shifts, or more in emergency.

Leave accrual gives effect to, among other things, weekends and public holidays worked, annual leave of 35 days, sick leave, carer's leave and leave in lieu of a 35 hour working week.

Annual leave for the purposes of section 83-10 of the ITAA 1997 is the annual leave of 35 days under the Agreement. The leave accrual relating to unused annual leave is excluded from being an ETP.

However, any unused 'additional leave accrual' paid to you as a lump sum on termination, which does not relate to annual leave, will be classed as an ETP. This is because any 'additional leave accrual' is essentially leave in lieu of remuneration, such as for working in excess of the standard 35 hour working week, working on weekends or working on public holidays.

Whilst in employment the Seafarer would normally expend this leave during their time 'off duty', however when paid on termination it is likened to an unused rostered day off or flex day for a land based worker.

Tax treatment for ETPs

For amounts taxed as an ETP, a tax offset will apply that will limit the maximum rate of tax to 30% plus 2% Medicare on the taxable component. ETPs are concessionally taxed up to a certain limit, or 'cap'. The top rate of tax applies to amounts in excess of the cap.

Under preservation age: 32% up to the ETP cap

Preservation age or over: 17% up to the ETP cap

Amount above the ETP cap: 47%

There are two caps, the ETP cap and the whole-of-income cap. The ETP cap is $210,000 for the 2019-20 income year reduced by any earlier ETPs paid in the same income year. The whole-of-income cap is $180,000 minus other taxable income you earn throughout the income year. Which cap applies depends on the type of payment.

Subsection 82-10(4) of the ITAA 1997 states that the ETP cap will apply to an 'excluded payment'. For all other 'non-excluded' ETPs you will apply the lesser of the ETP cap and the whole-of-income cap. In your case, any unused 'additional leave accrual' payment will be a non-excluded ETP.

Under paragraph 82-10(6)(a) of the ITAA 1997 an excluded payment includes a payment that is a genuine redundancy payment. The ETP cap will apply to the amount that exceeds the tax-free limit.

Tax treatment of unused annual leave and long service leave payments

Where an unused annual leave and long service leave payment is made in connection with a genuine redundancy payment, it will be fully assessable and taxed at the maximum rate of 30% plus 2% Medicare levy - sections 83-15 and 83-85 of the ITAA 1997.

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).