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Ruling

Subject

Genuine redundancy payment

Issue

Question

Is any part of the total payment you received, a tax-free part of a genuine redundancy payment (GRP) in accordance with section 83-170 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Advice/Answer

Yes.

This ruling applies for the following period

For the year ended 30 June 2013

The scheme commenced on

1 July 2012

Relevant facts and circumstances

Several years ago, you commenced employment with a company (Company 1).

A few years later, you commenced employment with another company (Company 2) and under a sale agreement between Company 1 and Company 2, your entitlements and service were transferred to Company 2.

In the 2011-12 income year, your position with Company 2 was abolished when an Insolvency Practitioner (the IP) was appointed to manage the affairs of Company 2 (In Liquidation).

In the 2012-13 income year, a letter from the Department of Education, Employment and Workplace Relations (DEEWR) advised that pursuant to the General Employee Entitlement and Redundancy Scheme (GEERS) you are eligible to a specified payment (before tax).

This amount was forwarded by DEEWR to the IP to be made to you.

Your entitlements paid by GEERS included annual leave, annual leave loading, payment in lieu of notice and redundancy.

Tax was withheld on these payments, which were made within 12 months of the termination of your employment.

The IP sent an email to you, referring to a fact sheet from the Australian Taxation Office titled 'Pay as you go (PAYG) withholding for external administrators'. They advised that in accordance with Item 5 the amount of tax to be deducted from your pay in lieu of notice and redundancy entitlements is 31.5%, therefore the payment made to you is correct.

The PAYG fact sheet at Item 5 of Table 1 refers to 'Part of a genuine redundancy payment or early retirement scheme payment that exceeds the tax free limit'.

The number of whole years of service with Company 2, upon which the payments were based, included the period of prior service with Company 1.

There was no date prior to your 65th birthday when you were required to cease employment.

There was no arrangement between you and the employer, or the employer and another person, to employ you after the date of termination.

No part of the payment was made to you in lieu of superannuation benefits.

You are under the age of 65 years.

Relevant legislative provisions

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(e).

Income Tax Assessment Act 1997 Section 83-10.

Income Tax Assessment Act 1997 Section 83-15.

Income Tax Assessment Act 1997 Section 83-170.

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 payments made to you in lieu of notice and redundancy, is considered to be a genuine redundancy payment (GRP). As this total is below the tax-free amount of a GRP, it is not assessable income and is not exempt income. Therefore, no part of these payments is required to be included in your income tax return for the 2012-13 income year.

The payments received by you for unused annual leave and leave loading, are to be included in your assessable income for the 2012-13 income year, but will be taxed concessionally.

Detailed reasoning

Genuine redundancy payments

A payment made to an employee is a genuine redundancy payment (GRP) if it satisfies all criteria set out in section 83-175 of the 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 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);

(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.

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)).

As noted in the facts, your employment was terminated in the 2011-12 income year, due to Company 2 going into liquidation and the IP being appointed to manage the affairs of your former employer. As a result, your position was made redundant and a payment in lieu of notice and a redundancy amount, was advanced by the DEEWR pursuant to the GEERS in the 2012-13 income year.

The payment received by you is paid in circumstances of genuine redundancy and is in excess of the amount that could reasonably be expected to be received by a worker in consequence of voluntary termination.

Therefore, it is accepted that all the conditions in subsection 83-175(1) of the ITAA 1997 have been satisfied.

You were under the age of 65 years when your employment was terminated. There is no date prior to you attaining age 65 where you would have had to retire from your employment.

The employer and you were dealing with each other at arm's length and there was no arrangement between you and the employer, or the employer and another person, to employ you after the date of termination.

Furthermore, there is no evidence to indicate that any part of the payment is in lieu of superannuation benefits to which you may have become entitled at the time of the payment or at a later time.

Therefore, it is accepted that all the conditions in subsection 83-175(2) and subsection 83-175(3) of the ITAA 1997 have been satisfied.

