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Ruling

Subject: Genuine redundancy

Question

Are the amounts your client received for unused annual leave and unused long service leave eligible for tax offsets in accordance with sections 83-15 and 83-80 of the Income Tax Assessment Act 1997 (ITAA 1997) respectively?

Advice/Answers

No.

This ruling applies for the following period

For the year ended 30 June 2011

The scheme commenced on

1 July 2010

Relevant facts

Your client is under 55 years of age.

Your client was employed at an Australian company (the Australian company) which is part of a group of companies (the Company).

Your client has worked at the Company for more than 20 years globally.

For the last few years, your client was appointed in a senior position in the Company for Australia and a foreign country (country A). This was his last appointment in the Australian company.

Your client's role involved facilitating various processes across the Company business units, specifically within the Australian and country A regions.

Due to internal changes at the Australian company, your client was required to travel extensively from Australia to another foreign country (country B). As a result a significant portion of his personal time with his family had been reduced.

Your client initiated a business case to the Australian company to have his role relocated permanently to country B in order to undertake his duties in a more effective manner. However, this proposal was not accepted by the Australian company.

Your client resigned from the Australian company and ceased work in the 2010-11 financial year to take up a position for an overseas based company.

Your client asserts that the changed circumstances to his appointment in the senior position was as a result of a constructive dismissal as he had no choice but to resign from his role at the Australian company.

Your client advised his replacement within the Company was an Australian company employee and was eventually relocated to country B in order to undertake the role effectively.

On your client's PAYG summary, accrued annual leave and long service leave were reported as part of his gross salary and taxed accordingly.

No long service leave and annual leave had been accrued prior to 18 August 1993. Leave entitlements were only accrued after that date when your client returned to Australia.

Since the resignation date your client no longer has any involvement with the Australian company. There is no future agreement between your client and the Australian company in any way.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 82-130

Income Tax Assessment Act 1997 section 82-135

Income Tax Assessment Act 1997 section 83-10

Income Tax Assessment Act 1997 section 83-15

Income Tax Assessment Act 1997 subsection 83-10(2)

Income Tax Assessment Act 1997 subsection 83-10(3)

Income Tax Assessment Act 1997 section 83-75

Income Tax Assessment Act 1997 section 83-80

Income Tax Assessment Act 1997 section 83-85

Income Tax Assessment Act 1997 section 83-170

Income Tax Assessment Act 1997 section 83-175

Reasons for decision

Question

Are the amounts your client received for unused annual leave and unused long service leave eligible for tax offsets in accordance with sections 83-15 and 83-80 of the Income Tax Assessment Act 1997 (ITAA 1997) respectively?

Summary of decision

As the your client's position was not terminated due to genuine redundancy, the payments for unused annual leave and long service leave are not eligible for a tax offset and have been taxed correctly.

Detailed reasoning

According to section 83-15 of the ITAA 1997, you are entitled to a tax offset to ensure that the rate of tax on an unused annual leave payment does not exceed 30% where:

a) The payment was made in connection with a payment that includes, or consists of, any of the following:

(i) A genuine redundancy payment;

(ii) An early retirement scheme payment

(iii) The invalidity segment of an employment termination payment or superannuation benefit; or

b) The payment was made in respect of employment before 18 August 1993.

In relation to unused long service leave section 83-85 of the ITAA 1997 states that you are entitled to a tax offset to ensure that the rate of tax on an unused long service leave payment does not exceed 30% if:

a) The payment was made in connection with a payment that includes, or consists of, any of the following:

(i) A genuine redundancy payment;

(ii) An early retirement scheme payment

(iii) The invalidity segment of an employment termination payment or superannuation benefit; or

b) The payment was made in respect of employment before 18 August 1993.

Therefore, for the above payments to your client to be eligible for a tax offset your client had to be dismissed from his position because the role/position had been made redundant by his employer.

Taxation Ruling 2009/2 (TR 2009/2) outlines the Commissioner's view of the meanings of 'dismissal' and 'redundancy'.

Paragraphs 25 of TR 2009/2 provide the following in relation to the meaning of redundancy:

25. An employee's position is redundant when an employer determines that it is superfluous to the employer's needs and the employer does not want the position to be occupied by anyone. Accordingly, it is fundamentally the employer's decision that a position is redundant. On occasion the decision may be unavoidable due to the circumstances surrounding the employer's operations.

In your client's case, the facts provided show that the Australian company has not abolished his position and he has been replaced after his resignation i.e. the Australian company has not abolished the role and still require the duties and functions of that role to be undertaken by someone.

In view of this your client did not finish with the employer because his position was made redundant therefore there is no need to consider whether or not he was constructively dismissed.

Consequently, your client is not entitled to a tax offset in respect of the unused annual leave payment under section 83-15 of the ITAA 1997 or in respect of the unused long service leave payment under section 83-15 of the ITAA 1997. Instead, both the unused annual leave and long service leave payments are subject to tax at your client's marginal rate of tax.