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Ruling

Subject : Genuine redundancy payment

Issue

Question

Does your client's employment termination payment include a tax-free part of a genuine redundancy payment (GRP) in accordance with section 83-170 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Advice/Answer

Yes.

This ruling applies for the following period

For the year ended 30 June 2011

The scheme commenced on

1 July 2010

Relevant facts

During the 2007-08 income year, your client commenced employment with an employer (the employer).

The employer advised your client that the company's review of its operations has resulted in a decision to restructure the organisation and downsize their staffing arrangements.

As a result of the restructure your client's position was made redundant and your client's employment was terminated during the 2010-11 income year on the basis of redundancy.

The employer advised that as a result of the redundancy your client's total entitlements which included a termination pay, accrued annual leave and severance pay (excluding tax deduction) would be deposited into your client's account within a few days of your client's termination of employment.

The PAYG Payment Summary - individual non-business for the year ending 30 June 2011 shows a gross amount with an amount of tax withheld which included the redundancy payment.

Your client was entitled to receive accrued annual leave on resignation or retirement.

At the time of termination there were no arrangements between your client and the employer or any other person to employ your client after your client's termination of employment.

An ETP payment advice shows your client's entitlements for a payment in lieu of notice, annual leave and redundancy with an amount of tax withheld.

Your client had completed a specified number of whole years of service with the employer.

The redundancy payment was made to your client based on an award as there was no contract.

There was no date prior to your client's sixty fifth birthday when your client was required to cease employment.

No part of the employment termination payment was not made to your client in lieu of superannuation benefits.

Your client is under the age of 55 years.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 82-135.

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

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

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 made in lieu of notice and severance pay is considered to be a genuine redundancy payment (GRP) as all the conditions have been satisfied.

As the payment is below the tax-free amount of a GRP it is not assessable income and is not exempt income therefore is not required to be included in your client's income tax return for the 2010-11 income year.

Detailed reasoning

Genuine redundancy payments

A payment made to an employee is a genuine redundancy payment (GRP) if it satisfies all criteria set out in section 83-175 of the ITAA 1997. This section states:

(1) A genuine redundancy payment is so much of a payment received by an employee who is dismissed from employment because the employee's position is genuinely redundant as exceeds the amount that could reasonably be expected to be received by the employee in consequence of the voluntary termination of his or her employment at the time of dismissal.

(2) A genuine redundancy payment must satisfy the following conditions:

(a) the employee is dismissed before the earlier of the following:

(i) the day he or she turned 65;

(ii) if the employee's employment would have terminated when he or she reached a particular age or completed a particular period of service - the day he or she would reach the age or complete the period of service (as the case may be);

(b) if the dismissal was not at arm's length - the payment does not exceed the amount that could reasonably be expected to be made if the dismissal were at arm's length;

(c) at the time of the dismissal, there was no arrangement between the employee and the employer, or between the employer and another person, to employ the employee after dismissal.

(3) However, a genuine redundancy payment does not include any part of a payment that 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 time.

Payments not covered

(4) A payment is not a genuine redundancy payment if it is a payment mentioned in section 82-135 (apart from paragraph 82-135(e)).

As noted in the facts, your client was dismissed from employment during the 2010-11 income year, as a result of redundancy due to the employer's decision to restructure the organisation and downsize their staffing arrangements.

The payment was made on termination of your client's employment due to your client's role being abolished. The payment is paid in circumstances of genuine redundancy, and is in excess of the amount that could reasonably be expected to be received by a worker in consequence of voluntary termination.

Therefore, it is accepted that all the conditions in subsection 83-175(1) of the ITAA 1997 have been satisfied.

Your client was under 55 years of age when your client's employment was terminated. There is no date prior to your client attaining age 65 where your client would have had to retire from your client's employment.

The employer and your client were dealing with each other at arm's length and there is no evidence to indicate that there was an arrangement between your client and the employer, or the employer and another person, to employ your client after the termination time.

Furthermore, there is no evidence to indicate that any part of the payment is in lieu of superannuation benefits to which your client may have become entitled at the time of the payment or at a later time.

Therefore, it is accepted that all the conditions in subsection 83-175(2) and subsection 83-175(3) of the ITAA 1997 have been satisfied.

As noted previously, subsection 83-175(4) of the ITAA 1997 provides that a payment is not a GRP if it is a payment mentioned in section 82-135 of the ITAA 1997 (apart from paragraph 82-135(e)).

Section 82-135 of the ITAA 1997 includes payments such as pensions, foreign termination payments, unused annual leave and unused long service leave.

Payments for unused annual leave are expressly mentioned in paragraphs 82-135(c) of the ITAA 1997. The payment for accrued annual leave was made to your client in addition to the redundancy payment.

Therefore, the payment made in lieu of notice and severance pay does not include the unused annual leave payment.

Hence the requirement in subsection 83-175(4) of the ITAA 1997 has been satisfied.

In light of the above, as all the conditions have been satisfied in accordance with section 83-175 of the ITAA 1997, the payment made in lieu of notice severance pay is considered to be a GRP.

Tax free amount

Section 83-170 of the ITAA 1997 applies to determine the tax-free treatment of a 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. Under subsection 83-170(3) of the ITAA 1997, the formula for working out the tax free amount is:

Base amount + (Service amount × Years of service)

Your client was employed during the 2007-08 income year and was made redundant during the 2010-11 income year. Consequently the 'years of service' to which the GRP relates is a specified number of whole years of service.

As your client's dismissal occurred during the 2010-11 income year, the base amount will be $8,126 and the service amount will be $4,064. Therefore the tax-free amount calculated in accordance with subsection 83-170(3) of the ITAA 1997, is the tax-free part of a GRP your client can receive in the 2010-11 income year.

As the payment made to your client in lieu of notice and severance pay is below the tax-free amount of a GRP the total amount should be shown at label D on your client's Payment Summary. The tax free amount is not assessable income and is not exempt income under subsection 83-170(2) of the ITAA 1997 therefore is not required to be included in your client's income tax return for the 2010-11 income year.