Edited version of your private ruling

Authorisation Number: 1012513968584

Ruling

Subject: Genuine redundancy payment

Question 1

Is any part of a payment made on termination of the taxpayer's employment the tax-free part of a genuine redundancy payment?

Answer

No.

This ruling applies for the following periods:

Year ending 30 June 2013.

The scheme commences on:

1 July 2012.

Relevant facts and circumstances

Your client commenced full time employment with the Employer over 10 years ago.

Your client was offered a redundancy package and was told that it would be tax free by the payroll officer from the Employer.

Your client ceased employment with the Employer during the relevant financial year.

The Redundancy/Severance payment was included by your client's employer on a PAYG payment summary - employment termination payment with a taxable component in addition to tax withheld from the payment.

The taxable component was inclusive of the Redundancy/Severance payment a payment for Rostered Days Off (RDO).

You have been advised by the Employer that the figures have been put through a software package that is endorsed by the ATO.

On your client's payslip for a pay period during the relevant financial year, a sum has been reported under the Lump SUM D component. You have been advised by the Employer that this has then been converted to Lump SUM C due to your client being over 60 years of age.

Your client was over 65 years of age when her employment ceased with the employer.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 82-135.

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

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 of decision

No part of the payment made to your client by the Employer is a genuine redundancy payment. This is because your client was over the age of 65 on the day their employment with the Employer ceased, resulting in your client not satisfying all of the conditions set out in section 83-175 of the Income Tax Assessment Act 1997 (ITAA 1997).

Therefore, the total redundancy/severance payment is to be included in your client's assessable income as an employment termination payment for the relevant income year.

Detailed reasoning

Genuine redundancy payment

A payment made to an employee is a genuine redundancy payment 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 employees 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)).

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

Dismissed before the day he or she turns 65

Under subparagraph 83-175(a)(i) of the ITAA 1997 a genuine redundancy will not be satisfied if the employee is dismissed before the day he or she turns 65. Your client's employment with the Employer was terminated during the 2012-13 financial year. Your client was more than 65 years of age on the day which their employment was terminated with the Employer. Your client has not met the condition under subsection 83-175(2) of the ITAA 1997.

As mentioned all conditions set out in section 83-175 of the ITAA 1997 must be met for a payment to be a genuine redundancy payment. As your client has not met one of the conditions under section 83-175 of the ITAA 1997, it is not necessary to discuss whether your client will meet the other conditions under section 83-175 of the ITAA 1997. Therefore the payment your client received from their employer is not a genuine redundancy payment under section 83-175 of the ITAA 1997.