Edited version of private ruling

Authorisation Number: 1011912697998

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Ruling

Subject: Genuine redundancy payment - payment in lieu of notice

Questions

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/Answers

Yes.

This ruling applies for the following period

Year ending 30 June 2011

The scheme commenced on

1 July 2010

Relevant facts

Your client commenced employment with their employer (the Employer) over five years ago.

The Employer ceased trading and your client's employment was terminated in a subsequent income year.

Your client had completed 1 whole year of service at the time of the termination of their employment.

Your client was dismissed before they were 65 years of age

A letter received by your client in the 2010-11 income year advised that a distribution has been declared for employee entitlements and you had a claim with respect to payment in lieu of notice and annual leave as a consequence of their redundancy.

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 in lieu of notice is a genuine redundancy payment. As the payment in lieu of notice is less than your client's tax-free amount, in respect of the genuine redundancy of this employment, the entire payment is not assessable income and is not exempt income.

Unused annual leave payments, made as a result of genuine redundancy, are included in your client's assessable income and subject to tax at no more than 30% (plus Medicare levy).

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 commenced employment with their employer (the Employer). The Employer ceased trading and your client's employment was terminated more than 12 months later.

A letter received by your client in the 2010-11 income year advised that your client received as payment in lieu of notice as a consequence of their redundancy.

Your client's employer had ceased trading and your client's position ceased to exist.

The decision to terminate your client's employment was made without your client's consent.

Therefore, it is considered that the payment made to your client was made in consequence of the termination of their employment. The termination of employment and the payment are all intertwined and connected. If not for the termination of employment, the payment would not have been made.

Further, 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 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 part of the payment was 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.

In this case part of the payment is for unused annual leave. This part of the payment is excluded from being a genuine redundancy payment, because the payment is mentioned in section 82-135 of the ITAA 1997 (subsection 82-135(c) of the ITAA 1997).

However, the payment in lieu of notice satisfies the requirements under subsection 83-175(1) of the ITAA 1997.

It is accepted that the payment in lieu of notice is a genuine redundancy payment.

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 x Years of service)

For the 2011-12 income year:

Base amount means $8,435;

Service amount means $4,218; 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 1 whole year 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:

= $8,435 + [4,218 x 1 completed year of service]

= $12,653

In this case the payment in lieu of notice satisfies all the conditions in section 83-175 of the ITAA 1997. Therefore, the payment in lieu of notice is a genuine redundancy payment. As the payment in lieu of notice is less than your client's tax-free amount, in respect of the genuine redundancy of this employment, it is not assessable income and is not exempt income.

This amount does not have to be included in your client's income tax return.

Unused annual leave

Unused annual leave payments, made as a result of genuine redundancy, are included in your client's assessable income and subject to tax at no more than 30% (plus Medicare levy).

This is a 'lump sum A amount, returned at item 3 'Employment lump sum payments' of the 'Tax return for individuals' 2011. Because the payment relates to a genuine redundancy payment you are also required to print 'R' in the 'Type' box.

Your client will need a PAYG payment summary - individual non-business or a comparable statement. Where you are unsuccessful in obtaining any of these, you will need to make a statutory declaration. A copy of the form 'Statutory declaration (for PAYG payment summary forms)' (NAT 4135) can be found on the our website - go to www.ato.gov.au and search for NAT 4135.