Edited version of private advice

Authorisation Number: 1052109598178

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Date of advice: 18 May 2023

Ruling

Subject: Genuine redundancy - payment in lieu of notice

Question

Is any part of the payment in lieu of notice a genuine redundancy under section 83-175 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commences on:

1 July 2022

Relevant facts and circumstances

Your date of birth is DD MM YYYY.

You are aged x in the 20XX-XX income year.

You signed an employment contract with the Employer on DD MM YYYY, and it was not a fixed term contract.

You worked for your employer (the Employer) since DD MM YYYY.

On DD MM YYYY the Employer provided you with a termination letter stating that

•            due to changes in operational requirements the business will no longer require the job currently done by you.

•            your position will be made redundant on DD MM YYYY.

•            Your notice period was noted as four weeks and your redundancy pay as six weeks.

You were employed as a Customer Operations Manager from XX October 20XX to XX October 20XX. Your employment with the Employer therefore was for two years but less than three years.

Clause 7.1 of your employment contract states

(a)  The Company or the Employee may, after the probationary period referred to in clause 2.2(b) and without assigning any reason, terminate this Agreement by providing one month's notice in writing.

(b)  The Company may, in its absolute discretion, terminate this Agreement immediately at any time prior to the expiry of the notice period given by the Employee or the Company by making a payment to the Employee equal to the value of the Employee's Salary in lieu of the period of notice or unexpired part of that notice period.

(c)   The Company may direct the Employee not to attend work during some or part or all of the notice period.

Clause 7.3 states your redundancy entitlements are as set out in National Employment Standards under the Fair Work Act 2009 (Cth). In accordance with these guidelines for a period of continuous service of two years but less than three years (your service based on your commencement date and termination date) you are entitled to redundancy pay of six weeks.

You have provided a copy of a payslip noting the following payments to you:

Table 1: Copy of a payslip noting type of payments

There is no relationship between you and the Employer.

There was no arrangement between you and the Employer, or between the Employer and another person, to employ you after the termination of your employment.

You have not returned to work for the Employer in any capacity subsequent to the termination of your employment.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 83-135.

Income Tax Assessment Act 1997 Section 83-170.

Income Tax Assessment Act 1997 Section 83-175.

Reasons for decision

Detailed reasoning

Genuine redundancy payment

A payment made to an employee is a genuine redundancy payment (GRP) if it satisfies all the conditions 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 and 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 the employee reached pension age;

(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 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)).

Section 82-135 of the ITAA 1997 includes (among others):

•         superannuation benefits;

•         the payment of a pension or annuity; and

•         unused annual leave (paragraph 82-135(c)) or long service leave payments (paragraph 82-135(d)).

Of the total redundancy payment of $X you received ; what will constitute a genuine redundancy payment and the treatment of the amount that exceeds the tax- free amount will be addressed below.

In order to satisfy the definition of a genuine redundancy payment under subsection 83-175(1) of the ITAA 1997 there must be a dismissal from employment and the dismissal must result from the positions being made genuinely redundant.

The term dismissal is not defined in the ITAA 1997. Therefore, it is necessary to consider the common law or ordinary meaning of the term and the meaning the judicial authorities have ascribed to it.

Dismissal from employment

Taxation Ruling TR 2009/2, titled Income Tax: genuine redundancy payments, which outlines the Commissioners view of the requirements for a payment to qualify as a GRP under section 83-175 of the ITAA 1992, discusses what constitutes a 'dismissal'. In particular:

"18. Dismissal is a particular mode of employment termination. It requires a decision to terminate employment at the employer's initiative without the consent of the employee. This stands in contrast to employment that is terminated at the initiative of the employee, for example in the case of resignation."

In your case, X (the Employer) provided you with a termination letter stating due to changes in operational requirements the business will no longer require the job currently done by you accordingly your position will be made redundant on DD MM YYYY.

It is concluded that the termination of your employment constitutes a dismissal for the purposes of subsection 83-175(1) of the ITAA 1997.

The remaining conditions under section 83-175 of the ITAA 1997 are satisfied as:

•         Your position was made redundant;

•         The payment in lieu of notice exceeds what you would have received had you voluntarily resigned outside the redeployment process;

•         You are below pension age;

•         There was no arrangement between you and the Employer or between the employer and another person, to employ you following the termination of your employment; and

•         No amount was received by you in lieu of superannuation.

