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Ruling

Subject: Genuine redundancy

Questions

1. Does the 12 month rule apply in respect of your termination payment?

2. Is any part of the payment a genuine redundancy payment?

Answers

1. No.

2. Yes.

This ruling applies for the following period:

Year ended 30 June 2012

The scheme commences on:

1 July 2011

Relevant facts and circumstances

You are under 50 years of age.

You commenced employment with an entity (the Employer) during the relevant income year.

The Employer subsequently went into liquidation and the Liquidator was appointed.

As a result of the liquidation, your employment was terminated.

The Liquidator had previously made a claim for your employee entitlements however this was dismissed.

You subsequently lodged an appeal to review the decision regarding your eligibility for assistance in relation to your employment with the Employer.

Your appeal was approved during the subsequent income year and two payments were made to you.

The following is a breakdown of your entitlements, as advised by the Liquidator:

	Payment	Tax Deducted	Net Payment
Annual leave	X
Payment in lieu of notice	X
Redundancy	X
Long service leave	X
Total	X	X	X

The Liquidator has withheld the amount of X from the payments as tax.

The Liquidator issued three payment summaries during the subsequent income year:

PAYG payment summary - Individual non-business

Gross payments label A: X

Total tax withheld: X

PAYG payment summary - Employment termination payment

Taxable component: X

Total tax withheld: X

PAYG payment summary - Employment termination payment

Taxable component: X

Total tax withheld: X

On the payment summaries, the Liquidator advised that as the payments were made more than 12 months after the date of termination, there was no applicable redundancy tax free threshold.

You state that had you voluntarily resigned, you would have only been entitled to the payment of accrued long service leave and annual leave.

You were dismissed before you reached 65 years of age.

You state that none of the payments received were for payment in lieu of superannuation.

At the time of dismissal there was no arrangement between you and the Employer or between the Employer and another person, to employ you after the dismissal.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 82-130.

Income Tax Assessment Act 1997 Subsection 82-130(4).

Income Tax Assessment Act 1997 Section 82-135.

Income Tax Assessment Act 1997 Paragraph 82-135(c).

Income Tax Assessment Act 1997 Paragraph 82-135(d).

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

Income Tax Assessment Act 1997 Section 83-10.

Income Tax Assessment Act 1997 Section 83-15.

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 Subsection 83-170(2).

Income Tax Assessment Act 1997 Subsection 83-170(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 Subsection 83-175(3).

Income Tax Assessment Act 1997 Subsection 83-175(4).

Reasons for decision

Summary

The 12 month rule that applies to employment termination payment does not apply to the tax-free part of a genuine redundancy payment.

The sum of the payment in lieu of notice and the redundancy payment is a genuine redundancy payment. As this amount is less than your tax-free amount, in respect of the genuine redundancy of this employment, it is not assessable income and is not exempt income.

Detailed reasoning

Employment termination payment

Section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997) states that:

employment termination payment has the meaning given by section 82-130.

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

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

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 payment; and

· reasonable capital payments for personal injury.

The gross amounts you received from the Liquidator were made up of unused annual leave, unused long service leave, payment in lieu of notice and redundancy. As these are excluded from being considered employment termination payments, the 12 month rule does not apply.

Genuine redundancy

A payment made to an employee is a genuine redundancy payment (GRP) if it satisfies all the conditions 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 and 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 arms length the payment does not exceed the amount that could reasonably be expected to be made if the dismissal were at arms 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.

Payments not covered

(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)).

Subsection 82-135 includes (among others):

· superannuation benefits;

· the payment of a pension or annuity; and

· unused annual leave (paragraph 82-135(c)) or long service leave payments (paragraph 82-135(d)).

As such, the payments you received for unused annual leave) and unused long service leave are not genuine redundancy payments pursuant to subsection 82-135(4) of the ITAA 1997. The taxation treatment of these payments will be discussed in due course.

The redundancy payment and the payment in lieu of notice will be addressed below.

In a letter, the Liquidator advised you were entitled to a payment in lieu of notice for the amount of X. You were later advised in another letter that you were also entitled to a redundancy payment for the amount of X gross.

When the Company ceased trading and was placed into liquidation your position within the firm effectively no longer existed and your employment was terminated, As such, we can deduce that you were dismissed from the Company because your position was made genuinely redundant. Further, you have stated that had you voluntarily resigned, you would not have been entitled to the redundancy payment or the payment in lieu of notice. As such, subsection 83-175(1) of the ITAA 1997 has been satisfied.

The three conditions pertaining to subsection 83-175(2) have been satisfied as:

· You were dismissed before you reached 65 years of age;

· The dismissal was made at arm's length; and

· At the time of dismissal, there was no arrangement between yourself 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, requires 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. As none of the payments received were for payment in lieu of superannuation, this requirement is satisfied.

Lastly, the redundancy payment and payment in lieu of notice are not excluded from the definition of a GRP. As such, subsection 83-175(4) of the ITAA 1997 has been satisfied.

As all the conditions under section 83-175 of the ITAA 1997 have been satisfied, it is accepted that the total of the redundancy payment and the payment in lieu of notice is a genuine redundancy payment.

As stated previously, the payments for unused annual leave and long service leave are neither employment termination payments nor genuine redundancy payments. The taxation treatment of these will be discussed below.

Tax-free amount

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)

For the subsequent income year:

· Base amount means X;

· Service amount means X; and

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

The 'years of service' to which the genuine redundancy payment relates is Y whole years of service.

Accordingly, the tax-free part of a genuine redundancy payment you can receive in the 2011-12 income year under subsection 83-175(3) of the ITAA 1997 is:

X + (X × Y) = Z

As the payment of X 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 amount of X is not required to be included in your income tax return for the 2011-12 income year.

Taxation treatment of unused annual leave and unused long service payments

Unused annual leave would ordinarily be included in assessable income under section 83-10 of the ITAA 1997 and subject to marginal rates of tax. However, as this payment was made in connection with a genuine redundancy payment, section 83-15 allows a tax offset to ensure that the rate of tax on this amount does not exceed 30%.

Similarly, unused long service leave would ordinarily be included in assessable income under section 83-80 of the ITAA 1997. However, as this payment was made in connection to a genuine redundancy payment, section 83-85 allows a tax offset to ensure that the rate of tax on this amount does not exceed 30%.

We recommend that you lodge a paper based income tax return for the 2011-12 income year and enclose a copy of this ruling together with it.