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Ruling

Subject: genuine redundancy

Question 1

Is any part of the proposed payment in lieu of notice to be received by you, considered to be a genuine redundancy payment in accordance with section 83-175 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

This ruling applies for the following periods

2012-13 income year

The scheme commences on:

1 July 2012

Relevant facts and circumstances

You are under 65 years of age.

You commenced employment with the Employer over 15 years ago.

In late 2012, the Employer advised that due to the operational needs of the company, your role was to be made redundant. You were provided details in relation to your separation package, which included the offer of several weeks' redundancy pay and more than a months' payment in lieu of notice.

At that meeting, you were also offered an alternative role with the Employer. You were given until the following day to either accept or reject the role offered.

You rejected the role offered, but accepted the redundancy component offered.

Your Employer then advised that in order to receive the initial redundancy pay offered you would have to sign a settlement deed. You declined to sign the settlement deed and you also rejected the alternative role offered. The Employer then advised that your position was redundant effective immediately and you would be paid a reduced redundancy entitlement.

In late 2012, the Employer advised that your position had been made redundant, effective from that date. Subsequently, the Employer paid you (amongst other entitlements) a redundancy amount and an amount representing pay in lieu of notice and car allowance.

You also received payments for unused annual leave and long service leave.

You are currently involved in negotiations with the Employer to receive an additional payment in lieu of notice, executed under a deed of settlement.

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 83-170.

Income Tax Assessment Act 1997 section 83-175.

Reasons for decision

Summary

The additional payment in lieu of notice you anticipate receiving is a genuine redundancy payment.

Your total tax-free part of a genuine redundancy payment has been calculated in accordance with the formula in subsection 83-170(3) of the ITAA 1997.

The remaining amount in excess of the tax-free part is an employment termination payment and treated as assessable income.

Detailed reasoning

Employment termination payment

A payment is an employment termination payment if it satisfies all the requirements in section 82-130 of the Income Tax Assessment Act 1997 (ITAA 1997) and is not specifically excluded under section 82-135.

Subsection 82-130(1) states:

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 employer termination payments. These include (among others):

· superannuation benefits

· unused annual leave or long service leave payments

· foreign termination payments covered under Subdivision 83-D of the ITAA 1997 and

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

Based on the information provided, you employment was terminated when you were made redundant in late 2012.

Severance package (Redundancy payment)

Your 'severance package' was paid to you in late 2012. This package consisted of an amount representing severance pay and a further amount representing payment in lieu of notice, including car allowance.

Taxation Ruling TR 2003/13 Income tax: eligible termination payments (ETP): payments made in consequence of the termination of any employment: meaning of the phrase 'in consequence of' states that:

5. ...the Commissioner considers that 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.

6. The phrase requires a causal connection between the termination and the payment, although the termination need not be the dominant cause of the payment.

This total amount was made to you in consequence of the termination of your employment. There is a clear causal connection between the termination of your employment and the payment of these amounts. The payment followed as an effect or result of the termination of your employment. In other words, but for the termination of employment these payments would not have been made to you. Had you voluntarily resigned, you would not have been entitled to the severance payment or the payment in lieu of notice. You would have been required to provide the mandatory notice period and work that period on voluntary resignation.

It is noted that the payment in lieu of notice, includes an amount representing payment of several weeks' car allowance. The car allowance payment is not a payment specifically excluded under section 82-135 of the ITAA 1997. It is accepted that the car allowance payment would not be expected on voluntary termination and therefore will be included as part of the payment in lieu of notice. The car allowance represents the amount that would have been paid to you during the notice period.

Therefore, the 'severance package' was made in consequence of the termination of employment as defined in subparagraph 82-130(1)(a)(i) of the ITAA 1997.

Further, this 'severance package' was paid to you:

· within 12 months of your termination (thereby satisfying paragraph 82-130(1)(b)) of the ITAA 1997, and

· apart from the possible exception of paragraph 82-135(e) of the ITAA 1997, which is discussed below, it is not a payment excluded from being an employment termination payment under section 82-135.

Genuine redundancy payment

Under subsection 83-175(1) of the ITAA 1997 a genuine redundancy payment is one 'received by an employee who is dismissed from employment because the employee's position is genuinely redundant'.

In Taxation Ruling 2009/2 Income tax: genuine redundancy payments (TR 2009/2), the Commissioner has outlined the requirements to be satisfied before any payment made to a person whose employment is terminated qualifies for treatment as a genuine redundancy payment under section 83-175 of the ITAA 1997.

There are four necessary components within this termination requirement:

1. The payment being tested must be received in consequence of an employee's termination.

2. That termination must involve the employee being dismissed from employment.

3. That dismissal must be caused by the redundancy of the employee's position.

4. The redundancy payment must be made genuinely because of a redundancy.

Component 1: Payment being tested must be received in consequence of an employee's termination.

It has been established previously that both the severance payment and the payment in lieu of notice have been received in consequence of the termination of your employment in late 2012. Therefore the requirement of the first component of subsection 83-175(1) of the ITAA 1997 has been satisfied.

