Edited version of your private ruling

Authorisation Number: 1012550605860

Ruling

Subject: Employment termination payment - genuine redundancy

Question

Is any part of the payment for in lieu of notice, received on termination of employment, the tax-free part of a genuine redundancy payment under section 83-170 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

This ruling applies for the following period:

1 July 2012 to 30 June 2013

The scheme commences on:

1 July 2012

Relevant facts and circumstances

1. You were an employee of the employer and during the year ended 30 June 2013 you were made redundant after a number of years of service (employment service period).

2. Your position was made redundant due to a restructure within the employer (supporting documentation provided from the employer).

3. Your PAYG payment summary states that you received:

· Lump sum D (tax-free part of a genuine redundancy payment) and

· Lump sum A (unused annual leave and unused long service leave).

4. You also received a payment for in lieu of notice which was shown on a separate payment summary. The entire payment was treated by the employer as the taxable component of an employment termination payment (ETP) from which tax was withheld.

5. You provided a copy of your employment contract and a copy of the calculation sheet provided by your employer showing details of how your redundancy payment was calculated and confirming the above amounts.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 82-10(1).

Income Tax Assessment Act 1997 Subsection 82-10(4).

Income Tax Assessment Act 1997 Section 82-130.

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 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 Subsection 83-170(1)

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 payment received for in lieu of notice is not subject to tax as it is forms part of the tax-free amount of a genuine redundancy payment.

Detailed reasoning

Employment termination payment

A payment made to an employee is an employment termination payment 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 of the ITAA 1997.

Subsection 82-130(1) of the ITAA 1997 states:

82-130(1) 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 persons death, in consequence of the termination of the other persons 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.

Payment is made in consequence of the termination of employment

The first condition (paragraph 82-130(a) of the ITAA 1997 to be met is that there must be an employment termination payment that is made in consequence of the termination of employment of the taxpayer.

The phrase in consequence of is not defined in the ITAA 1997. However, the words have been interpreted by the courts in several cases. The Commissioner has also issued Taxation Ruling TR 2003/13 titled Income tax: eligible termination payments (ETP): payments made in consequence of the termination of any employment: meaning of the phrase 'in consequence of' (TR 2003/13) which discusses the meaning of the phrase.

In paragraph 5 of TR 2003/13 the Commissioner states:

… a payment is made in respect of a taxpayer in consequence of the termination of the employment of the taxpayer if the payment 'follows as an effect or result of' the termination. In other words, but for the termination of employment, the payment would not have been made to the taxpayer.

As further stated by the Commissioner in paragraph 6 of TR 2003/13, there must be:

… a causal connection between the termination and the payment, although the termination need not be the dominant cause of the payment. The question of whether a payment is made in consequence of the termination of employment will be determined by the relevant facts and circumstances of each case.

Some court cases are discussed below.

Of note are the decisions made by the High Court in Reseck v. Federal Commissioner of Taxation (1975) 49 ALJR 370; (1975) 6 ALR 642; (1975) 5 ATR 538; (1975) 75 ATC 4213; (1975) 133 CLR 45 (Reseck) and the Full Federal Court in McIntosh v. Federal Commissioner of Taxation (1979) 25 ALR 557; (1979) 10 ATR 13; (1979) 45 FLR 279; (1979) 79 ATC 4325 (McIntosh).

Both Courts' views were that for a payment to be made in consequence of the termination of employment it had to follow on as a result or effect of the termination of employment. Additionally, while it is not necessary to show that termination of employment is the sole or dominant cause, a temporal sequence alone would not be sufficient.

Therefore if the payment follows as an effect or a result from the termination of employment, the payment will be made 'in consequence of' the termination of employment for the purposes of subparagraph 82-130(1)(a)(i) of the ITAA 1997. Hence the payment will be an employment termination payment unless the payment is specifically excluded under section 82-135 of the ITAA 1997.

From the information provided, it is evident that the payment was made in consequence of your termination of employment that occurred during the income year ended 30 June 2013. The payment would not have been made if there was no termination of employment. The termination of employment and the payment are intertwined and connected.

Therefore the requirement of subparagraph 82-130(1)(a) of the ITAA 1997 has been met.

The 12 month rule

To qualify as an employment termination payment, the payment must be received 'no later than 12 months after' the termination of the taxpayer's employment (paragraph 82-130(1)(b) of the ITAA 1997).

In this case the termination of employment occurred during the year ended 30 June 2013 and the payment in lieu of notice was paid within 12 months of the termination date. Therefore this condition of paragraph 82-130(1)(b) of the ITAA 1997 has been met.

Payments excluded from being employment termination payments

Paragraph 82-130(1)(c) of the ITAA 1997 requires that an employment termination payment is not a payment under section 82-135 of the ITAA 1997.

Section 82-135 of the ITAA 1997 includes payments such as pensions, foreign termination payments, unused annual leave and unused long service leave and the tax-free part of genuine redundancy payments or early retirement scheme payments.

We will now consider if any part of the payment in lieu of notice is a tax-free part of a genuine redundancy payment.

Genuine redundancy payment

A payment made to an employee is a genuine redundancy payment (GRP) if it satisfies all the criteria set out in section 83-175 of the ITAA 1997.

The first criteria is subsection 83-175(1) of the ITAA 1997 which requires:

· that the payment is received by an employee who is dismissed from employment because the employee's position is genuinely redundant; and

· that the payment 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.

Dismissal because of genuine redundancy

This requires the taxpayer to be dismissed from employment because the taxpayer's position is genuinely redundant.

The Commissioner's view as stated in Taxation Ruling TR 2009/2 - Income tax: genuine redundancy payments (TR 2009/2) is that a position is redundant when the functions, duties and responsibilities formerly attached to the position are determined by the employer to be superfluous to the current needs and purposes of the organisation. The decision to make an employee's position redundant is fundamentally one made by the employer. Dismissal requires that a termination of employment is made at the initiative of the employer without the consent of the employee.

