Edited version of your private ruling

Authorisation Number: 1012530365292

Ruling

Subject: Genuine redundancy payment

Questions:

1. Is any part of the termination payment a tax-free part of a genuine redundancy payment under section 83-170 of the Income Tax Assessment Act 1997?

2. Does the full amount of the tax-free amount of a genuine redundancy payment for the 2012-13 income year based on the completed years of service, apply to the termination payment?

Advice/Answers:

1. Yes.

2. No.

This ruling applies for the following periods:

1 July 2011 to 30 June 2012

1 July 2012 to 30 June 2013

The scheme commenced on:

1 July 2011

Relevant facts:

You are under 55 years of age.

You commenced employment with an employer (the employer).

You ceased employment with the employer after some years.

In the 2011-12 income year you received a redundancy payment.

In the 2012-13 income year you received a golden handshake.

A payment summary for the 2012-13 income year shows a taxable component.

A modified payment summary for the 2012-13 income year shows a taxable component and a tax free amount.

Relevant legislative provisions:

Income Tax Assessment Act 1997 Section 82-140

Income Tax Assessment Act 1997 Section 82-145

Income Tax Assessment Act 1997 Section 82-150

Income Tax Assessment Act 1997 Section 82-155

Income Tax Assessment Act 1997 Section 83-165.

Income Tax Assessment Act 1997 Section 83-170.

Income Tax Assessment Act 1997 Section 82-175.

Reasons for decision

Summary

The entire redundancy payment of received in the 2011-12 income year is tax free and does not have to be included in your tax return for the 2011-12 income year.

Of the redundancy payment of received in the 2012-13 income year, only a part is tax-free. The remainder is a taxable component of an employment termination payment and is to be declared in your tax return for the 2012-13 income year.

Detailed reasoning

You received a redundancy payment in the 2011-12 income year. In the 2012-13 income year you received a further redundancy payment. Both payments relate to the same termination of employment.

Multiple payments for a redundancy

A genuine redundancy payment is normally a payment made by the employer of a terminated employee. However, paragraph 73 to 76 of Taxation Ruling TR 2009/2 titled 'Income tax: genuine redundancy payments' (TR 2009/2) include the situation where there may be more than one payment and/or payer, to be attributable to a redundancy. It states the following at paragraphs 73 to 78.

Multiple payments for one dismissal due to redundancy

73. There will be cases where an employee receives payments in consequence of their dismissal due to redundancy other than as one amount paid at a single point of time. For example, an employee's redundancy payout may be paid as a series of amounts, whether by way of structured instalments or due to cash flow constraints of the payer. It is also possible that amounts paid in consequence of dismissal due to redundancy may be made by more than one payer, which may or may not include the terminating employer.

74. While it may be possible to identify more than one 'payment' in some of these circumstances according to the ordinary meaning of that term, the Commissioner considers that the provisions of Part 2-40 operate to unify any such payments as a single sum attributable to redundancy when working out the tax treatment of the payments.

75. Therefore, in these circumstances, it is necessary to properly take account of all other redundancy payments made at the same or an earlier time when working out how to treat a given redundancy payment. The structure of Part 2-40 and provisions governing the tax treatment of the payments contemplates that this cumulative approach be adopted.

76. This requires that all payments made in consequence of the dismissal up to and including the time of the payment in question are assessed against a single voluntary termination element worked out at the time of the dismissal. Similarly, the tax-free amount of a genuine redundancy payment can only be claimed once for any given termination of employment because of redundancy.

77. Where multiple redundancy payments are made over more than one income year, this cumulative approach does not require that the payments be brought to account in a single income year. To the extent that the payments are taxable, they are brought to account in the year that they are received.

78. The elements in working out the tax-free amount threshold for a genuine redundancy payment under section 83-170 are indexed annually. In bringing amounts to account in the year that they are received, the total tax-free amount applied under this cumulative approach is that in the latest income year an amount is received.

