Edited version of your private ruling

Authorisation Number: 1012534479162

Ruling

Subject: Genuine redundancy

Question

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

Answer :

No.

This ruling applies for the following period:

Year ended 30 June 2013

The scheme commences on:

1 July 2012

Relevant facts and circumstances

You were employed with an employer (the Employer).

In the relevant income year the Employer advised you that your position would be made redundant effective from a date within that income year.

The Employer provided you with

(a) the choice of accepting redundancy or redeployment; and

(b) estimates of your redundancy and leave entitlements.

The Employer also stated that in the case of the redundancy option, which you accepted, a suitable exit date would be discussed and determined.

The estimates show amongst other matters:

· your first day of service with the Employer

· your date of birth

· all of the redundancy component would be taxed as an employment termination payment (ETP).

You received a 'PAYG payment summary - employment termination payment' (the Summary) for the relevant income year which shows:

(a) the amount of payment and when it was made to you in the relevant income year;

(b) all of the payment was a taxable component; and

(c) tax withheld on payment.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 82-10.

Income Tax Assessment Act 1997 Section 82-130.

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

Income Tax Assessment Act 1997 Subsection 82-130(2).

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 82-175(1)

Income Tax Assessment Act 1997 Subsection 82-175(2

Income Tax Assessment Act 1997 Paragraph 82-175(2)(a)

Income Tax Assessment Act 1997 Paragraph 82-175(2)(b)

Income Tax Assessment Act 1997 Paragraph 82-175(2)(c)

Income Tax Assessment Act 1997 Subsection 82-175(3)

Income Tax Assessment Act 1997 Subsection 82-175(4)

Reasons for decision

Summary

No part of the termination payment (the Payment) you received from your former employer represents a genuine redundancy payment as you were over 65 years of age when your employment was terminated.

As the Payment satisfies the conditions in the income tax legislation for it to be treated as an employment termination payment (ETP) it is taxed according to its components and the relevant ETP caps.

Detailed reasoning

A payment made to an employee is an employment termination payment (ETP) if the payment 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) of the ITAA 1997 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 employment termination payments, including:

· payment for unused annual leave or unused long service leave;

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

· capital payments for personal injury.

In your case the facts show that the Payment made to you is an employment termination payment (ETP).

As your employment was terminated due to your Employer's decision to make your position redundant, the issue of whether any part of the Payment represents a genuine redundancy payment is discussed below.

Genuine redundancy payment

To determine if any part of the Payment you received constitutes a GRP, all the conditions in section 83-175 of the ITAA 1997 need to be satisfied.

A GRP is defined in subsection 83-175(1) of the ITAA 1997 as:

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 the dismissal.

Subsection 83-175(2) of the ITAA 1997 states that for a payment to qualify as a GRP all of the following conditions must be met:

(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 the dismissal. (emphasis added)

In addition, subsection 83-175(3) of the ITAA 1997 provides that a GRP 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 of the payment or at a later time. In addition, subsection 83-175(4) provides that a payment is not a GRP if it is a payment mentioned in section 82-135.

The Commissioner has issued Taxation Ruling TR 2009/2, which outlines the Commissioner's view of the requirements to be satisfied for a payment to qualify as a genuine redundancy payment under section 83-175 of the ITAA 1997. TR 2009/2 can viewed on the ATO website, www.ato.gov.au.

Though your termination of employment was the result of a genuine redundancy, that is, the Employer's decision to make your position redundant, this does not in itself mean any part of the Payment is a GRP.

As stated earlier, for any part of a termination payment to be a GRP all the conditions in section 83-175 of the ITAA 1997 must be satisfied and one of those conditions is that the employee must be dismissed before the earlier of:

· the day he or she turned 65; or

· 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 applicable). (paragraph 83-175(2)(a) of the ITAA 1997).

In your case, paragraph 83-175(2)(a) of the ITAA 1997 has not been satisfied as you were over 65 years. Accordingly, as this condition has not been satisfied it is not necessary to consider whether the other conditions in section 83-175 of the ITAA 1997 have been satisfied.

In view of the above, no part of the Payment is a GRP and section 83-170 of the ITAA 1997, which relates to the tax-free treatment of GRPS and early retirement scheme payments, does not apply to your Payment.

Tax treatment of the Payment

The Payment is an ETP comprising wholly of a taxable component.

Subsection 82-10(2) of the ITAA 1997 provides that the taxable component of a life benefit termination payment, which the Payment in your case satisfies, is assessable income. Accordingly, the Payment is to be included in your income tax return for the relevant income year.

In relation to the rate of tax that applies to the Payment, subsection 82-10(3) of the ITAA 1997 specifies that a taxable component is subject to tax and the rate applied depends on the recipient's age.

As you were of preservation age when the Payment was made, a maximum tax rate of 15% plus Medicare levy applies on the amount of the Payment which does not exceed the ETP cap in the 2012-13 income year. In relation to any amount of the Payment in excess of the ETP cap it is taxed at the top marginal tax rate including Medicare levy).

In view of the above the tax that was withheld from your ETP is correct.

For further information in relation to the tax rates applied to ETPs please refer to the following link:

www.ato.gov.au/Individuals/Working/In-detail/Leaving-a-job/Taxation-of-termination-payments