Edited version of your private ruling

Authorisation Number: 1012438544999

Ruling

Subject: Genuine Redundancy

Question 1

Is any part of the redundancy payment you have received the tax-free part of a genuine redundancy payment?

Answer

No.

Question 2

Is any part of the bonus payment you have received the tax-free part of a genuine redundancy payment?

Answer

No.

Question 3

Are you entitled to a tax offset on your unused annual leave payment because your position was made redundant?

Answer

No.

Question 4

Are you entitled to a tax offset on your long service leave payment because your position was made redundant?

Answer

No.

This ruling applies for the following periods:

Year ended 30 June 2013.

The scheme commences on:

1 July 2012.

Relevant facts and circumstances

You are over the age of xx.

You commenced employment prior to 1 July 1983.

You were given a Formal Offer for a Voluntary Separation after your position was made redundant due to a restructure.

You accepted the Formal Offer for a Voluntary Separation believing the payment received from this redundancy would be tax free.

Your employment was terminated in the 2012-13 income year.

Upon termination you were entitled to redundancy, bonus, annual leave and long service leave payments. These were made to you within 12 months of your termination of employment.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 82-10(2).

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

Income Tax Assessment Act 1997 Paragraph 82-130(1)(a)

Income Tax Assessment Act 1997 Paragraph 82-130(1)(b)

Income Tax Assessment Act 1997 Paragraph 82-130(1)(c)

Income Tax Assessment Act 1997 Section 82-135.

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

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

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

Income Tax Assessment Act 1997 Section 82-155.

Income Tax Assessment Act 1997 Section 83-80(1).

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 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 Subsection 83-175(3).

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

Reasons for decision

Summary

As you were over the age of xx at the time of the termination of your employment, the redundancy, bonus, annual leave and long service leave payments received are not the tax free part of a genuine redundancy payment

As you commenced employment prior to 1 July 1983, your redundancy and bonus payment will be the tax free component of the employment termination and non assessable non exempt income to the extent that is attributable to employment before 1 July 1983.

Your unused annual leave, annual leave loading and long service leave payments are excluded from being employment termination payments. They will be fully assessable income and included in your income tax return for the 2012-13 year. The payments are not eligible for tax offsets as you did not receive a genuine redundancy payment or receive payments in connection an early retirement scheme or the invalidity segment of an employment termination payment.

Detailed reasoning

Employment termination payment

A payment made to an employee is an employment termination payment if the payment satisfies all the requirements under 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) of the ITAA 1997 states that:

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 that termination (but see subsection (4)); and

(c) it is not a payment mentioned in section 82-135.

Failure to satisfy any of the three conditions in section 82-130(1) of the ITAA 1997 will result in the payment not being considered an employment termination payment.

As noted in the facts, you received redundancy, bonus, annual leave and long service leave payments on the termination of your employment due to redundancy.

The payments were made in consequence of your employment and made to you within 12 months of your employment termination. Consequently, paragraphs 82-130(1)(a) and (b) of the ITAA have been satisfied.

Paragraph 82-130(1)(c) of the ITAA 1997 specifically excludes payments mentioned in section 82-135 from being employment termination payments. Section 82-135 provides that certain payments are not employment termination payments. Of particular note in this case, are paragraphs 82-135(c), (d) and (e).

Paragraphs 82-135(c) and (d) of the ITAA 1997 exclude unused annual leave payments (including payments for unused leave loading) and long service leave payments from being employment termination payments. These payments are covered separately under Subdivisions 83 A and 83 B. Accordingly, the payments in respect of unused annual leave and leave loading are specifically excluded from being employment termination payments. The tax treatment of the unused annual leave, annual leave loading and long service leave payments will be dealt with later in this ruling.

Paragraph 82-135(e) excludes the tax free part of a genuine redundancy payment or an early retirement scheme payment worked out under section 83-170 of the ITAA. Any part of the redundancy payment which does not qualify as a tax-free part of a genuine redundancy payment will constitute an employee termination payment and be taxed according to the taxation rules surrounding employment termination payments in Division 82 C of the ITAA 1997.

Accordingly, it is necessary to determine the extent (if any) to which the remaining payments (redundancy and incentive bonus payment):

· qualify as genuine redundancy payments; and

· is excluded as the tax-free part of a genuine redundancy payment.
Genuine redundancy payments

Genuine redundancy payments

A payment made to an employee after 30 June 2007 is a genuine redundancy payment if it satisfies all criteria set out in section 83-175 of 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)).

Under subparagraph 83-175(2)(a)(i) of the ITAA 1997 your employment must be terminated on or before the age of 65. You had turned 65 years of age before the date your employment was terminated and as such you do not meet the condition under subsection 83-175(2) of the ITAA 1997.

As you have not met one of the conditions under section 83-175 of the ITAA 1997, it is not necessary to discuss whether you meet the other conditions under section 83-175 of the ITAA. Therefore the payment you received from the employer is not a genuine redundancy payment under section 83-175 of the ITAA 1997.