Tax-free treatment of this genuine redundancy payment

Section 83-165 of the Income Tax Assessment Act 1997 (ITAA 1997) states that any part of a genuine redundancy payment (GRP) that is not tax free under Subdivision 83 will normally be an employment termination payment.

Section 83-170 applies to determine the tax free treatment of the GRP. This section places a limit on the amount of a GRP that is eligible for concessional tax treatment and states:

(1) This section applies if you receive a genuine redundancy payment or an early retirement scheme payment.

(2) So much of the relevant payment as does not exceed the amount worked out under subsection (3) is not assessable income and is not exempt income.

(3) Work out the amount using the formula:

Base amount + (Service amount x Years of service)

where:

base amount means:

(a) for the income year 2006-2007 - $6,783; and

(b) for a later income year - the amount mentioned in paragraph (a) indexed annually.

service amount means:

(a) for the income year 2006-2007 - $3,392; and

(b) for a later income year - the amount mentioned in paragraph (a) indexed annually.

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

Subsection 83-170(2) of the ITAA 1997 provides that so much of the GRP that does not exceed the amount worked out using the formula prescribed in subsection 83-170(3) of the ITAA 1997 is not assessable income and is not exempt income.

The Commissioner states in paragraph 72 of TR 2009/2:

Any amount of a genuine redundancy payment in excess of the tax-free amount worked out under section 83-170 will be taxable as an employment termination payment.

Tax free amount

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

Base amount + (Service amount Years of service)

For the 2011-12 income year:

Base amount means $8,435;

Service amount means $4,218; and

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

Therefore in accordance with subsection 83-175(3) of the ITAA 1997, the tax-free part of a genuine redundancy payment you can receive in the 2011-12 income year equals:

$8,435 + ($4,218 x number of years of service with the employer).

However, you received a redundancy payment of which is below the threshold calculated above. This tax-free amount is not assessable income and is not exempt income under subsection 83-170(2) of the ITAA 1997. It does not have to be declared in your tax return for the 2011-12 income year.

For the 2012-13 income year:

Base amount means $8,806;

Service amount means $4,404; and

Years of service means number of years of service with the employer.

Therefore in accordance with subsection 83-175(3) of the ITAA 1997, the tax-free part of a GRP you can receive in the 2012-13 income year equals:

$8,806 + ($4,404 x number of years of service with the employer).

The second instalment is being made to you in the 2012-13 for the dismissal due to redundancy in the 2011-12 income year.

However, a redundancy payment was received in the 2011-12 income year. As this was below the threshold for that income year, the whole payment would be tax-free. Therefore, the tax-free amount of the GRP has not been exhausted in the 2011-12 income year.

In the 2012-13 income year, the tax free threshold has increased. As some of the threshold has been used up by the first redundancy payment the remainder (i.e. the 2012-13 threshold less the first redundancy payment) would be tax-free.

Of the amount you received in the 2012-13 income year the amount calculated above (i.e. the 2012-13 threshold less the first redundancy payment) is tax free and the remainder is entirely a taxable component of an employment termination payment and is to be declared in your assessable income for the 2012-13 income year. This is in accordance with paragraph 72 of TR 2009/2.

Tax Treatment of the employment termination payment

An employment termination payment is comprised of the following components:

Ÿ Tax free component - this includes the pre-July 83 segment (if any) and/or the invalidity segment (if any); and

Ÿ 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 is subject to tax, depending on the person's age when the payment is received.

For recipients below preservation age, the taxable component of an employment termination payment is taxed at 30% for amounts below the employment termination payments cap of $175,000 for the 2012-13 income year and at the top marginal rate for amounts above the cap. Medicare levy of 1.5% is added to the tax rate that applies.

Preservation age is the age at which retirees can access their superannuation benefits. This will be 55 for persons born before 1 July 1960 and between 55 and 60 for persons born after 30 June 1960.

Preservation age is 59 years for persons born on 1 July 1963 to those born on 30 June 1964. In your case, as you were under preservation age on the last day of the income year in which the payment was made, the taxable component is taxed at 30% plus Medicare levy of 1.5%.