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Ruling

Subject: Genuine Redundancy

Question 1

Is any part of the payment received on termination of employment the tax-free part of a genuine redundancy payment?

Answer

No.

Question 2

Are your wages and overtime payments assessable as ordinary income?

Answer

Yes.

Question 3

Are your wages and overtime payments taxed at the marginal tax rates?

Answer

Yes.

This ruling applies for the following periods

Year ending 30 June 2013

The scheme commences on

1 July 2012

Relevant facts and circumstances

You were employed as a daily hire employee by a company (the Employer) under a specific industry award (the Award).

During the 2012-13 income year, you were terminated under the Award due to a lack of work.

All trade workers at the Employer are paid under the Award on a 'Daily Hire' basis.

The Award defines redundancy as any situation where an employee ceases employment, other than for misconduct.

A payslip from the Employer for a particular pay period during the 2012-13 income year shows an Award Redundancy payment was made to you during the period.

You claim that the Employer has not yet provided you with a PAYG payment summary for the employment termination payment.

You are under 60 years of age.

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 of decision

The payment made to you as an Award Redundancy does not qualify as a genuine redundancy payment as not all conditions under section 83-175 of the ITAA 1997 have been satisfied. Consequently, the entire payment made as an Award Redundancy will be assessable as an employment termination payment (ETP) which is to be declared in your income tax return for the 2012-13 income year.

As you are under your preservation age of 60 years, the ETP is taxed at a rate which will not exceed 31.5%, including the Medicare levy.

Your wages and overtime payments are assessable and taxed at marginal tax rates.

Detailed reasoning

Genuine redundancy payment

A payment made to an employee is a GRP if it satisfies all criteria 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 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 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)). [Bold emphasis added]

Section 82-135 of the ITAA 1997 lists payments that are not employment termination payments. Paragraph 82-135(e) provides that the tax-free part of a GPR worked out under section 83-170 is not an ETP.

In Taxation Ruling 2009/2 Income tax: genuine redundancy payments, 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 the proposed payment will be received in consequence of the termination of your employment with the Employer during the 2012-13 income year. Therefore the requirement of the first component of subsection 83-175(1) of the ITAA 1997 will be satisfied.

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

In this case, you were dismissed from your employment as a daily hire at the instigation of your employer due to a shortage of work. This was confirmed in a letter from the Employer during the 2012-13 income year.

The above letter also provides evidence that you were terminated and given notice as per a specific clause of the Award.

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

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

The information provided shows that the Employer made your position redundant due to a shortage of work. Since the redundancy of your position was the prevailing reason for the dismissal, the third requirement of a genuine redundancy is 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. Furthermore, the fact that an employer and employee have an understanding that a payment on termination is caused by redundancy or that the employer treats the payment as a redundancy payment for tax purposes does not of itself establish genuine redundancy.

In your case, your employer indicated on your payslip that a payment was made to you as an Award redundancy. There is nothing else to indicate that the redundancy is not genuine.

Please note that the fact that your employer treated this payment as a redundancy payment for tax purposes does not necessarily establish that the payment resulted from genuine redundancy.

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, with one exception.

Amount paid was not in excess of amount on voluntarily resignation

As outlined above, section 83-175(1) of the ITAA 1997 states, in part, that:

A genuine redundancy payment is so much of a payment... as exceeds the amount that could reasonably be expected to be received... in consequence of the voluntary termination of his or her employment...

The Award defines redundancy as any situation where an employee ceases employment, other than for misconduct.

Consequently, under the Award, 'redundancy' refers to any termination of employment (other than for misconduct) including resignation by an employee.

In practical terms, this means that an employee under this award receives the same payment whether they resign or are made redundant.

As a result, you would have received the same redundancy payment that you received during the 2012-13 income year if you had resigned voluntarily.

Your payment is not a genuine redundancy payment

Therefore, as you have not satisfied all the conditions for genuine redundancy under section 83-175 of the ITAA 1997, the payment made to you as an Award redundancy will be assessable as an ETP during the 2012-13 income year.

As you are under your preservation age of 60 years, an ETP is taxed at a rate which will not exceed 31.5%, including the Medicare levy.

Ordinary income

Subsection 6-5(2) of the ITAA 1997 provides that the assessable income of an Australian resident includes the ordinary income they derived directly or indirectly from all sources, whether in or out of Australia, during the income year.

Salary and wages are regarded as ordinary assessable income and are assessable under subsection 6-5(2) of the ITAA 1997.

Your payments for hours worked and your overtime payments are regarded as ordinary income and are included in your assessable income under subsection 6-5(2) of the ITAA 1997.

Such income is taxed at the relevant marginal tax rate.

Pay as you go (PAYG) withholding

The Australian Taxation Office produces a weekly tax table and a calculator to help work out the correct amount of tax employers need to withhold from salary and wage payments made to employees.

There are special rules for employment termination payments, however these do not apply to payments for ordinary hours worked or overtime payments. There are no special rates that apply to ordinary salary and wages payments. The amount (or rate) of PAYG withheld will depend on the amount of wages paid.

The amount to be withheld for a weekly wage of $1,095 with the tax free threshold is $210.

Where the amount of PAYG withheld during a year is more than the tax payable, then a credit for any overpaid tax will be paid after the relevant tax return is lodged.