Edited version of your private ruling

Authorisation Number: 1012541694733

Ruling

Subject: Retention bonus - redundancy

Question

Does the retention payment offered by the Company meet the definition of a genuine redundancy payment?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 2014.

The scheme commenced on:

1 July 2013.

Relevant facts and circumstances

The applicant is a company (the Company).

One of the Company's facilities is anticipated to close during the 2013-14 income year which will result in various redundancies.

In addition to redundancy entitlements in accordance with the organisation's enterprise agreement, the Company is offering a retention payment to employees whose employment will be terminated as a result of the facility's closure.

The retention payment will be offered to employees who continue with their employment through to the date of closure or as otherwise agreed.

The retention payment will be made at the employee's end date and is subject to the employees maintaining the normal standards of safety, efficiency and quality of work.

The retention payment will not be paid to individuals that:

· Have been in breach of any company policies and/or procedures; or

· Take another position within the company or an associated entity; or

· Are redeployed within the company or an associated entity.

Employees who resign before the agreed end date will not be entitled to the retention payment.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 83-10.

Income Tax Assessment Act 1997 Section 83-15.

Income Tax Assessment Act 1997 Section 83-80.

Income Tax Assessment Act 1997 Section 83-85.

Income Tax Assessment Act 1997 Section 83-170.

Income Tax Assessment Act 1997 Subsection 83-170(2).

Income Tax Assessment Act 1997 Subsection 83-170(3).

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

The retention payment meets the definition of a genuine redundancy payment. Therefore, provided all the other conditions under section 83-175 of the ITAA 1997 are satisfied, the retention payment will be part of a genuine redundancy payment.

The tax-free amount of a genuine redundancy payment will depend on the tax-free cap applying to each employee. The amount of the genuine redundancy payment up to the employee's cap will be non-assessable and non-exempt income. Any amounts in excess of the cap will be taxed as an employment termination payment.

Detailed reasoning

A payment made to an employee is a genuine redundancy payment (GRP) if it satisfies all the conditions 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 and 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)).

Subsection 82-135 includes (among others):

· superannuation benefits;

· the payment of a pension or annuity; and

· unused annual leave (paragraph 82-135(c)) or long service leave payments (paragraph 82-135(d)).

In order to satisfy the definition of a genuine redundancy payment under subsection 83-175(1) of the ITAA 1997 there must be a dismissal from employment and the dismissal must result from the positions being made genuinely redundant.

The facts state that one of the facilities of the Company is closing during the 2013-14 income year. As such, we can accept that the dismissals that follow the closure will be as a result of the positions being made genuinely redundant.

The definition also states that the payment must exceed what employees would have received had they voluntarily terminated their employment. The facts state that for employees to satisfy eligibility to the retention payment, they are required to continue their employment until the agreed end date. Should they voluntarily resign prior to this date, they would lose eligibility to the retention payment. As such the retention payment will exceed what employees would receive if they voluntarily resign and therefore definition of a GRP under subsection 83-175(1) of the ITAA 1997 has been satisfied.

The conditions under subsection 83-175(2) of the ITAA 1997 will be satisfied provided:

· Each employee is dismissed before:

o they turn 65 years of age; or

o they reach a specified age or completed a specified period of service;

· The dismissal is made at arm's length; and

· At the time of dismissal, there is no arrangement between the employee and the employer, or between the employer and another person, to employ the employee after the dismissal.

Further, provided that no part of the retention payment is received by the employee in lieu of superannuation benefits, subsection 83-175(3) of the ITAA 1997 will be satisfied.

Lastly, as the retention payment is not excluded from the definition of a GRP, subsection 83-175(4) of the ITAA 1997 is satisfied.

The retention payment meets the definition of GRP. Therefore, provided all the other conditions under section 83-175 of the ITAA 1997 are satisfied, the retention payment will be part of a genuine redundancy payment.

Further information

Tax-free amount

Subsection 83-170(2) of the ITAA 1997 provides that so much of the genuine redundancy payment that does not exceed the amount worked out using the formula prescribed in subsection 83-170(3) is non-assessable and non-exempt income. Any amount in excess of the tax-free amount is taxed as an employment termination payment. The formula for working out the tax-free amount is:

Base amount + (Service amount × Years of service)

For the 2013-14 income year:

Base amount is $9,246;

Service amount is $4,624; and

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

Taxation treatment of unused annual leave and unused long service payments

Unused annual leave would ordinarily be included in assessable income under section 83-10 of the ITAA 1997 and subject to marginal rates of tax. However, if the payment of unused annual leave is made in connection with a genuine redundancy payment, section 83-15 allows a tax offset to ensure that the rate of tax on this amount does not exceed 30%.

Similarly, unused long service leave would ordinarily be included in assessable income under section 83-80 of the ITAA 1997. However, if this payment is made in connection with a genuine redundancy payment, section 83-85 allows a tax offset to ensure that the rate of tax on this amount does not exceed 30%.