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Ruling

Subject: Genuine redundancy payment - GEERS

Questions

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

Is the payment included in the income year in which the payment was received?

Advice/Answers

Yes.

Yes.

This ruling applies for the following period

Year ending 30 June 2010

The scheme commenced on

1 July 2009

Relevant facts

You commenced employment with the Employer in the 2008-09 income year.

The Employer went into liquidation in the 2010-11 income year and your employment ceased.

You were dismissed before you were 65 years of age.

The dismissal was made at arm's length

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

You were informed that the Employer had no money and you would have to make an application under the General Employee Entitlements & Redundancy Scheme (GEERS) to obtain your entitlements.

You made a claim under GEERS in the 2010-11 income year.

A letter from the receiver and manager of the Employer (the Receiver) shows a payment was made to you for wages, annual Leave (including leave loading), payment in lieu of notice and the tax withheld.

The 'years of service' to which the payment relates is nil whole years of service.

No part of the payment was received by you in lieu of superannuation benefits.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 4

Income Tax Assessment Act 1997 Section 82-135

Income Tax Assessment Act 1997 Subsection 83-170(2)

Income Tax Assessment Act 1997 Subsection 83-170(2)

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 for wages owing is that which an employee would reasonably expect to receive as a consequence of the termination of their employment. The payment for wages is not a genuine redundancy payment and is ordinary assessable income.

The payment in lieu of notice is a genuine redundancy payment and consists wholly of the tax-free amount. The payment in lieu of notice is not assessable income and is not exempt income. Consequently the amount is not required to be included in your income tax return for the 2010-11 income year.

The payment for annual leave is excluded from being a genuine redundancy payment. Unused annual leave payments, made as a result of genuine redundancy, are included in your assessable income and subject to tax at no more than 30% (plus Medicare levy).

You will need a PAYG payment summary - individual non-business or a comparable statement from the Receiver in order to claim a credit for the tax withheld. As the Receiver has advised that they are not able to provide you with a group certificate, you will need to make a statutory declaration, setting out the information provided in the Receiver's letter.

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.

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.

You commenced employment with the Employer in the 2009-10 income year. The Employer subsequently went into liquidation in the 2010-11 income year and your employment ceased.

As noted in the facts, you were informed that the Employer had no money and you would have to make an application under the General Employee Entitlements & Redundancy Scheme (GEERS) to obtain your entitlements.

You made a claim under GEERS in the 2010-11 income year.

A letter from the receiver and manager of the Employer (the Receiver) shows a payment was made to you for wages, annual Leave (including leave loading), payment in lieu of notice and the tax withheld.

It is considered that the Employer had ceased trading and your position ceased to exist.

The decision to terminate your employment was made without your consent.

Therefore, 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 the Employer has been made genuinely redundant.

Please note a genuine redundancy payment is so much of a payment as exceeds the amount that could reasonably be expected to be received by an employee in consequence of the voluntary termination of his or her employment at the time of the dismissal.

In this case, it is considered that the payment for wages owing is that which an employee would reasonably expect to receive as a consequence of the termination of their employment. The payment for wages is not a genuine redundancy payment and is ordinary assessable income.

Subsection 83-175(1) of the ITAA 1997 has been satisfied in respect of the annual leave and payment in lieu of notice amounts.

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 (written, verbal or implied) between you and the Employer or between the 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.

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 for annual leave is excluded from being a genuine redundancy payment as mentioned in section 82-135 of the ITAA 1997.

It is accepted that the payment in lieu of notice 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 'years of service' to which the genuine redundancy payment relates is nil whole years of service.

Accordingly, the tax-free part of a genuine redundancy payment you can receive in the 2010-11 income year under subsection 83-175(3) of the ITAA 1997 is:

$8,126 + ($4,064 × 0) = $8,126.

As the payment in lieu notice is below the tax-free amount of a genuine redundancy payment, the entire amount of the payment is the tax-free part of a genuine redundancy payment. This tax-free amount is not assessable income and is not exempt income under subsection 83-170(2) of the ITAA 1997.

Consequently the amount for payment in lieu of notice is not required to be included in your income tax return for the 2010-11 income year.

You will need a PAYG payment summary - individual non-business or a comparable statement from the in order to claim a credit for the tax withheld. As the Receiver has advised that they are not able to provide you with a group certificate, you will need to make a statutory declaration, setting out the information provided in the Receiver's letter.

A copy of the form 'Statutory declaration (for PAYG payment summary forms)' (NAT 4135) can be found on our website - go to www.ato.gov.au and search for NAT 4135.

Unused annual leave

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

Unused annual leave payments are 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.

As noted above you will need to make a statutory declaration, setting out the information provided in the Receiver's letter.

Section 4 of the ITAA 1997 sets out how to work out the taxable income on your taxable income and provides that an individuals income tax is worked out by reference to their taxable income for the income year.

In this case, the payments you have received from the Receiver are in relation to your employment with the Employer from which you ceased employment. However, the payments have been made in the 2010-11 income year and are to be included in that income year.