As noted previously, subsection 83-175(4) of the ITAA 1997 provides that a payment is not a GRP if it is a payment mentioned in section 82-135 (apart from paragraph 82-135(e)).

Section 82-135 of the ITAA 1997 includes payments such as pensions, foreign termination payments, unused annual leave and unused long service leave.

Payments for unused annual leave are expressly mentioned in paragraphs 82-135(c) of the ITAA 1997. The payments for accrued annual leave and annual leave loading were made to you in addition to the redundancy payment and payment in lieu of notice.

Therefore, your GRP does not include the unused annual leave payments.

In respect of the payment in lieu of notice and the redundancy payment, the requirement in subsection 83-175(4) of the ITAA 1997 has been satisfied.

In light of the above, as all the conditions have been satisfied in accordance with section 83-175 of the ITAA 1997, the payment made in lieu of notice and redundancy is considered to be a GRP.

Tax-free treatment of this genuine redundancy payment

The Commissioner has issued Taxation Ruling TR 2009/2, titled Income tax: genuine redundancy payments. It provides useful guidance on the factors to be considered in the interpretation of section 83-175 of the ITAA 1997 and the tax free amount under section 83-170.

Paragraphs 69 and 70 of TR 2009/2 state:

69. The extent to which the payment is tax-free will depend on the amount of the payment and the total number of whole years of employment to which the payment relates. There is no requirement for the years of service to be continuous when applying the threshold in section 83-170.

70. If earlier years of service with a previous employer are carried over and acknowledged on commencement with a new employer that later makes a redundancy payment to an employee, those years of service can be included in working out the tax-free amount of the genuine redundancy payment.

In this case, you commenced employment several years ago with Company 1 and your service entitlements were transferred to Company 2 (your former employer) under the sale agreement. Your position with your former employer was abolished in the 2011-12 income year.

Pursuant to GEERS you received an amount for payment in lieu of notice and genuine redundancy with an amount of tax withheld. The payment relates to your period of employment which included a period of prior service.

Section 83-170 of the ITAA 1997 applies to treat so much of the GRP (that does not exceed the amount worked out under a specified formula) as tax-free. That is, the tax-free part is not assessable income and is not exempt income.

Under subsection 83-170(3) of the ITAA 1997, the formula for working out the tax free amount is:

Base amount + (Service amount × Years of service)

You were employed several years ago and made redundant in the 2011-12 income year. Consequently the 'years of service' to which the GRP relates has been determined.

As the payment was made to you during the 2012-2013 income year, the base amount will be $8,806 and the service amount will be $4,404. Therefore the tax-free amount calculated in accordance with subsection 83-175(3) of the ITAA 1997, is the tax free part of a genuine redundancy payment you can receive in the 2012-13 income year.

As the payment made to you in lieu of notice and redundancy is below the tax-free amount of a GRP the entire amount is not assessable income and is not exempt income under subsection 83-170(2) of the ITAA 1997.

Therefore your income tax return for the 2012-13 income year will not include any part of the total GRP paid to you in lieu of notice and redundancy.

Unused annual leave and annual leave loading payments

On termination of employment you received a payment of unused annual leave and leave loading. These payments are to be included in your assessable income for the 2012-13 income year in accordance with subdivision 83-A of the ITAA 1997.

As these payments were made in connection with a genuine redundancy you are entitled to a tax offset to ensure that the rate of tax for unused leave and leave loading does not exceed 30% plus Medicare Levy.

Conclusion

The payment made to you in lieu of notice and redundancy is considered to be GRP.

As the payment is below your tax-free amount of a GRP it is not assessable income and is not exempt income. Therefore, no part of this payment is to be included in your income tax return for the 2012-13 income year.

The payments of unused annual leave and leave loading received by you are to be included in your assessable income for the 2012-13 income year and will be subject to concessional tax treatment.