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Ruling

Subject: Payment in lieu of notice

Question 1

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)?

Answer

Yes.

Question 2

Is the payment you received in lieu of notice subject to taxation?

Answer

No.

This ruling applies for the following periods:

Year ended 30 June 2011

Year ending 30 June 2012

The scheme commences on:

1 July 2010

Relevant facts and circumstances

You are under 65 years of age

You commenced employment with a company in the 2009-10 financial year.

Your employment contract did not specify your entitlement to any payments to be made to you on termination of employment.

During the 2009-10 financial year you were advised your contract would be terminated as the employer was going into receivership and liquidation.

You were owed wages from the employer and were advised to lodge a General Employee Entitlements & Redundancy Scheme (GEERS) claim.

The appointed receiver and manager of your employer issued you a cheque in respect of the first and final GEERS payment. The amount represented unpaid wages, annual leave and a payment in lieu of notice.

In the 2011-12 financial year you received another cheque relating to unused annual leave.

There was no agreement between you and the employer or between the employer and any other person or entity for future employment existing at the time your employment ceased.

Reasons for decision

Summary

The payment for wages owing is an amount you had earned and so was not received as a consequence of the termination of your 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 it 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 in order to claim a credit for the tax withheld. As you do not have a PAYG payment summary - individual non-business, you will need to make a statutory declaration.

A copy of the form 'Statutory declaration (for PAYG payment summary forms)' (NAT 4135) can be found on the 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 company in the 2009-10 financial year. The employer subsequently went into receivership and liquidation and your employment ceased.

As noted in the facts, you were advised to make an application under the General Employee Entitlements & Redundancy Scheme (GEERS) to obtain your entitlements.

The appointed receiver and manger of the employer issued a cheque in respect of the GEERS payment.

A further payment was made to you in the 2011-12 financial year.

These amounts comprised wages, annual leave and payment in lieu of notice.

On the facts provided, 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. 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.

It is considered that the payment for wages owing was made for the services you had previously provided your employer. As a result, while paid at the time your employment was terminated, it can not be said that it was paid as a consequence of the termination of their employment. The payment for wages is not a genuine redundancy payment and is ordinary assessable income.

It is considered, however, that the other payments were paid in consequence of the termination of your employment, which occurred as a result of a genuine redundancy.

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):

o superannuation benefits;

o the payment of a pension or annuity; and

o 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.

Tax-free amount

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 your case, you were not entitled to a payment on ordinary termination of employment.

In view of the above, it is considered that the payment in lieu of notice is 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 x Years of service)

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 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 in order to claim a credit for the tax withheld.

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.

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

In this case, the payments you have received are in relation to your employment with the company. The payments should be included in your assessable income in the financial year they were received.