The legislation itself is quite specific. It requires all the conditions set out in section 83-175 of the ITAA 1997 to be met. It does not contain a discretion that can be exercised by the Commissioner to allow the payment to be exempt from tax as a genuine redundancy.

Please note that there are no age discrimination issues in this case. Section 40 of Division 4 (General Exemptions) of Part 4 (Unlawful Age Discrimination) of the Age Discrimination Act 2004 states:

This part 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).

Further, the Explanatory Memorandum to the Age Discrimination Bill 2003 (which was enacted as the Age Discrimination Act 2004) states in relation to section 40:

Taxation: Distinctions based on age can legitimately feature in a number of ways in taxation legislation including rebates and other concessions. To ensure this flexibility is retained it is appropriate that taxation legislation laws be exempt.

As your redundancy payment does not qualify as a genuine redundancy payment there is no tax free element. Instead the entire amount is considered an employment termination payment and taxed in accordance to the employment termination rules.

Taxation treatment of the employment termination payment

An employment termination payment made on or after 1 July 2007 will be comprised 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 tax free component is not assessable income and is not exempt income. The taxable component is included, in full, as assessable income.

As the payment is not made because you ceased being gainfully employed as a result of suffering from ill-health, there is no invalidity segment for the purposes of section 82-150 of the ITAA 1997.

As you commenced employment on 19 June 1978, a pre-July 83 segment will exist. Section 82-155 of the ITAA 1997 sets out that the pre-July 83 segment is the portion of the employment termination payment attributable to employment occurring before 1 July 1983. The prescribed formula was provided.

The pre-July 83 segment is not assessable and is not exempt income. It will not be required to be recorded on your 2012-2013 tax return. The remainder of the employment termination payment is thus the taxable component of the employment termination payment.

As you are above your preservation age of 55 years and below the employment termination payments cap for the 2012-13 income year ($175,000), the taxable component of your employment termination payment will be taxed at no more than 15% plus 1.5% Medicare levy.

Taxation treatment of an unused annual leave and loading payment

Subsection 83-10(2) of the ITAA 1997 includes as assessable income an unused annual leave payment you receive in the year of income. An unused annual leave payment is a payment that you received in consequence of the termination of your employment if:

(a) it is for annual leave you have not used; or

(b) it is a bonus or other additional payment for annual leave you have not used; or

(c) it is for annual leave, or is a bonus or other additional payment for annual leave, to which you were not entitled just before the employment termination, but that would have been made available to you at a later time if it were not for the employment termination.

Section 83-15 of the ITAA 1997 states:

You are entitled to a *tax offset to ensure that the rate of tax on an *unused annual leave payment does not exceed 30%, to the extent that:

(a) the payment was made in connection with a payment that includes, or consists of, any of the following:

(i) a *genuine redundancy payment;

(ii) an *early retirement scheme payment;

(iii) the *invalidity segment of an *employment termination payment or *superannuation benefit; or

(b) the payment was made in respect of employment before 18 August 1993.

Your received a payment with respect to unused annual leave and unused annual leave loading.

You are not entitled to a tax offset on these payments as your unused annual leave and annual leave loading is attributable to employment after 18 August 1993. Furthermore, you did not receive a genuine redundancy payment (as noted above), or payments in connection an early retirement scheme or the invalidity segment of an employment termination payment or superannuation benefit.

Accordingly these payments will not be entitled to a tax offset and will be included in your assessable income for the 2012-13 income year.

Taxation treatment of an unused long service leave payment

Subsection 83-80(1) of the ITAA 1997 includes five percent of an unused long service leave payment attributable to employment before 16 August 1978 in assessable income.

Subsection 83-85(2) of the ITAA 1997 entitles the taxpayer to a tax offset for:

             (2)  The amount is the part of the * unused long service leave payment included in your assessable income under subsection 83-80(1):

a) to the extent that it is attributable to the * pre-18/8/93 period; and

b) to the extent that it is attributable to the * post-17/8/93 period, if the payment was made in connection with a payment that includes, or consists of, any of the following:

(i). a * genuine redundancy payment; or

(ii). an * early retirement scheme payment; or

(iii). an * invalidity segment of an * employment termination payment or a * superannuation benefit.

You have received a payment in respect of unused long service leave which is attributable to employment prior to 16 August 1978.

Similar to above, this amount is made in respect of employment after 18 August 1993. Furthermore, it is not made in connection with, or consists of, a genuine redundancy payment, early retirement scheme, or the invalidity segment of an employment termination payment or superannuation benefit.

Accordingly, this amount will not be entitled to a tax offset and will be included in your 2012-13 income tax return as assessable income.

Conclusion

No part of the payments received on the termination of your employment are the tax-free part of a genuine redundancy payment as you have not met all the conditions in subsection 83-175(1) of the ITAA 1997.