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Ruling

Subject: Employment termination payment - genuine redundancy

Question

Is any part of the payment received by your client considered to be a genuine redundancy payment in accordance with section 83-175 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Advice/Answer

Yes.

This ruling applies for the following period

Year ending 30 June 2010

The scheme commenced on

1 July 2009

Relevant facts

Your client was been employed with their employer (the Employer) as a manager.

During the 20XX-XX income year your client's employer (the Employer) advised that due to financial issues the Employer had no alternative but to offer notice of redundancy and in accordance with the current workplace guidelines give your client a severance payment. Another employee's position was also abolished at this time.

Your client was dismissed from their role before they were 65 years of age.

Your client had completed X years of service at the time of the termination of their employment.

The Employer took over all responsibilities of your client at the termination of their employment.

The severance payment was made to your client over a number of weeks.

On voluntary termination of your client's employment, he would only have been entitled to his accrued holiday pay.

Your client's employment would ordinarily have been terminated at age 65.

At the time of dismissal there was no arrangement (written, verbal or implied) between your client and the Employer or between the Employer and another person, to employ your client after the dismissal.

No parts of the payments were received by your client in lieu of superannuation benefits.

The payments are not a payment mentioned in section 82-135 of the ITAA 1997 (apart from paragraph 82-135(e)).

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 27F
Income Tax Assessment Act 1997 Section 82-135
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

Summary

The payment made to your client is a genuine redundancy payment. The payment is below your client's tax-free amount is not assessable income and is not exempt income.

Detailed reasoning

Genuine redundancy payment

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

Under subsection 83-175(1) of the ITAA 1997, four criteria 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.

Your client has been employed with their employer (the Employer) as a manager.

During the 2009-10 income year the Employer advised that due to financial issues the Employer had no alternative but to offer notice of redundancy and in accordance with the current workplace guidelines and give your client a severance payment.

The Employer took over all responsibilities of your client at the termination of their employment.

The severance payment was made to your client on a weekly basis over a number of weeks.

Hence, it is considered that the payments made to your client were made in consequence of the termination of your client's employment. The termination of employment and the payments are all intertwined and connected. If not for the termination of employment, the payments would not have been made.

Further, your client's role as a manager was made redundant. The Employer made the decision to terminate your client's employment without your client's consent. It is considered that your client has been dismissed from their employment because their role with the Employer has been made genuinely redundant.

Therefore, subsection 83-175(1) of the ITAA 1997 has been satisfied.

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 your client was dismissed from their role before they were 65 years of age.

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

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

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.

This condition is satisfied as, at the time of dismissal there was no arrangement (written, verbal or implied) between your client and the Employer or between the Employer and another person, to employ your client after the dismissal.

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 this case, this condition is satisfied as no parts of the payments were received by your client in lieu of superannuation benefits.

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.

This condition is satisfied as the payments are not a payment mentioned in section 82-135 of the ITAA 1997 (apart from paragraph 82-135(e)).

Multiple payments for one dismissal due to redundancy

In this case, your client was paid their severance pay over a number of weeks.

Taxation Ruling TR 2009/2 (TR 2009/2) outlines the treatment of multiple payments for one dismissal due to redundancy and states at paragraphs 73 to 76:

73. There will be cases where an employee receives payments in consequence of their dismissal due to redundancy other than as one amount paid at a single point of time. For example, an employee's redundancy payout may be paid as a series of amounts, whether by way of structured instalments or due to cash flow constraints of the payer. It is also possible that amounts paid in consequence of dismissal due to redundancy may be made by more than one payer, which may or may not include the terminating employer.

74. While it may be possible to identify more than one 'payment' in some of these circumstances according to the ordinary meaning of that term, the Commissioner considers that the provisions of Part 2-40 operate to unify any such payments as a single sum attributable to redundancy when working out the tax treatment of the payments.

75. Therefore, in these circumstances, it is necessary to properly take account of all other redundancy payments made at the same or an earlier time when working out how to treat a given redundancy payment. The structure of Part 2-40 and provisions governing the tax treatment of the payments contemplates that this cumulative approach be adopted.

76. This requires that all payments made in consequence of the dismissal up to and including the time of the payment in question are assessed against a single voluntary termination element worked out at the time of the dismissal. Similarly, the tax-free amount of a genuine redundancy payment can only be claimed once for any given termination of employment because of redundancy.

Therefore, in accordance with TR 2009/2, the series of severance payments attributable to your client's redundancy and made on a weekly basis is to be unified as a single sum when working out the tax treatment of the payments.

Tax-free amount

So much of the genuine redundancy payment 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 is:

Base amount + (Service amount Years of service)

For the 2009-10 income year:

Base amount means $7,732;

Service amount means $3,867; and

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

Your client had completed 2 years of service at the time of the termination of their employment. Therefore, the tax-free amount determined under subsection 83-170(3) of the ITAA 1997 is:

= $7,732 + ($3,876 x 2 completed years of service)

= $15,484

The sum of the payments actually received by your client does not exceed this tax-free amount. Consequently, the total of the payments received are not assessable income and is not exempt income.

Conclusion

In this case all the conditions in section 83-175 of the ITAA 1997 have been satisfied the payment made to your client is a genuine redundancy payment.