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Ruling

Subject: Genuine redundancy

Question 1:

Does the redundancy payment include the tax-free part of a genuine redundancy payment?

Answer:

No.

Question 2:

How will the redundancy payment be taxed?

Answer:

A portion of your redundancy payment (excluding unused annual and long service leave components) will be treated as an employment termination payment taxed at a maximum rate of 15% plus Medicare levy.

Question 3:

How will the unused annual leave be taxed?

Answer:

The payment will be included in your assessable income taxed at the applicable marginal tax rate plus Medicare levy. No tax offset is available as the unused annual leave component has been accrued after the 19 August 1993 period.

Question 4:

How will the unused long service leave be taxed?

Answer:

5% of the pre - 16 August 1978 component and 100% of the post - 17 August 1993 component of your unused long service leave payment will be included as assessable income taxed at marginal tax rate plus Medicare levy. No tax offsets are available as components have been accrued during the pre - 18 August 1993 and post - 17 August 1993 periods.

This ruling applies for the following period

For the year ending 30 June 2013

The scheme commenced on

1 July 2012

Relevant facts

Your position will be made redundant.

You believe it is likely that you will receive a redundancy payment in the 2012-13 income year with the following components:

· salary

· special inducement payment

· Unused long service leave: comprising pre - 16 August 1978 and post - 17 August 1993

· Unused annual leave: comprising post - 18 August 1993

· You will reach age of 65 years when you receive the redundancy payment.

· The payment will be made to you within 12 months of the termination of your employment.

· You intend to be employed until 70 years of age.

Relevant legislative provisions

Age Discrimination Act 2004 Section 40

Income Tax Assessment Act 1997 Section 83-10

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

Income Tax Assessment Act 1997 Section 83-15

Income Tax Assessment Act 1997 Section 83-70

Income Tax Assessment Act 1997 Section 83-115

Income Tax Assessment Act 1997 Subsection 82-130(1)

Income Tax Assessment Act 1997 Section 82-135

Income Tax Assessment Act 1997 Section 83-175

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 Section 995-1

Reasons for decision

Issue

Summary of decision

The concession for genuine redundancy payments (GRP) will not apply to you as the conditions in subsection 83-175(2) of the Income Tax Assessment Act 1997 (ITAA 1997) have not been satisfied. However, a portion of the payment is considered to be an employment termination payment (ETP) as some of the requirements under subsection 82-130(1) of the ITAA 1997 have been satisfied.

The taxation treatment of the components of your payment is as follows:

Detailed reasoning

Genuine Redundancy Payments

Section 83-175 of the Income Tax Assessment Act 1997 (ITAA 1997) specifies the conditions to determine whether the concession for genuine redundancy payments (GRP) applies.

In accordance with subsection 83-175(2), to qualify as a GRP, the dismissal must meet the following conditions:

· the employee is dismissed before the earlier of the following:

· the day he or she turned 65;

· 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).

In your situation, you would have reached the age of 65 years on the date you are expecting to receive your redundancy payment. Under the legislation, the Commissioner does not have any discretion to extend the genuine redundancy payment concession to payments made after the age of 65. Accordingly, the payment does not meet the requirements of subsection 83-175 of the ITAA 1997 and the payment is not considered to be a GRP in this instance.

Employment termination payment

As outline in the above, the payment you are expecting to receive from your employer does not meet the requirements of a GRP. However, the payment may be an employment termination payment provided that a number of conditions are satisfied.

Section 995-1 of the ITAA 1997 states that:

Employment termination payment has the meaning given by section 82-130 of the ITAA 1997.

Subsection 82-130(1) of the ITAA 1997 states that:

A payment is an employment termination payment if:

· it is received by you;

· in consequence of the termination of your employment; or

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

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

· it is not a payment mentioned in section 82-135.