Therefore the questions to be answered are whether the position you occupied with the employer was abolished and whether you were dismissed from employment.

Your employer has provided written confirmation that your position was made redundant during the year ended 30 June 2013 due to a restructure within the employer. Therefore, it is considered that your termination of employment was due to a genuine redundancy and the part of the first criteria in subsection 83-175(1) of the ITAA 1997 has been met.

The second part requires that for a payment to be a GRP, it should not exceed the amount that would be received by the employee on voluntary termination of employment.

The payment must be in excess of the amount that would be received on voluntary termination of employment

From the copy of your service agreement made at the commencement of your employment service period (the employment agreement), it can be seen that it contains a clause (the clause) that sets out in detail the grounds for termination of employment and that the employer could at its sole discretion terminate the employment in the manner specified in the sub-clause which sets out the notice requirements for the employer.

Therefore it can be seen that apart from the clause of the employment agreement referring to grounds for termination and notice requirements as above, none of the clauses of the employment agreement refer to voluntary termination of employment or termination of employment due to redundancy.

Accordingly the payment received in lieu of notice is considered to be in excess of the amount that would be received on voluntary termination of employment.

Consequently, the requirement of subsection 83-175(1) of the ITAA 1997 is satisfied and the above is consistent with the Commissioner's view as set out in paragraph 64 of TR 2009/2:

64. A payment in lieu of notice can be a genuine redundancy payment provided that such a payment would not be expected on voluntary termination.

The second criteria to be satisfied is subsection 83-175(2) of the ITAA 1997 which requires that all of the following conditions must be met:

· The employee is dismissed before the earlier of:

o the day he or she turned 65; or

o 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 that age or complete the period of service (as applicable).

· If the dismissal was not at arm's length the payment must not exceed the amount that could reasonably be expected to be made if the dismissal was at arm's length.

· 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.

Termination occurred before age 65 or expiration of fixed term

The employment agreement did not specify a particular date when your employment would terminate for example, a set retirement age. Another specific clause of the agreement gives the employer the power to indefinitely extend the term of the contract after its initial term of three months.

Your employment terminated when you were age under 65, and well after the initial three month period. Therefore this condition is satisfied.

Dealing at arm's length

The requirement is that if the employer and the employee were not dealing with each other at arm's length in relation to the termination of employment, the amount of the eligible termination payment must not be greater than the amount that could reasonably be expected to have been paid if the parties had been at arm's length.

From the information provided, it is considered that you and the employer dealt with each other at arm's length.

Therefore this condition is satisfied.

No agreement to re-employ after date of termination

The final condition is that at the termination time, there was no agreement in force between yourself and the employer or the employer and another person, to employ you after the termination date.

From the information provided, there was no agreement between yourself and the employer or the employer and another person to employ you after your termination of employment. Therefore this requirement is satisfied.

Accordingly, the criteria in subsection 83-175(2) of the ITAA 1997 which requires that all of the conditions set out in the subsection must be met is also satisfied.

Not a payment received in lieu of superannuation benefits

In addition to the requirements discussed above, subsection 83-175(3) of the ITAA 1997 requires that no part of the payment which represents a payment in lieu of superannuation benefits will be included as part of a GRP. As no part of the payment in lieu of notice is in lieu of superannuation benefits, this requirement is satisfied.

Not a payment mentioned in section 82-135 of the ITAA 1997

The last requirement for a genuine redundancy payment is that the payment in lieu of notice must not be a payment covered by section 82-135 of the ITAA 1997, apart from paragraph 82-135(e) i.e. a GRP.

As noted earlier, section 82-135 of the ITAA 1997 includes payments such as pensions, foreign termination payments, unused annual leave and unused long service leave and the tax-free part of genuine redundancy payments or early retirement scheme payments.

None of the paragraphs in section 82-135 of the ITAA 1997 (apart from paragraph 82-135(e) relating to genuine redundancy) apply. Therefore, this requirement has been satisfied.

As all the conditions have been met, the payment in lieu of notice is a GRP under section 83-175 of the ITAA 1997.

Should the payment in lieu of notice form part of the tax-free part of a genuine redundancy payment?

Section 83-170 of the ITAA 1997 applies to determine the tax-free treatment of a GRP. Section 83-170 places a limit on the amount of a GRP that is eligible for tax-free treatment.

So much of the GRP that does not exceed the amount worked out using the prescribed formula is not assessable income and is not exempt income (the tax-free amount). The formula for working out the tax-free amount (subsection 83-170(3) of the ITAA 1997) is:

Base amount + [Service amount × Years of service]

For the 2012-13 income year:

Base amount means $8,806;

Service amount means $4,404; and

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

From the details of your employment service period, the limit for the tax-free amount of your GRP can be calculated.

Therefore this tax-free amount is the amount of genuine redundancy payment eligible for tax-free treatment.

From the information provided, you received a redundancy payment which was treated by the employer as the tax-free amount (Lump sum D) on your payment summary on termination of employment.

You also received a payment in lieu of notice, treated by your employer as an employment termination payment (ETP) and shown on a separate payment summary.

Consequently, the total of the genuine redundancy payments you received was the sum of the Lump sum D amount and the payment in lieu of notice.

As this total amount does not exceed the amount calculated as the limit for the tax-free amount of your GRP based on your years of completed service, the payment in lieu of notice that was treated as an ETP should also form part of the tax-free part of your genuine redundancy payment and is not subject to tax.

Accordingly, the payment in lieu of notice is a tax-free amount and excluded from your assessable income for the 2012-13 income year.