Component 2: That termination must involve the employee being dismissed from employment.

On the basis of the facts as presented in your case, it is evident you were dismissed from your employment at the initiative of your employer. This was confirmed in a letter from the Employer, stating that your employment had been terminated effective from that day.

Therefore, the second component of subsection 83-175(1) of the ITAA 1997 has been satisfied.

Component 3: That dismissal must be caused by the redundancy of the employee's position.

Based on the information provided it is evident that your employer made the ultimate decision that your position was redundant and that was the prevailing reason you were dismissed from your employment.

The Employer has confirmed this in their letter to you which provides that your dismissal was in fact caused by the redundancy of your position with their firm. The third requirement of a genuine redundancy has therefore been satisfied.

Component 4: The redundancy payment must be made genuinely because of a redundancy.

The need for an employee's position to be genuinely redundant establishes that contrived cases of redundancy will not meet the conditions in section 83-175 of the ITAA 1997.

In your case, there is nothing to indicate that the redundancy is not genuine. Therefore, the fourth component of a genuine redundancy has been satisfied.

Further conditions for a genuine redundancy payment

Before a payment that meets the basic redundancy requirement in subsection 83-175(1) of the ITAA 1997 qualifies as a genuine redundancy payment, all other conditions in subsections 83-175(2) and (3) must be met. These conditions include:

· The payment must be made before a person turns 65 or an earlier mandatory age;

· The termination was not at the end of a fixed period of employment;

· the actual amount that was paid is not greater than the amount that could reasonably be expected to be paid had the parties been dealing at arm's length;

· the amount that was paid was in excess of what a person would have been entitled to receive if they had voluntarily resigned;

· there was no arrangement for re-employment with the employer or a related party after the termination date; and

· the payment was not in lieu of superannuation benefits.

On the basis of the information provided, it is considered that all the conditions of subsections 83-175(2) and 83-175(3) of the ITAA 1997 are also satisfied.

Consequently, it can be concluded that the total 'severance package' payment is a genuine redundancy payment as defined in section 83-175 of the ITAA 1997.

A letter from your lawyers confirms (on your instructions), that you are seeking an additional amount, representing the difference between the payment in lieu of notice received to date and reasonable notice discounted to six months pay.

This anticipated additional payment in lieu of notice, to be executed by way of deed of settlement, would clearly not have been payable on voluntary termination.

Given the first payment in lieu of notice has satisfied the conditions for a genuine redundancy payment, and this further payment in lieu of notice is derived under the exact same circumstances as the first one, and is simply 'in addition to' the first payment, then it logically follows that this anticipated payment in lieu of notice will also qualify as a genuine redundancy payment.

Section 83-170 then applies to treat so much of the relevant payment (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. Any amount in excess of the tax-free amount is taxed as an employment termination payment.

Taxation of 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.

The formula for working out the tax-free amount is:

Base amount + (Service amount × Years of service)

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

For the 2012-13 income year:

Base amount means $8,806; and

Service amount means $4,404.

In your case, the tax-free part of a genuine redundancy payment you can receive in the 2012-13 income year has been calculated in accordance with subsection 83-170(3) of the ITAA 1997. This tax-free amount is not assessable income and is not exempt income in accordance with subsection-83-170(2) of the ITAA 1997.

You have thus far received a severance payment and a payment in lieu of notice. You also anticipate receiving an additional payment in lieu of notice in the subsequent income year.

As per paragraphs 73-78 of TR 2009/2, the Commissioner considers that the genuine redundancy provisions operate to unify multiple payments due to redundancy when working out the tax treatment of the payments. The tax-free amount can only be claimed once for any given termination of employment because of redundancy.

Accordingly, in your case, your severance package payment plus the anticipated additional payment in lieu of notice, comprises your total redundancy payment.

Therefore, the amount remaining after deducting the tax-free part of the genuine redundancy payment we have calculated from your total redundancy payment, is an employment termination payment (ETP), to be included in your income tax return for the subsequent income year.

The tax payable on the ETP depends on your age when your employment is terminated. If you have reached preservation age in the income year your employment is terminated, a maximum rate of 16.5% (including the Medicare levy) applies on payments up to the ETP cap amount. If you have not reached preservation age in the income year, a maximum rate of 31.5% (including the Medicare levy) applies to the ETP up to this cap. This is referred to as receiving concessional tax treatment. ETP amounts greater than this cap, regardless of your age are taxed at the highest marginal tax rate of 46.5% (including the Medicare levy).

From 1 July 2012, employment termination payments may also be subject to the 'whole of income cap'. This cap is $180,000 less your other taxable income for the year.

Any part of an ETP you receive that exceeds the whole of income cap will be taxed at 46.5%, regardless of whether or not it exceeds the ETP cap amount.

Conclusion:

Both the 'severance package' payment and the additional payment in lieu of notice qualify as genuine redundancy payments.

The tax-free part of your total redundancy payment in the subsequent income year has been calculated in accordance with the formula in subsection 83-170(3) of the ITAA 1997. The remaining amount in excess of the tax-free part is an employment termination payment and treated as assessable income.