Section 82-135 of the ITAA 1997 provides that certain payments are not employment termination payments, including:

· payment for unused annual leave or unused long service leave

· the tax-free part of a genuine redundancy payment or an early retirement scheme

· reasonable capital payments for personal injury

Failure to satisfy any of the three conditions will result in the payment not being considered an employment termination payment. Furthermore, any termination payments received outside of the 12 months will be taxed as ordinary income at marginal tax rates, unless the taxpayer is covered by a determination exempting them from the 12 month rule.

Paid as a consequence of the termination of employment

It should be noted that the phrase 'in consequence of the termination of your employment' is not defined in the legislation.

In Taxation Ruling TR 2003/13 (TR 2003-13) the Commissioner has considered the meaning of the phrase 'in consequence of'. In paragraph 5 of TR 2003/13 the Commissioner states:

… a payment is made in respect of a taxpayer in consequence of the termination of the employment of the taxpayer if the payment 'follows as an effect or result of' the termination. In other words, but for the termination of employment, the payment would not have been made to the taxpayer.

In essence, if the payment follows as an effect of a result from the termination of employment, the payment will be made in consequence of the termination of employment for the purposes of subparagraph 82-130(1)(a)(i) of the ITAA 1997.

In the facts of this case, you have indicated that your position will be made redundant and a payment will be made to you in the 2012-13 income year. As such, it is considered that the payment will be made in consequence of the termination of your employment. Therefore, the first requirement under subparagraph 82-130(1)(a)(i) of the ITAA 1997 has been satisfied.

The payment is received no later than 12 months after termination

The second condition is stated under paragraph 82-130(1)(b) of the ITAA 1997. The settlement sum must be received within 12 months of the employee's termination of employment, unless the payment is covered by a determination exempting them from the 12 month rule.

The facts of this case show that the payment will be made to you within 12 months of the termination of your employment.

Therefore, the requirement of paragraph 82-130(1)(b) of the ITAA 1997 has been satisfied.

Exclusions under section 82-135 of the ITAA 1997

The final requirement under paragraph 82-130(1)(c) of the ITAA 1997 is that the payment is not a payment mentioned in section 82-135 of the ITAA 1997.

Certain payments made on termination of employment are excluded from being an employment termination payment under section 82-135 of the ITAA 1997. These payments include any accrued annual and long service leave, the tax-free parts of a genuine redundancy payment or an early retirement scheme payment as well as other types of payments which do not apply to your client's settlement payment.

In your case, the facts have indicated that the payment to be made to you include components of unused annual and long service leave, Accordingly, the portion of the payment excluding those components will be treated as an employment termination payment for the purpose of paragraph 82-130(1)(c) of the ITAA 1997.

Tax Treatment of the payment as a Life Benefit Termination Payment (LBTP):

An employment termination payment will comprise of the following components:

· Tax free component - this includes the pre-July 83 segment (if any) and/or the invalidity segment (if any); and

· Taxable component - the amount remaining after deducting the tax free component from the total payment.

The taxable component is subject to tax, depending on the person's age, as follows:

The preservation age is the age at which retirees can access their superannuation benefits. This will be 55 for persons born before 1 July 1960.

The $175,000 cap on concessionally taxed employment termination payments is indexed annually to average weekly ordinary times earnings.

The taxable components of employment termination payments received in an income year care counted towards this cap. Any tax-free amounts are not counted towards the cap.

Based of the facts provided, you will be over the preservation age on the last day of the income year in which the payment will be made. The facts have also indicated that there are no tax-free components of the employment termination payment. Therefore, as the payment will be under the $175,000 cap, the payment will be taxed at a maximum rate of 15% plus Medicare levy.

Unused Annual Leave

A payment made to an employee in consequence of the termination of employment for unused annual leave is not taxed as an employment termination payment. Instead, certain parts of the unused annual leave payment may be taxed concessionally under sections 83-10 and 83-15 of the ITAA 1997.

Subsection 83-10(1) of the ITAA 1997 covers payments made for accrued leave of the following types:

· Leave ordinarily known as annual leave, including recreational leave and annual holidays.

