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Ruling
Subject: Genuine Redundancy
Question 1
Was the taxpayer's employment terminated as a result of genuine redundancy?
Answer
No
Question 2
Is the taxpayer entitled to a tax offset on any amount of unused long service leave payment received on the termination of the taxpayer's employment?
Answer
Yes
This ruling applies for the following period:
Income year ended 30 June 2013
The scheme commenced on:
During the income year ended 30 June 2013
Relevant facts and circumstances
1. The Taxpayer is aged between 50 and 55 years old.
2. The Taxpayer was employed by the same employer (the Employer) for more than 20 years.
3. The Taxpayer's was employed by the Employer on a fixed term basis. At the end of each term, the Taxpayer had an option to re-apply for another fixed term.
4. In 2012, the portfolio in which the Taxpayer worked was reviewed and the Employer decided that the position that the Taxpayer then held would be made redundant after the Taxpayer's current contract expires.
5. Consequently, the Taxpayer was advised by the Employer that at the end of the current term the Taxpayer's contract will not be renewed because the position the Taxpayer held will not exist in the new structure.
6. On termination of employment the Taxpayer received a lump sum payment for unused long service leave. The unused long service leave payment was not taxed as a payment made in connection with a genuine redundancy payment (GRP).
Relevant legislative provisions
Income Tax Assessment Act 1997 Subsection 83-85(1)
Income Tax Assessment Act 1997 Subsection 83-85(2)
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)
Reasons for decision
Question 1
Summary
7. The Taxpayer's employment was terminated at the end of a contractually specified term. Therefore, the Taxpayer's dismissal was not due to genuine redundancy.
Detailed reasoning
8. Subsection 83-175(1) of the Income Tax Assessment Act 1997 (ITAA 1997) defines the meaning of a GRP and states:
A genuine redundancy payment is 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.
9. However, before a payment that meets the basic redundancy requirement in subsection 83-175(1) of the ITAA 1997 qualifies as a genuine redundancy payment, all other conditions in section 83-175 of the ITAA 1997 must be met.
10. Relevantly, subsection 83-175(2) of the ITAA 1997 provides that for a payment to be a GRP, the employee must be dismissed before the earlier of the following:
▪ turning 65 years of age (or any earlier age of compulsory retirement for the particular position in question), or
▪ before the end of a fixed period of employment.
11. The Commissioner has issued Taxation Ruling TR 2009/2 (TR 2009/2) which outlines the requirements to be satisfied before any payment made to a person whose employment is terminated qualifies for treatment as a GRP under section 83-175 of the ITAA 1997. At paragraphs 36 and 37 of TR 2009/2 the Commissioner considers payments made at the end of a fixed period of employment and states:
36. Under subparagraph 83-175(2)(a)(ii), a payment made at the end of a fixed period of employment cannot normally be a genuine redundancy payment.
37. However, some 'rolling' fixed-term contracts may, as a matter of fact, establish an ongoing employment relationship. The reference to 'rolling' contracts contemplates the situation where fixed-term contracts are renewed on one or more occasions following the expiry of the contracted term. The completion of a stipulated term in these circumstances does not necessarily disqualify a payment made at the end of the period from being a genuine redundancy payment. It is therefore possible that a genuine redundancy payment may be paid in these types of cases. However, where a contract is not renewed at the end of a contractually stipulated term, evidence is required to displace the express terms of the contract and establish an ongoing employment relationship.18 This is likely to be the exception rather than the rule.
12. In this case, the Taxpayer's employment was terminated at the end of a contractually stipulated term. As such, all the conditions of section 83-175 of the ITAA are not met. Therefore, the Taxpayer's employment was not terminated as a result of genuine redundancy.
Question 2
Summary
13. The Taxpayer is entitled to a tax offset on the amount of long service leave payment that is attributable to the pre-18/8/93 period only. The taxpayer is not entitled to the offset on the post-17/8/93 period because the payment for unused long service leave was not made in connection with a genuine redundancy payment.
Detailed reasoning
14. In accordance with subsection 83-85(1) of the ITAA 1997, where a person receives a lump sum payment for unused long service leave, the person is entitled to a tax offset on the amount of payment included in the person's assessable income that ensures that the rate of income tax on the amount of payment mentioned in subsection 83-85(2) does not exceed 30%.
15. Subsection 83-85(2) of the ITAA 1997 sets out the amounts on which a person is entitled to an offset and, as far as relevant, states:
The amount is the part of the *unused long service leave payment included in your assessable income under subsection 83-80(1):
(a) to the extent that it is attributable to the *pre-18/8/93 period; and
(b) to the extent that it is attributable to the *post-17/8/93 period, if the payment was made in connection with a payment that includes, or consists of, any of the following:
(i) a *genuine redundancy payment; or …
16. Based on the above, the Taxpayer is entitled to a tax offset on the amount of long service leave that is attributable to the pre-18/8/93 period only. The taxpayer is not entitled to the offset on the post-17/8/93 period because the payment for unused long service leave was not made in connection with a genuine redundancy payment.