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Ruling

Subject: Genuine redundancy payment - payment in lieu of notice

Question

Is the payment in lieu of notice made to you on termination of employment as a result of redundancy, included as part of the genuine redundancy payment (GRP) in accordance with section 83-170 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

This ruling applies for the following period:

For the year ended 30 June 2011

The scheme commences on:

1 July 2010

Relevant facts and circumstances

You commenced working for your employer in April 20XX.

In February 20XX, you were made redundant and were given a notice of termination of employment.

Your employment with your employer was terminated due to genuine redundancy.

According to your employment contract, the notice period is two weeks.

Your employment termination payment included four weeks pay for redundancy and two weeks pay in lieu of notice.

You have completed over 1 year of service with your employer.

No part of the employment termination payment was made to you in lieu of superannuation benefits.

You are under 55 years of age.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 27F
Income Tax Assessment Act 1997 Section 82-10(2)
Income Tax Assessment Act 1997 Section 82-135
Income Tax Assessment Act 1997 Section 83-170
Income Tax Assessment Act 1997 Subsection 83-170(2)
Income Tax Assessment Act 1997 Subsection 83-170(3)
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 Paragraph 83-175(2)(a)

Income Tax Assessment Act 1997 Paragraph 83-175(2)(b)
Income Tax Assessment Act 1997 Paragraph 83-175(2)(c)
Income Tax Assessment Act 1997 Subsection 83-175(3)
Income Tax Assessment Act 1997 Subsection 83-175(4)

Reasons for decision

Summary

The payment in lieu of notice (the payment) made on termination of employment on account of genuine redundancy should be added to the four weeks pay for redundancy to form your total genuine redundancy payment. This total amount is tax-free up to the amount calculated in accordance with a prescribed formula.

The genuine redundancy payment threshold for the 2010-11 income year is a base amount of $8,126 plus $4,064 for each complete of service. In your case, this threshold is $XX,XXX.

Any amount of your total genuine redundancy payment remaining after deducting the tax-free amount from the payment must be included in your tax return for the 20XX-XX income year.

Detailed reasoning

A payment in lieu of notice is made when, rather than having a person work out the period of their notice, the employer no longer requires an employee to perform work for them and pays them what they would otherwise have received as salary and wages during that notice period.

A payment under these circumstances forms part of the person's employment termination payment under section 82-130 of the ITAA 1997. Alternatively, where a person works out all or part their notice period, any payment they receive for days actually worked would simply be salary and wages.

Based on the information provided, the payment you have received in lieu of notice is an employment termination payment under section 82-130 of the ITAA 1997.

As your employer has determined that your position was made redundant, the employment termination payment you have received (including the payment in lieu of notice) will be a genuine redundancy payment.

Tax-free part of a genuine redundancy payment

Genuine redundancy payment

Section 83-170 of the ITAA 1997 applies to determine the tax-free treatment of a genuine redundancy payment (GRP). Section 83-170 places a limit on the amount of a GRP that is eligible for concessional tax treatment. So much of the GRP that does not exceed the amount worked out using the prescribed formula is not assessable income and is not exempt income. The formula for working out the tax free amount (subsection 83-170(3) of the ITAA 1997) is:

Base amount + (Service amount x Years of service)

For the 2010-2011 income year:

Base amount means $8,126;

Service amount means $4,064; and

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

As you commenced employment with the employer in April 20XX and your employment terminated in February 20XX, you have 1 complete year of service.

The tax- free amount is calculated as follows:

$8,126 + ($4,064 x 1) = $12,190

An amount of GRP received up to $12,190, as calculated above, is the tax-free amount of a GRP and is not required to be included in your income tax return for the 2010-11 income year.

After deducting the tax-free component of a GRP, the remaining amount is considered to be a life benefit employment termination payment.