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Ruling

Subject: Genuine redundancy payment

Questions

Is any part of the payment received by you an employment termination payment in accordance with subsection 82-130(1) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Is any part of the payment received by you a genuine redundancy payment in accordance with section 83-175 of the ITAA 1997?

Advice/Answers
Yes.

Yes.

This ruling applies for the following period

Year ending 30 June 2011

The scheme commenced on

1 July 2010

Relevant facts

You commenced employment with your employer in the 1996-97 income year.

The area you worked in was subject to reorganisation and a merger. As a consequence your position ceased.

Your employer was unable to identify a suitable position in which to redeploy you. As a result your employment ceased by reason of redundancy in the 20XX-XX income year.

Within 12 months of the termination of your employment you commenced legal action against your employer regarding your employment and entitlement to payments.

You entered into a Settlement Deed (the Deed) in the 20XX-XX income year with your employer. Under the Deed it was agreed:

· that entitlements shall be paid in accordance with an Enterprise Agreement and in accordance with the Deed upon termination of your employment;

· that your date of termination of employment be in the 20XX-XX income year; and

· that you have elected to receive income maintenance in accordance with an Enterprise Agreement.

In the 2010-11 income year you received payments in accordance with the Deed.

There was no agreement to re-employ you on the termination of employment.

You were dismissed before you were 65 years of age

Assumptions

None.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 82-130.

Income Tax Assessment Act 1997 Subsection 82-130(1).

Income Tax Assessment Act 1997 Paragraph 82-130(1)(a).

Income Tax Assessment Act 1997 Paragraph 82-130(1)(b).

Income Tax Assessment Act 1997 Paragraph 82-130(1)(c).

Income Tax Assessment Act 1997 Subsection 82-130(2).

Income Tax Assessment Act 1997 Section 82-135.

Income Tax Assessment Act 1997 Subsection 82-135(e).

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 995-1.

Reasons for decision

Summary:

The payment is a genuine redundancy payment. The tax-free amount in respect of the genuine redundancy of your employment is not assessable income and is not exempt income.

The amount in excess of the tax-free amount of the genuine redundancy is an employment termination payment.

Detailed reasoning:

Employment termination payment

Section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997) states that:

employment termination payment has the meaning given by section 82-130 of the ITAA 1997.

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

A payment is an employment termination payment if:

· it is received by you:

· in consequence of the termination of your employment; or

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

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

· it is not a payment mentioned in section 82-135.

An employment termination payment, where the payment is made during the life of a taxpayer, is known as a life benefit termination payment (subsection 82-130(2) of the ITAA 1997).

To determine if the payment made by your employer to you constitutes an employment termination payment, all the conditions in section 82-130 of the ITAA 1997 will need to be satisfied.

Failure to satisfy any of the conditions will result in the payment not being considered an employment termination payment.

In this case you were employed by your employer. The area you worked in was subject to reorganisation and a merger. Your employer was unable to identify a suitable position in which to redeploy you, as a consequence, your position ceased in the 2008-09 income year.

You commenced legal action against your employer within 12 months of the termination of your employment regarding your employment and entitlement to payments.

You entered into a Settlement Deed (the Deed) in the 20XX-XX income year with your employer. Under the Deed it was agreed:

· that entitlements under the Enterprise Agreement shall be paid in accordance with an Enterprise Agreement and in accordance with the Deed upon termination of your employment;

· that your date of termination of employment occurred in the 20XX-XX income year; and

· that you have elected to receive income maintenance in accordance with an Enterprise Agreement.

In the 2010-11 income year you received payments in accordance with the Deed,.

From the facts it is clear that the payment was made in consequence of the termination of your employment. The termination of employment and the payment are all intertwined and connected.

Because the payment is considered to be received by you in consequence of the termination of your employment, the requirement under subparagraph 82-130(1)(a) of the ITAA 1997 has been met.

The payment is received no later than 12 months after termination

Paragraph 82-130(1)(b) of the ITAA 1997 requires that the payment must be received no later than 12 months after the termination of employment.

However, paragraph 82-130(4)(a) of the ITAA 1997 states that the 12 month rule prescribed in paragraph 82-130(1)(b) of the ITAA 1997 will not apply if a person is covered by a determination made by the Commissioner under subsection 82-130(7) of the ITAA 1997.

The Employment Termination Payments (12 month rule) Legislative Instrument 2007 is a legislative instrument made by the Commissioner of Taxation pursuant to subsection 82-130(7) of the ITAA 1997. This instrument applies to employment termination payments received after 30 June 2007.

This instrument states that a payment received more than 12 months after termination of persons employment will be an employment termination payment if the delay in the payment was due to the commencement of legal action concerning either or both:

(a)   the persons entitlement to the payment;

(b)   the amount of the persons entitlement;

and the legal action was commenced within 12 months of the termination of employment.

In this case, the payments were made more than 12 months after the termination of your employment. However, you commenced legal action against your employer within 12 months of the termination of your employment regarding your employment and entitlement to payments. Therefore, the payment is exempt from the 12 month rule found in paragraph 82-130(1)(b) of the ITAA 1997.

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

Section 82-135 of the ITAA 1997 lists payments that are not employment termination payments. These include (among others):

· superannuation benefits;

· unused annual leave or long service leave payments;

· foreign termination payments covered under Subdivision 83-D of the ITAA 1997; and

· the tax free part of a genuine redundancy payment or an early retirement scheme payment.

Relevant to this particular case is whether any part of the payment represents the tax free part of a genuine redundancy payment.

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.

As noted above, you were employed by your employer. The area you worked in was subject to reorganisation and a merger. Your employer was unable to identify a suitable position in which to redeploy you. As a result, your employment ceased by reason of redundancy and a payment was made to you in accordance with the Deed.

Your position with your employer ceased to exist. The decision to terminate your employment was made without your consent.

Therefore, it is considered that the payment made to you was made in consequence of the termination of your 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 you have been dismissed from your employment because your role with your 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 you were dismissed before you 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 between you and your employer or between your employer and another person, to employ you 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 you in lieu of superannuation benefits.

Further, no part of the payment is that which is excluded from being a genuine redundancy payment as mentioned in section 82-135 of the ITAA 1997.

Therefore, it is accepted that the payment is a genuine redundancy payment.

Tax-free amount

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 not assessable income and is not 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 x Years of service)

For the 2010-11 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.

The amount in excess of the tax-free amount of the payment will be an employment termination payment.

Tax Treatment of the payment as a Life Benefit Termination Payment (LBTP):

An employment termination payment will comprise of the following components:

· Tax free component - this includes the pre-July 83 segment (if any) and/or the invalidity segment (if any); and

· Taxable component - the amount remaining after deducting the tax free component from the total payment.

The tax free component is not assessable income and is not exempt income. The taxable component is included, in full, as assessable income.

The taxable component is subject to tax, depending on the person's age when the settlement payment is received.

For persons over their preservation age, the taxable component of the LBTP is taxed at 15% plus Medicare levy for amounts below the employment termination payment cap of $160,000 for the 2010-2011 income year, and at the top marginal rate for the amount above this cap.

The taxable components of all LBTPs received in an income year are counted towards this cap. Any tax-free amounts are not counted towards the cap.

Employment termination payments cannot be rolled over into a complying superannuation fund, complying approved deposit fund (ADF) or to a retirement savings account (RSA) provider.