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Ruling

Subject: Genuine redundancy payment

Question

Is the lump sum payment you received on the termination of your employment a genuine redundancy payment?

Answer

Yes

This ruling applies for the following period:

1 July 2011 to 30 June 2012

The scheme commences on:

1 July 2011

Relevant facts and circumstances

You are under age 50.

You commenced employment with your employer (the Company) over 10 years ago.

You recently entered into a new contract with the Company for a part time position.

The part time position was covered by the provisions of the relevant services award (the Award).

Subsequently, your contracted hours were changed without your consent and you tried to resolve the issue both in writing and face to face with the Company's general manager (the general manager).

You were advised by the general manager that the Company was not bound by the conditions of your employment contract and had the right to change your work hours.

You submitted a complaint to the Fair Work Ombudsman (FWO) for a ruling on the matter stating your preferred outcome was to have your contracted hours returned.

The FWO officer advised you that the general manager had been contacted by FWO to return you to your contracted hours effective immediately; and if that was not possible then the general manager could renegotiate your contract or make you redundant.

During a meeting in the presence of a senior employee of the Company, the general manager told you that they were unable to return you to your contracted hours as your 'set hours' position no longer existed. They went on to say that at this time you could enter into a new contract with the 'changed hours' or you could be made redundant.

The new position offered to you was not feasible for you and you told the general manager you would accept the redundancy.

The FWO advised you in writing that your employer had been directed to return your employment to the contracted hours of your part-time position.

Believing the matter was resolved by the FWO's instructions to the Company, you did not contact the FWO again.

You sent a confirmation email to the general manager as your offer of redundancy was given during the verbal discussion that occurred between yourself and the general manager in the presence of the senior employee of the Company.

Your email to the general manager re-stated what had occurred in the verbal discussion and your acceptance of redundancy offer. You also advised the general manager the date you assessed as your termination date using the notice period of four weeks.

You received a response to your email from the general manager on the same day.

You later requested an estimate of your final pay entitlements as your pay slips had not shown entitlements such as accrued annual and long service leave.

The general manager asked you (by email) to give the five weeks termination notice as was required rather than the four weeks you had given them as it suited the business. The required five weeks' notice was in accordance with the redundancy of a person over 45 years of age.

In that email, your employer also quoted the content of the 'Job search entitlement' provision of your Award (which referred to circumstances of redundancy) and asked that you comply with this.

Your employment was terminated at the end of the notice period of five weeks and your employer sent you a spreadsheet which showed your estimates with hand written comments.

You received an email from the general manager regarding discussions with the Australian Taxation Office (ATO) and the FWO regarding your termination pay as follows:

Annual Leave Loading: You only receive the 17.5% loading if you are on the minimum age. As you are not, you do not receive the loading for unused annual leave.

Tax on Redundancy: This is based on preservation age which is 59 years. As you are younger than 59 years, you are taxed on redundancy at 31.5%.

LSL: Is also taxed at 31.5%.

When you received your final payroll advice details (payroll advice), you noted that the amounts on the spreadsheet that was returned to you on your termination date did not match your payroll advice details.

Based on your your service period, you considered the termination payment should consist entirely of the tax-free amount of a genuine redundancy payment.

You sent several email requests to the general manager to clarify the tax treatment of the payment but received no reply.

You submitted a workplace complaint to the FWO who asked you to re-submit your case for review. You subsequently received a letter from the FWO confirming your termination was due to your position being made redundant by your employer.

The roster for the period during the two months prior to your termination date and the roster for the period during the two months after your termination date indicate your position was not replaced and no longer existed.

You provided the following addition information:

· No payment was received in lieu of superannuation benefits.

· Had you retired voluntarily you would have been entitled to all payments in your final payroll advice with the exception of the redundancy payment.

· Your employment contract was for ongoing employment and there was no date set for ceasing of employment prior to notice of redundancy.

· There was no agreement between yourself, your employer or a third party for future employment.

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)(b)

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

Income Tax Assessment Act 1997 Section 82-135

Income Tax Assessment Act 1997 Paragraph 82-135(e)

Income Tax Assessment Act 1997 Section 82-170

Income Tax Assessment Act 1997 Subsection 82-170(2)

Income Tax Assessment Act 1997 Subsection 82-170(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 83-75(2)(a)

Income Tax Assessment Act 1997 Paragraph 83-75(2)(b)

Income Tax Assessment Act 1997 Paragraph 83-75(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 lump sum payment you received during the 2011-12 income year is a payment made in consequence of the termination of your employment.