Voluntary termination of employment element

Subsection 83-175(1) of the ITAA 1997 requires the payment to exceed the amount that the Employee could reasonably be expected to receive in consequence of voluntarily terminating their employment.

Paragraphs 61 and 62 of TR 2009/2 state:

61. It would generally be expected that a greater amount would be paid on redundancy than voluntary termination. This recognises the purpose of redundancy payments, being primarily to compensate for loss of non-transferable entitlements (for example accrued sick leave and accrued long service leave prior to 10 year's service) and the peculiar hardship associated with being made redundant.

62. Contractual or other entitlements payable by an employee on voluntary termination are generally a sound guide as to what might reasonably be expected....

The employment contract states that you will be paid payment in lieu of notice if the Employer terminates your employment immediately (subclause 7.1.a). The Employer will pay you when the Employer directs you not to attend part or all of the required termination notice period. This option is only available to the employer (subclause 7.1.b.). There is no expectation that you will receive payment in lieu of notice when you voluntarily terminate your position. As a result, the payment in lieu of notice will form part of the redundancy payment on the condition that the redundancy payment falls within the tax-free amount threshold.

As the Employee does satisfy all the requirements of subsection 83-175(1) of the ITAA 1997, the payment in lieu of notice is a genuine redundancy payment. The amount $X will be treated as genuine redundancy payment and any amount below the tax-free amount is non assessable, non-exempt income. The total amount of redundancy payment is the $x and the whole amount is compared to the tax-free amount to determine the amount of non-assessable and non-exempt income.

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) is non-assessable, non-exempt income. Any amount in excess of the tax-free amount is taxed as an employment termination payment. The formula for working out the tax-free amount is:

Base amount + (Service amount × Years of service)

For the 20XX-XX income year:

Base amount is $XXX;

Service amount is $XX; and

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

Your employment commenced on DD MM YYYY and ceased DD MM YYYY. Hence the 'years of service' to which the genuine redundancy payment relates is two whole years of service.

Accordingly, the tax-free part of a genuine redundancy payment you can receive in the 20XX-XX income year under subsection 83-175(3) of the ITAA 1997 is:

$XXX + ($XX × 2) = $XXX.

The total redundancy payment is $X, and the tax-free part of the payment is $XXX. The difference is equal to $X-$XX. Any amount that exceeds the tax-free amount will be treated as employment termination payment (ETP).

Employment termination payments

Subsection 82-130(1) of the ITAA 1997 states that:

A payment is an employment termination payment if:

(a) it is received by you:

(i) in consequence of the termination of your employment; or

(ii) after another person's death, in consequence of the termination of the other person's employment; and

(b) it is received no later than 12 months after that termination (but see subsection (4)); and

(c) it is not a payment mentioned in section 82-135.

Section 82-135 of the ITAA 1997 provides that certain payments are not employment termination payments.

To determine if a payment constitutes an employment termination payment, all the conditions in section 82-130 of the ITAA 1997 must be satisfied.

Failure to satisfy any of the conditions under subsection 82-130(1) of the ITAA 1997 will result in the payment not being considered an employment termination payment. Furthermore, any termination payments received outside of the 12 months will be taxed as ordinary income at marginal tax rates, unless the taxpayer is covered by a determination exempting them from the 12 month rule.

If a payment is considered an employment termination payment it may be comprised of the following components:

Tax free component - as provided in section 82-140 of the ITAA 1997, this includes an invalidity segment within the meaning of section 82-150 (if any) and/or a pre-July 83 segment within the meaning of section 82-155 (if any); and

Taxable component - the amount remaining after deducting the tax-free component from the total payment, as prescribed in section 82-145 of the ITAA 1997.

Pursuant to subsection 82-10(2) of the ITAA 1997, the taxable component of a life benefit employment termination payment is assessable income.

For recipients below preservation age, an individual is entitled to a tax offset on the taxable component of a life benefit termination payment to ensure that the rate of income tax does not exceed 30% for amounts below the ETP cap amount ($XXX for the 20XX-XX income year) (subsection 82-10(3) of the ITAA 1997). The remainder of the taxable component is taxed at the top marginal rate.

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