Edited version of private ruling

Authorisation Number: 1011613173151

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Ruling

Subject: Genuine redundancy payment

Is any part of the payment received on termination of employment exempt from tax as a genuine redundancy payment?

Yes.

This ruling applies for the following period:

Year ended 30 June 2010

The scheme commenced on

1 July 2009

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You are less than 65 years of age and commenced employment with the Employer more than five years ago.

During the 2008-09 income year your employment ceased as the Employer went into liquidation.

A liquidator (the Liquidator) was subsequently appointed for the Employer.

In the 2009-10 income year you were advised by a third party that you were eligible for a gross payment for payment in lieu of notice and redundancy in accordance with a workplace agreement (the Agreement).

The Liquidator withheld tax from your gross entitlements before sending you a payment.

The Agreement included a clause stating that where termination of employment was instigated by an employee, that employee would only be entitled to his or her accrued statutory entitlements.

In cases where the Employer terminates the employment of an employee, there was a clause which specified the period of notice to be provided to an employee.

In the Agreement there were also redundancy provisions which stated an employee's job is considered to be redundant if the Employer has made a definite decision that the job is no longer required and will not be done by any person due to operational requirements such as economic, structural or technical changes.

The Agreement also stated that the redundancy provisions do not apply to casual employees or circumstances where:

· an incoming employer offers to continue the employment of the employee

· the Employer transfers the employee to a related Company and ensures; continuity of service

· employment is terminated as a consequence of conduct that justifies instant dismissal.

In the 2009-10 income year the liquidator provided you with a payment from which tax was withheld and confirmation that the payment comprised amounts relating to a redundancy payment and a payment in lieu of notice.

There was no date prior to you turning 65 years of age on which your employment would have ceased nor were you required under normal circumstances to terminate employment on a specified date.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 83-170.

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).

Income Tax Assessment Act 1997 Section 82-130.

Income Tax Assessment Act 1997 Section 82-135.

Reasons for decision

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

Summary

The gross payment (which includes a redundancy payment and payment in lieu of notice) is not to be included in your tax return for the 2009-10 income year as it all represents the tax-free amount of a genuine redundancy payment.

Detailed reasoning

The facts provided show that the gross payment (the payment) made to you is an employment termination payment as it was made in consequence of the termination of your employment and satisfies the requirements of section 83-130 of the Income Tax Assessment Act 1997 (ITAA 1997).

Genuine redundancy payment

A payment made to an employee, after 30 June 2007, is a genuine redundancy payment (GRP) if it satisfies all the criteria set out in section 83-175 of the ITAA 1997.

Section 83-175 of the ITAA 1997 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 arms length - the payment does not exceed the amount that could reasonably be expected to be made if the dismissal were at arms 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)).

Further, the Commissioner has issued Taxation Ruling TR 2009/2 (TR 2009/2), titled Income Tax: genuine redundancy payments in which he provides guidance on the factors to be considered in the interpretation of section 83-175 of the ITAA 1997.

Subsection 83-175(1) of the ITAA 1997

Under subsection 83-175(1) of the ITAA 1997, four components 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 is made in consequence of the termination of employment

In this case, this condition is satisfied as the payment to be made to you is made when your employment was terminated on the liquidation of your Employer.

Dismissal and Redundancy

The second component of the condition in section 83-175(1) of the ITAA 1997 is that the taxpayer is dismissed from employment because the taxpayer's position is genuinely redundant.

In your case, your employment was terminated not as a result of resignation, or any personal default, but due to you being dismissed from employment as a result of difficulties experienced by the Employer as evidenced by its being placed into liquidation.

It should also be noted that in a clause in the Agreement, under which you were employed and subsequently received a redundancy payment, it stated an employee's job is considered to be redundant if the Employer has made a definite decision that the job is no longer required and will not be done by any person due to operational requirements such as economic, structural or technical changes.

The Agreement also stated that the redundancy provisions do not apply to casual employees or circumstances where:

· an incoming employer offers to continue the employment of the employee

· the Employer transfers the employee to a related Company and ensures; continuity of service

· employment is terminated as a consequence of conduct that justifies instant dismissal.

