Edited version of your private ruling

Authorisation Number: 1012575749947

Ruling

Subject: Genuine redundancy payment

Question

Is any portion of the payment made under a Deed (the Deed) received in settlement of the termination of employment a tax-free part of a genuine redundancy payment?

Advice/Answer

Yes.

This review applies for the following period

Year ended 30 June 2014

The scheme commences on

1 July 2013

Relevant facts and circumstances

A few years ago, you commenced permanent employment with a company (the Company) on a part time basis for a specified number of days per week.

In early 2012, the Company increased your number of days per week.

You have provided a pay slip which shows your annual salary prior to commencing a period of leave.

In late 2012, you commenced a period of specified leave.

In mid 2013, you met with a Company representative to discuss changes being made to the business, the restructure of the Company and the redundancy of your pre-specified leave position.

A few days later, the Company confirmed your pre-specified leave position was being made redundant and that there were no suitable alternative roles available.

The Company advised another position with a substantial lower salary and less days was available which you rejected as the salary was not financially viable.

A few weeks later, you commenced proceedings before a workplace commission, making claims against the Company regarding the termination including general protection claims.

Both parties agreed, without any admission of liability, to resolve all matters in relation to the employment and the claims under the Deed.

The Deed stated that the Company acted to terminate you effective on and from a specified date in the 2013-14 income year as a result of the redundancy of your position.

Under the terms of the Deed, the Company agreed to pay you a settlement sum (that is a redundancy payment plus a superannuation amount). The Deed also stated that the Company would pay you in instalments over a specified timeframe and subject to the required taxation deductions.

There was no date prior to your 65^th birthday when you were required to cease employment.

Relevant legislative provisions

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(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 redundancy amount made to you under the Deed is a genuine redundancy payment (GRP) as all the conditions have been satisfied.

As the payment is below the tax-free amount of a GRP it is not assessable income and is not exempt income therefore is not required to be included in your income tax return for the 2013-14 income year.

Detailed reasoning

Genuine redundancy payment

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

In this case, you were dismissed from employment in the 2013-14 financial year, as a result of redundancy due to changes to the business and the employer's decision to restructure the organisation.

The payment was made due to the termination of your employment when your pre-specified leave role was made redundant. The payment is made in circumstances of genuine redundancy, and is in excess of the amount that could reasonably be expected to be received by a worker in consequence of voluntary termination.

Therefore, it is accepted that all the conditions in subsection 83-175(1) of the ITAA 1997 have been satisfied.

You were under 65 years of age when your employment was terminated. There is no date prior to you attaining age 65 where you would have had to retire from your employment.

The Company and you were dealing with each other at arm's length.

It is noted that the Company advised you of an alternative role which provided a substantially lower amount of salary. However, there were no suitable alternative roles available for which you were qualified and suited nearest in status and pay to the pre-specified leave position. Therefore, it is considered that this condition has been satisfied.

The redundancy amount made under the Deed is not being made in lieu of superannuation benefits.

Therefore, it is accepted that the redundancy amount is a GRP, as all the conditions in subsection 83-175(2) and subsection 83-175(3) of the ITAA 1997 have been satisfied.

As noted previously, subsection 83-175(4) of the ITAA 1997 provides that a payment is not a GRP if it is a payment mentioned in section 82-135 (apart from paragraph 82-135(e)).

Section 82-135 of the ITAA 1997 includes payments such as pensions, foreign termination payments, unused annual leave and unused long service leave. However, the redundancy amount made under the Deed does not include any of these type of payments.

Hence the requirement in subsection 83-175(4) of the ITAA 1997 has been satisfied.

In light of the above, as all the conditions have been satisfied in accordance with section 83-175 of the ITAA 1997, the redundancy payment is considered to be a GRP.

Tax free amount

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 concessional tax 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. Under subsection 83-170(3) of the ITAA 1997, the formula for working out the tax free amount is:

Base amount + (Service amount × Years of service)

As your dismissal occurred during the 2013-14 income year, the base amount will be $9,246 and the service amount will be $4,624. Therefore the amount calculated under the formula in accordance with subsection 83-170(3) of the ITAA 1997, is the tax-free part of a GRP.

As the payment made to you under the Deed is below the tax-free amount of a GRP it should be shown at label D on your Payment Summary. The tax free amount is not assessable income and is not exempt income under subsection 83-170(2) of the ITAA 1997 therefore is not required to be included in your income tax return for the 2013-14 income year.