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Ruling

Subject: Genuine redundancy payment

Question

Is any part of the payment made on termination of your employment exempt from tax as a genuine redundancy payment?

Answer

Yes

This ruling applies for the following period:

30 June 2011

The scheme commences on:

1 July 2010

Relevant facts and circumstances

You are under 55 years of age.

You were employed by the employer (a wholly owned Australian subsidiary of an overseas company) in the role of 'Head of a Business Line, Australia'.

You were promoted to 'Head of a Business Line, Asia Pacific' (the position) in late 20XX.

Your employment with the employer was based in Australia.

In late 20XX from the employer advised the overseas company had restructured its business. Due to the restructuring the overseas company decided that it wanted the position and role to be relocated from the employer to an overseas branch.

The overseas company wanted you to move to an overseas branch, and you were provided with a contract that offered employment with the overseas branch of the company with a proposed commencement date in the beginning of the 2010-11 income year.

You could not agree with the terms of the contract and you declined the offer. In early June 2010, you proposed to remain as the Head of the position, based in Australia employed by the employer. This was not acceptable by the employer or the overseas company which insisted the position and role be relocated to a different branch of the overseas company.

In early July 2010 you were given a termination letter from the employer directing that you do not enter the office or communicate with the employer's staff.

In late July 2010, 'a settlement and release deed' (the Deed) was executed and your employment with the employer was terminated on a specific date (the termination date).

All payments were made by the employer and received in the 2010-11 income year.

The PAYG payment summary - individual non-business shows the Gross payments and total tax withheld.

The PAYG payment summary - employment termination payment shows the taxable component and total tax withheld.

The position and role of Head of a Business Line, Asia Pacific was given to an employee of the overseas branch, and that employee retains the position today.

An email from the Senior Country Officer of the employer confirmed that your role and position based in Australia with the employer no longer existed after your dismissal and the role was now undertaken in the overseas branch.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 82-10(2).

Income Tax Assessment Act 1997 Paragraph 82-10(3)(b).

Income Tax Assessment Act 1997 Section 82-135.

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

Income Tax Assessment Act 1997 Section 83-170.

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 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 82-175(4).

Reasons for decision

Summary

The termination payment received by you from the employer during the 2010-11 income year is a genuine redundancy payment. Part of this amount represents the tax free part of a genuine redundancy payment.

The remaining balance is an employment termination payment and consists entirely of a taxable component which is to be included in your assessable income for the 2010-11 income year.

The ETP cap amount for the 2010-11 income year is $160,000.

As the remaining balance is under the ETP cap, you will be entitled to a tax offset that ensures that the rate of income tax on the amount up to the ETP cap amount will not exceed 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). 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 employees 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.

(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)).

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

· superannuation benefits;

· the payment of a pension or annuity; and

· unused annual leave or long service leave payments.

In addition, paragraph 82-135(e) provides that the part of a genuine redundancy payment worked out under section 83-170 is not an employment termination payment.

An email from the Senior Country Officer of the employer confirmed that your position based in a State with the employer no longer existed after your dismissal and the role was now undertaken in the overseas branch.

Based on the facts provided it is clear that a dismissal occurred (subsection 83-175(1) of the ITAA 1997) because the cessation of your employment was initiated by the employer and due to the restructure of the company's global project finance business, your position based in a State was relocated overseas. This means the dismissal was because your position was genuinely redundant. (subsection 83-175(1)).

In addition,

· you were dismissed before you reach age 65 (paragraph 83-175(2)(a));

· you and the employer are at arm's length (paragraph 83-175(2)(b)); and

· at the time of the dismissal, there was no agreement between you and the employer and another person, to employ you after the dismissal (paragraph 83-175(2)(c)).

In light of this it is considered the requirements under subsections 83-175(1) and 83-175(2) of the ITAA 1997 have been satisfied.

The other requirements to be satisfied under section 83-175 of the ITAA 1997 are that:

· the payment is in excess of the amount that could reasonably be expected to be received by you in consequence of the voluntary termination of your employment at the time of dismissal (subsection 83-175(1));

· the payment is not in lieu of superannuation benefits to which you may have become entitled at the time the payment was received or at a later date (subsection 83-175(3)); and

· the payment is not a payment mentioned in section 82-135 other than paragraph 82-135(e) (subsection 83-175(4)).

From the information you have provided it is clear that:

· the payment is in excess of the amount that could reasonably be expected to be received by you in consequence of the voluntary termination of your employment at the time of dismissal; and

· the redundancy payment received by you is not in lieu of superannuation benefits, the payment of a pension or annuity or unused annual leave or long service leave payments.

Accordingly, the payment is a genuine redundancy payment under section 83-175 of the ITAA 1997. However, paragraph 82-135(e) specifically excludes the tax-free part of part of a genuine redundancy payment from being an employment termination payment.

Tax-free part 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 2010-11 income year:

Base amount means $8,126; and

Service amount means $4,064.

The payment worked out in the formula under subsection 83-170(2) of the ITAA 1997 4 is the tax-free amount of a genuine redundancy payment and is not required to be included in your income tax return for the 2010-11 income year.

After deducting the tax-free amount of a genuine redundancy payment, the remaining amount of is considered to be an employment termination payment.

The employment termination payment will consist entirely of a taxable component which is included in your assessable income under subsection 82-10(2) of the ITAA 1997.

For the 2010-11 income year the ETP cap amount is $160,000.

As you are under preservation age you will be entitled to a tax offset under paragraph 82-10(3)(b) of the ITAA 1997 that ensures that the rate of income tax on the amount up to the ETP cap amount will not exceed 30% plus Medicare levy.