· Any other leave made available in circumstances similar to those in which the leave mentioned above is ordinarily made available.

In your case, you stated that unused annual leave have been accrued and will be paid upon the termination of your employment. As such, section 82-10 will apply to your situation.

Taxation of Unused Annual Leave

According to subsection 83-10(2) if the ITAA 1997, a lump sum payment for unused annual leave is included in a taxpayer's assessable income for the year that it is received and taxed at marginal rates.

Tax Offset for Unused Annual Leave

If applicable, a tax offset may apply to the amount of the unused annual leave payment limited to 30% where:

The payment was made before 18 August 1993 (or is in respect of unused annual leave that accrued in respect of service before 18 August 1993).

The payment was made in conjunction with a payment that consists of or include a genuine redundancy amount, an early retirement scheme amount or an invalidity segment of an employment termination payment or superannuation benefit.

You have stated that the unused annual leave was accrued in the periods after 19 August 1993. Consequently, no tax offset will apply in your case and the payment for your unused annual leave will be taxed at marginal tax rate plus Medicare levy.

Unused Long Service Leave

An unused long service leave payment to an employee in consequence of the termination is not taxed as an employment termination payment. Instead, certain parts of the payment are included as assessable income and concessionally taxed under sections 83-70 and 83-115 of the ITAA 1997.

A payment that an employee receives in consequence of the termination of their employment is an unused long service payment if:

· It is for long service leave that the employee has not used

· It is a bonus or other additional payment for unused long service leave

· It is for long service leave to which the employee was not entitled just before the termination but that would have been available to the employee at a later time if the termination had not occurred.

Taxation of Unused Long Service Leave

According to subsection 83-10(1) of the ITAA 1997, the following components of unused long service leave payment will be included in a taxpayer's assessable income:

· 5% of that part of the payment - to the extent that the payment is attributable to the pre - 16 August 1978 period

· 100% of that part of the payment - to the extent that the payment is attributable to the pre - 18 August 1993 period

· 100% of that part of the payment - to the extent that the payment is attributable to the post - 17 August 1993 period

The remainder of that part of an unused long service payment that is attributable to the pre - 16 August 1978 period is not assessable income and not exempt income.

Tax Offset for Unused Long Service Leave

A tax offset applies to ensure that the rate of tax on assessable income is limited to a maximum rate of 30%:

To the extent that it is attributable to the pre - 18 August 1993 period

To the extent that it is attributable to the post - 17 August 1993 period if the payment was made in connection with a payment that includes or consists of any of the following

A genuine redundancy payment or an early retirement scheme payment

An invalidity segment of an employment termination payment or a superannuation benefit

In the facts, you stated that the following components have been accrued for your long service leave comprises of pre - 16 August 1978 and post - 17 August 1993.

Applying subsection 83-10(1) of the ITAA 1997 to your circumstances, the taxable treatment of your unused long service leave are as follows:

Further issues for you to consider

Unlawful Age Discrimination

You have advised you will lodge a complaint to the Anti-Discriminatory Commission (ADC) if the outcome of the current ruling is negative.

Part 4 of the Age Discrimination Act 2004 (ADA 2004) addresses issues relating to unlawful age discrimination. Whilst the Act provides conditions which make it unlawful in certain circumstances to discriminate against people on the basis of their age, the Act also contains a number of permanent exemptions which allow for otherwise discriminatory actions to occur because they are seen as necessary or leading to a good outcome for certain social purposes.

Section 40 of the ADA 2004 states the following:

This Part (Part 4) does not make unlawful anything done by a person in direct compliance with a taxation law (within the meaning of the Income Tax Assessment Act 1997)

Accordingly, the ADA 2004 specifically exempts acts done in direct compliance with certain Federal and State/Territory Laws. The relevant legislation is your situation is the ITAA 1997 and it involves direct compliance with a federal law. As such, the ADA 2004 will not apply in your situation.