In view of the above and there being a definite severing of your employment, it is considered the first condition is satisfied in that you were dismissed from employment because your position was genuinely redundant.

A further requirement set out in subsection 83-175(1) of the ITAA 1997 is that the payment exceeds the amount that could reasonably be expected to have been received by the employee had he or she voluntarily terminated from his or her employment at the time of the dismissal.

In your case, a third party determined, taking into account the Agreement, that you were entitled to a gross payment comprising a redundancy payment and a payment in lieu of notice which were based on your entitlements under the Agreement.

In the Agreement, where termination of employment is instigated by an employee, it stated an employee would only be entitled to his or her accrued statutory entitlements.

As the above shows, upon normal termination of employment you would have only received your statutory entitlements. Therefore, after also taking into account the redundancy provisions in the Agreement, it is evident that all of the gross payment is more than you would have received had you resigned.

In view of the above, the requirements under subsection 83-175(1) of the ITAA 1997 are satisfied.

As mentioned previously all conditions under section 83-175 of the ITAA 1997 must be satisfied before the payment is a genuine redundancy payment. We will now discuss the rest of the conditions under section 83-175 of the ITAA 1997.

Further conditions for a genuine redundancy payment

Subsection 83-175(2) of the ITAA 1997 sets out further criteria that must be satisfied for a payment to be regarded as a genuine redundancy payment.

The first condition requires that the taxpayer is dismissed before the earlier of the day the taxpayer turns 65 or the day they reach a particular age or completed a particular period of service that would have terminated the taxpayer's employment.

This condition is satisfied as you were dismissed from employment before you were 65 years of age and there was no date prior to you turning 65 years of age on which your employment would have ceased.

The second condition requires that if the dismissal were not at arms' length, that the payment does not exceed the amount that could be reasonably expected to be made if the dismissal were at arms' length.

This condition does not apply as the dismissal was made at arms' length.

No arrangement to employ after dismissal

The third condition is that at the time of dismissal, there was no arrangement between the employee and the employer, or between the employer and another person, to employ the employee after the dismissal.

In your case, as your employment was terminated due to your Employer going through receivership, it follows that at the time of your dismissal that the Employer would not re-employ you.

Further, as mentioned earlier, your entitlement to a redundancy payment was made in accordance with redundancy provisions in the Agreement which stated those provision do not apply to casual employees or circumstances where:

· an incoming employer offers to continue the employment of the employee

· the Employer transfers the employee to a related Company and ensures; continuity of service

· employment is terminated as a consequence of conduct that justifies instant dismissal.

In light of the Agreement's redundancy provisions and the payment having been made to you, it is evident that there was no arrangement entered into between the Employer and yourself, or the Employer and another party, to employ you.

In view of the above it is considered that this condition is satisfied as, at the time of dismissal there was no arrangement (written, verbal or implied) between you and your Employer or between your Employer and another person, to employ you after the dismissal.

Payment not in lieu of superannuation benefits

A further requirement, as set out in subsection 83-175(3) of the ITAA 1997, is that no part of the payment 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 date.

In your case, no part of the payment made to you represents a payment in lieu of superannuation benefits. As specified in the documentation you received from the third party and the Liquidator the payment comprises a redundancy payment and a payment in lieu of notice.

Accordingly, subsection 83-175(3) of the ITAA 1997 does not apply to the payment made to you.

Not a payment mentioned in section 82-135 of the ITAA 1997

Subsection 83-175(4) of the ITAA 1997 provides that 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 or long service leave payments.

In your case, the payment made to you is not of the type mentioned in section 82-135 of the ITAA 1997 which would preclude it from being a genuine redundancy payment. The payment made to you comprises a redundancy payment and a payment in lieu of notice.

Accordingly, the payment is not precluded from being a genuine redundancy payment under subsection 83-175(4) of the ITAA 1997.

Conclusion

The payment made to you is a genuine redundancy payment for the purposes of section 83-175 of the ITAA 1997.