The payment is also a genuine redundancy payment. The whole amount is a tax-free amount and is not assessable income and is not exempt income.

Detailed reasoning

Employment termination payment

A payment made to an employee is an employment termination payment if the payment satisfies all the requirements in section 82-130 of the Income Tax Assessment Act 1997 (ITAA 1997) and is not specifically excluded under section 82-135.

Subsection 82-130(1) states:

A payment is an employment termination payment if:

(a) it is received by you:

(i) in consequence of the termination of your employment; or

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

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

(c) it is not a payment mentioned in section 82-135.

Based on the information provided, the lump sum payment was made to you in consequence of the termination of your employment because there is a nexus between the termination of your employment and the lump sum payment made to you soon after your termination date. This is in accordance with the Commissioner's view in Taxation Ruling 2003/13 (TR 2003/13) and subparagraph 82-130(1)(a)(i) of the ITAA 1997.

In other words, you would not otherwise receive the payment except for the termination of your employment.

Genuine redundancy payment

Section 83-175 of the Income Tax Assessment Act 1997 (ITAA 1997) sets out the criteria to be met in order for a payment to be considered a genuine redundancy payment.

Section 83-170 applies to treat so much of the relevant payment (that does not exceed the amount worked out under a specified formula) as tax-free. That is, the tax-free part is not assessable income and is not exempt income.

Under subsection 83-175(1), one of the criteria to be met is that the payment is 'received by an employee who is dismissed from employment' because the employee's position is genuinely redundant.

In Taxation Ruling 2009/2 Income tax: genuine redundancy payments, the Commissioner has outlined the requirements to be satisfied before any payment made to a person whose employment is terminated qualifies for treatment as a genuine redundancy payment under section 83-175 of the ITAA 1997.

There are four necessary components within this termination requirement:

· The payment being tested must be received in consequence of an employee's termination.

· That termination must involve the 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.

Component 1: Payment being tested must be received in consequence of an employee's termination.

It has been established previously that the lump sum payment has been received in consequence of termination, therefore the requirement of the first component of subsection 83-175(1) of the ITAA 1997 has been satisfied.

Component 2: That termination must involve the employee being dismissed from employment.

On the basis of the facts as presented in your case, it is considered you were dismissed from employment at the initiative of your employer. Therefore, this second component of subsection 83-175(1) of the ITAA 1997 has been satisfied.

Component 3: That dismissal must be caused by the redundancy of the employee's position.

Based on the information provided it is evident that your employer made the ultimate decision that your position was redundant and that was the prevailing reason you were dismissed from your employment. You also received written confirmation of this from the FWO.

Therefore the facts of your case lead to the conclusion the reason for your dismissal was the redundancy of your position.

Component 4: The redundancy payment must be made genuinely because of a redundancy.

It is considered the condition for this fourth component has been satisfied as:

· the dismissed employee is not older than specified age limits;

· the termination is not at the end of a fixed period of employment;

· the actual amount that was paid is not greater than the amount that could reasonably be expected to be paid had the parties been dealing at arm's length;

· the amount that was paid was in excess of what you would have been entitled to receive if you had voluntarily resigned;

· there is no arrangement to employ the dismissed employee after the termination; and

· the payment is not in lieu of superannuation benefits.

On the basis of the information provided, it is also considered the conditions of subsections 83-175(2) and 83-175(3) are also satisfied.

Consequently, it can be concluded that the lump sum payment is a genuine redundancy payment as defined in section 83-175 of the ITAA 1997.

Taxation of a genuine redundancy payment

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 × Years of service)

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

For the 2011-12 income year:

Base amount means $X; and

Service amount means $X

Based on your employment service period, your 'years of service' to which the genuine redundancy payment relates has been calculated.

Accordingly, the tax-free part of a genuine redundancy payment you can receive in the 2011-12 income year exceeds the payment you received from the employer. This tax-free amount is not assessable income and is not exempt income in accordance with subsection 83-170(2) of the ITAA 1997.

Therefore, it is concluded that the payment consists entirely of the tax-free part of a genuine redundancy payment. This amount should appear on your PAYG payment summary for the 2011-12 income year as a Lump sum D amount. The total lump sum amounts for unused annual leave and unused long service leave on termination of employment because of a genuine redundancy should appear on your PAYG payment summary as a Lump sum A amount.